Finance & Business World

Pakistan's plan to slash its budget deficit may fail as slower economic growth threatens revenue targets and higher food and fertilizer prices increase the government's subsidy bill.

The budget gap in South Asia's second-largest economy is forecast to narrow to 4.7 percent of gross domestic product in the fiscal year starting July 1 from 7 percent in the previous 12 months, Finance Minister Naveed Qamar said yesterday in his 2008-09 budget speech in Islamabad.

“The budget deficit target looks hard to meet,'' said Mohammed Shoaib, who manages the equivalent of $300 million in Pakistani stocks and bonds as chief executive of Al-Meezan Investment Management Ltd. in Karachi. “Its too optimistic because there will be too many slippages to manage.''

Pakistan's fractured coalition government needs to narrow the budget shortfall to reduce its reliance on loans from the central bank, which have stoked inflation to a 30-year high of 19.3 percent. Qamar told parliament last night that the inflationary effect of borrowing from the central bank to fund the deficit was “like printing more money.''

Government spending will jump 30 percent to 2.01 trillion rupees ($29.8 billion) next fiscal year from 1.55 trillion rupees in the previous 12 months, according to Qamar's budget proposals. Outlays on subsidies on items including food, power and fertilizer are forecast at 295 billion rupees.

`Protect the Poor'

“The main purpose of this budget is to protect the poor from rising prices and falling real wages,'' said Qamar, who proposed giving poor households 1,000 rupees a month and pledged to build a one million homes for low-income workers. Salaries and pensions for government workers will be increased 20 percent.

Prime Minister Yousuf Raza Gilani's two-month-old government is facing challenges from a wider budget shortfall this year and slowing economic growth. Food shortages in recent months have stoked consumer prices and caused unrest in a nation where the World Bank estimates two-thirds of the population survive on less than $2 a day.

“The fiscal deficit target is too optimistic,'' said Suleman Akhtar, an economist at Foundation Securities Ltd. in Karachi. “The political and economic pressures are too high.''

Pakistan's government hasn't been able to make the tough decisions needed to trim spending and cut its funding needs, said Sayem Ali, an economist at Standard Chartered Bank Plc in Karachi. The central bank last week said “heavy'' government borrowing to finance the budget deficit could see a “substantial'' further acceleration in inflation.

Higher Inflation

Qamar, appointed less than five weeks ago, forecast average inflation will accelerate to 12 percent in the year commencing July 1, from an estimate of more than 11 percent this year faxless payday loans.

Tax collection of 1.25 trillion rupees next year from about 1 trillion rupees will help reduce the budget gap, Qamar said in his budget speech. The basic sales tax will be raised to 16 percent from 15 percent, import duties on 300 luxury goods will be increased, and higher taxes will apply to service industries.

“The great fear is on the revenue front,'' said Asad Sayeed, an economist at the Collective for Social Science Research in Karachi. “Meeting the deficit target would require drastic efforts which don't seem realistic in the current circumstances.''

Confusion over who is managing Pakistan's $146 billion economy has deterred much-needed foreign investment, which has already fallen this fiscal year for the first time since at least 2004.

Foreign Investment

Pakistan needs more foreign investment to spur economic growth, which the government expects to weaken this year to as low as 5.5 percent after averaging 7 percent in the five years from 2004. Qamar reduced duties on some raw materials to boost manufacturing and provided incentives for investment in agriculture, aiming to boost two sectors that underperformed this fiscal year.

Moody's Investors Service on May 21 cut Pakistan's credit rating for the first time in nine years, citing “growing economic imbalances and renewed political difficulties.'' Standard & Poor's also reduced its rating on May 15, making it more costly for Pakistan to finance its budget shortfall.

Gilani's government is in disarray after former premier Nawaz Sharif's Pakistan Muslim League and the party's nine ministers quit the cabinet in a dispute over the reinstatement of judges sacked by President Pervez Musharraf last year.

Power Sharing

Sharif agreed to share power with the Pakistan Peoples Party of assassinated opposition leader Benazir Bhutto after parliamentary elections in February.

Sharif will join a protest by lawyers, who plan to head toward Islamabad today from across the country to demonstrate in front of the parliament building, pressing the government to reinstate the justices and to demand the resignation of Musharraf. Sharif yesterday appealed to the people to participate in the so-called “long march.''

The State Bank of Pakistan on May 23 unexpectedly raised borrowing costs by 1.5 percentage points to 12 percent, the second increase this year, to curb runaway inflation.

“Higher interest rates and a steeper drop in growth still lie ahead,'' said Philip Wyatt, a senior economist at UBS AG in Hong Kong. “The fiscal funding problem is precarious and unsustainable in current global conditions.''

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The Supreme Court said Monday it will review a $79.5 million punitive damages judgment against Marlboro-maker Philip Morris for the third time.

The justices have twice struck down the award to the family of a longtime smoker of Marlboros, made by Altria Group Inc.’s (MO, Fortune 500) Philip Morris USA.

Oregon courts have repeatedly upheld the judgment. The most recent ruling, in January, followed a high court decision last year that said jurors may punish a defendant only for harm done to someone who is suing, not other smokers who could make similar claims.

The justices will consider only whether the Oregon Supreme Court in essence ignored the U.S. high court’s ruling, not whether the amount of the judgment is constitutionally permissible.

The case will be argued in the fall.

Altria associate general counsel Murray Garnick applauded the justices’ decision to review the case again.

"The Court has previously instructed the Oregon appellate courts to properly apply the constitutional standards to the punitive damage award in this case. The Oregon courts have not done so, and so the Supreme Court has agreed to review the case once again," Garnick said.

The award was for the family of Jesse Williams, a former Portland janitor who started smoking during a 1950s Army hitch and died in 1997, six months after he was diagnosed with lung cancer advance america cash advance. A jury in Portland made the award in 1999.

The Oregon high court made its first decision in 2002, refusing to hear an appeal from Philip Morris.

Then the U.S. Supreme Court rejected the judgment of nearly $80 million, saying that punitive damages generally should be held to no more than nine times actual economic damages. It declined, however, to make that a firm rule.

In the Williams case, the family was awarded $800,000 in actual damages. The punitive damages are about 97 times greater. A state court previously cut the compensatory award to $521,000.

Next, the Oregon Supreme Court upheld the punitive damages, citing "extraordinarily reprehensible" conduct on the part of Philip Morris officials.

Then came the U.S. Supreme Court’s second take on the case, last year, a narrower ruling that did not address the size of the award but only how juries could consider the conduct of defendants in determining punitive damages.

Philip Morris also had asked the justices to rule on the size of the award, but they declined Monday to review that aspect of the appeal.

The case is Philip Morris USA v. Williams, 07-1216. 

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Taiwan's export growth probably accelerated in May as demand from emerging markets, including China, tempered weakening sales to the U.S. and Europe.

Overseas shipments increased 15 percent from a year earlier, more than April's 14 percent gain, according to the median estimate of 11 economists surveyed by Bloomberg News. The report is due about 4 p.m. in Taipei today.

Taiwan's trade and investment with China, which regards the island as one of its provinces, is likely to improve as President Ma Ying-jeou's government works to lift a ban on direct transport across the 100-mile Taiwan Strait that separates them.

“There will be some influence from the U.S. for sure,'' Peter Kurz, head of Taiwan research at Citigroup Inc., said on Bloomberg Television. “But the growing exports to emerging markets in China, Russia, India and elsewhere will help mitigate the impact of a slowdown in the U.S.''

China's economy expanded 10.6 percent in the first quarter, compared with 11.9 percent for the whole of last year, an easing its central bank described last week as “moderate.''

Sales of electronics to the world's fastest growing major economy have helped Taiwan weather fallout from the U.S. financial crisis, which has cut demand for Asian exports. Still, a slowdown in the U.S. will inevitably affect export growth, central bank Governor Perng Fai-nan said on March 24.

Support From China

“We continue to expect robust sales to mainland China to keep overall growth supported,'' said Tony Phoo, an economist at Standard Chartered Bank in Taipei. Electronics shipments and sales to Europe and the U.S. are expected to “stay soft.''

China and the U.S electronic check payday advance. are the island's two biggest overseas markets. Overseas shipments are equivalent to about 50 percent of Taiwan's gross domestic product.

“As usual, strong demand from emerging markets boosted exports, while energy drove high imports,'' said Cheng Cheng- mount, chief economist at Citibank Taiwan Ltd. in Taipei.

Imports rose 20.3 percent in May, accelerating from April's 17.7 percent increase, according to the survey of economists.

Taiwan's economy grew a faster-than-expected 6.06 percent in the first quarter, bolstered by overseas shipments and a pickup in consumer spending. The island joined Japan, Hong Kong and Malaysia in reporting expansion that exceeded expectations as trade within Asia buoyed growth.

Hon Hai's Sales

Hon Hai Precision Industry Co., the world's largest contract electronics manufacturer, forecast 2008 sales could rise to as much as $60 billion, according to an analyst who attended the company's annual shareholder meeting in Taipei on June 2. The Taipei-based company makes iPods for Apple Inc., game consoles for Sony Corp. and computers for Dell Inc.

Many Taiwanese electronics makers ship parts and components to China that are re-exported as finished products to other markets. More than 85 percent of Taiwan's computer products are made in China.

Export orders from China and Hong Kong combined advanced 12.2 percent in April from a year earlier. Orders are indicative of actual shipments over the next one to three months.

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Cox Communications Inc. expanded its On Demand service to customers in Glendale, Peoria, Sun City, Sun City West, Surprise and northwest Phoenix as of last weekend.

Cox started the roll-out in February and is slowly upgrading to allow customers to choose shows from its video-on-demand service.

Cox On Demand features scores of shows, movies and other information — depending on what services a person subscribes to — with the ability to start the selected program at any time no fax payday loans.

Cox plans to have the system available Valleywide by the end of summer.

For info: www.cox.com/arizona.

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South African exporters should not rely on a weaker rand to remain globally competitive, a senior central bank official said.

“It is sometimes argued by some commentators that a weaker exchange rate is in the long-term interest of the export sector,'' Brian Kahn, a member of the bank's monetary policy committee, said in a speech in Stellenbosch, near Cape Town, today. “We believe this is a fallacy. No person can build a long-term business strategy on a one-way bet on the exchange rate.''

A panel of economists at Harvard University, appointed by South Africa's government to help advise it on how to boost economic growth, has recommended that the government intervene to weaken the rand to keep exports competitive. The rand has gained 54 percent against the dollar since the beginning of 2002.

“The South African Reserve Bank does not intervene to manage the exchange rate,'' Kahn said. “We would of course prefer to see a stable and competitive currency, but the best we can do is contribute to this through prudent monetary policy, which focuses on and achieving low inflation.''

The central bank has raised its benchmark leading rate five times in less than a year to contain inflation, which has exceeded its maximum 6 percent target since April last year payday loans. The bank will decide whether to raise interest rates again on June 12.

While food and gasoline costs have been the biggest contributor to rising prices, inflation pressures are now more “generalized,'' Kahn said, making it more difficult to bring inflation back into the target range.

Specter of Stagflation

“According to our most recent forecast, inflation is expected to persist above the inflation target of 3 percent to 6 percent and is not expected to return to within the target before the end of 2009,'' Kahn said. “We see the risk to this forecast to be significantly on the upside.''

The central bank will have to adjust interest rates to curb inflation expectations, Kahn said.

“If we do nothing about it, inflation will accelerate,'' Kahn said. “Inflation expectations will become entrenched. It is a very difficult situation we are in.''

Kahn also rejected suggestions that the 6 percent upper limit of the target should be raised, as this would “entrench'' inflation expectations at the higher level.

He added that the “specter of stagflation is a real one'' in South Africa.

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