The document discusses the prerequisites and consequences of establishing a common stock market in South Asia. It provides an overview of the economies, financial markets, and business environments of several South Asian countries. It examines topics like monetary and fiscal policies, stock market development, corporate governance, and competitiveness in areas relevant to establishing a linked stock exchange across borders in the region.

2. Lecture Series SAARC Chamber of Commerce & Industry Common Stock Market in South Asia: Prerequisites & Consequences Dr. Ayub Mehar Director General Federation of Pakistan Chambers of Commerce & Industry (FPCCI) Karachi: FPCCI, Auditorium March 30 , 2009

4. Wealth Maximization & Efficient Market Hypothesis

6. Equilibrium in Financial Assets Market Market Efficiency Price of Risk taking Dividends Risk Premium Capital Gain Investors Required Return on Stocks Risk Free Return Volume of Risk ( β ) Firms’ Potency & Strategies Macroeconomic Fundamentals

7. Required Returns and Sectoral Development Investors’ Required Return on Stocks Flow of Capital Cost of Capital Patterns of Investment and Sectoral Development

8. Effects of the Monetary and Fiscal Polices

9. Impact of Monetary and Fiscal Policies on Stock Market: Simultaneity in the Model Market Capitalization Monetary and Fiscal Policy Factors (Demand Side Effects) Corporate Factors (Supply Side Effects) Foreign Portfolio Investment Public Debt Money Supply (M2) Equities Use of Cash Balance External Borrowing Budget Deficit Time Deposits Change in Money Supply Banks' Credits to Private & Public Sectors Foreign Exchange Reserves

10. Foreign Investments and KSE-100 Index

11. Weekly Net Foreign Investment since Jul-2007 (4 weeks moving average)

12. Credit and Equity Prices

13. Overview of the South Asian Economies-I: Monetary and Fiscal Policies

14. Comparison on Economic Status 34307 10636418 317 Euro area 768 1146716 1,499 South Asia 7448 48461854 6,538 World 44710 13163870 299 United States 40560 2376984 61 U.K. 1310 26964 20 Sri Lanka 800 126836 159 Pakistan 320 8938 28 Nepal 820 911813 1110 India 450 61897 156 Bangladesh Per Capita Income ($) Gross Domestic Product (Million $) Population (Millions) Countries

15. Exchange Rates and Prices 3.9 2.6 2.5 1.0 1.0 1.00 United States 1.6 2.6 2.7 1.2 0.6 0.49 U.K. 9.7 9.7 8.8 0.4 37.6 109.13 Sri Lanka 6.7 5.6 6.1 0.3 20.2 61.22 Pakistan 4.9 4.2 4.2 0.3 15.1 39.44 India - 5.9 4.1 0.3 23.1 68.59 Bangladesh 2000-06 2007 average annual % growth local currency units to international $ local currency units to $ Wholesale price index Consumer price index GDP implicit deflator Ratio of PPP conversion factor to official exchange rate Purchasing power parity (PPP) conversion factor Official exchange rate Countries

16. Central Government Revenues 14 - 2 6 34 21 World 3 36 1 1 3 57 United States 4 21 6 - 31 39 U.K. 7 35 3 0 26 24 Euro area 32 0 2 15 33 16 South Asia 14 1 3 15 51 16 Sri Lanka 33 - 1 13 33 20 Pakistan 16 0 0 15 30 39 India 22 - 4 33 29 12 Bangladesh % of revenue Grants and other revenue Social contributions Other taxes Taxes on International Trade Taxes on goods and services Taxes on income, profits, and capital gains Countries

17. Monetary Indicators 0.8 7.3 9.0 United States -1.1 16.4 11.9 U.K. 3.1 15.9 19.0 Sri Lanka 1.6 10.6 14.6 Pakistan 2.4 16.8 21.6 India 6.3 12.2 20.2 Bangladesh % of M2 annual % growth Claims on governments and other public entities Claims on private sector Money and quasi money Countries

18. Central Banks’ Policy Rates 15.00 13.00 12.00 10.50 9.00 Pakistan 7.50 9.00 7.75 7.75 7.50 India 5.75 5.75 5.25 6.00 7.50 Philippines 2.75 3.50 3.25 3.25 4.75 Thailand 3.25 3.50 3.50 3.50 3.50 Malaysia 4.00 5.00 5.00 4.75 4.50 S. Korea 5.58 7.47 7.47 6.57 6.12 China 0.30 0.50 0.50 0.50 0.25 Japan 4.25 7.25 6.75 6.25 6.25 Australia 2.25 3.00 4.25 4.50 4.25 Canada 2.50 4.25 4.00 4.00 3.50 Euro zone 2.00 5.00 5.50 5.75 5.25 UK 1.00 2.00 4.25 5.25 5.25 USA Dec‐08 Jul‐08 Dec‐07 Jul‐07 Jan‐07

19. Phases of Monetary Tightening Note : CRR is on weekly average basis, subject to a daily minimum requirement *including Time deposits with tenor less than 6 months, revised to 1 year w.e.f. October 4, 2007 **Time deposits with tenors of 6 months and above

20. Financial Assets by Major Type (US$ bln.) 156 1968 46 819 Equity Securities 45 549 Banks Deposits 1 41 Private Debt Securities 64 559 Public Debt Securities PAKISTAN INDIA

21. Overview of the South Asian Economies-II: Financial Markets Strength and Efficiency

22. Stock Market Indices -19.3 -17.8 -5.3 3,805.0 Britain (FTSE 100) -21.7 -21.7 -5.4 7,486.6 United States (DJIA) -17.2 -12.4 -5.1 8,976.7 India (BSE) -2.2 -0.8 +4.2 6,266.0 Pakistan (KSE) in $ terms in local currency Mar 18 th 2009 Dec 31st 2008 One week % change on Index Country

23. Financial Strength 1 717 119.6 2428572 France 1 284 149.7 1026640 Italy 5133 2913 235 654 4887 278 Number of Listed Companies 7 1 1 3 22 2 No. of Stock Exchanges 182.8 19425855 United States 123.8 3794310 U.K. 12.3 7553 Sri Lanka 167.3 70262 Pakistan 95.9 1819101 India 95.5 6793 Bangladesh % of market capitalization (Million US $) Value of shares Traded Market Capitalization Countries

24. PE & PBV in Emerging Asia Source: Bloomberg * September 30, 2008 2 9.8 Average 1.5 6.8 Pakistan 1.4 7.8 Thailand 1.4 8.8 Korea 2.9 10.1 Indonesia 1.6 10.4 Malaysia 1.8 10.4 Philippine 1.6 10.8 Taiwan 2.5 11.2 China 3.7 11.7 India PBV (x) PE09 (x) Country

25. Financial Access, Stability, and Efficiency % of adult population 187.9 3.0 8.9 19.6 4.6 2.7 4.6 World 230.8 0.8 10.5 100.0 0.0 6.0 7.0 United States 176.9 0.9 8.9 84.6 0.0 6.0 10.0 U.K. 37.6 3.2 10.3 14.4 2.4 3.3 5.6 Europe & Central Asia 60.6 7.7 6.6 1.9 0.7 1.9 3.9 South Asia 44.1 9.6 6.7 2.9 0.0 3.0 3.0 Sri Lanka 43.0 7.7 8.8 1.4 4.6 4.0 4.0 Pakistan 63.4 3.5 6.6 10.8 0.0 4.0 6.0 India 58.1 13.2 4.0 0.0 0.7 2.0 7.0 Bangladesh % of GDP % % Private credit bureau coverage Public credit registry coverage Credit information index 0-6(low to high) Legal rights Index 0-10 (weak to stronger) Domestic credit provided by banking sector Ratio of Bank nonperforming loans to total gross Loans Bank capital to asset ratio Getting credit Countries

26. Stock Market Development Index 4.9 5.7 36 10 Ease of access to local equity market 98.2 70.5 16 19 Stock Market value traded to GDP 33.6 70.6 37 25 Stock Market Capitalization to GDP 374.3 93.6 1 17 Equity market turnover 37 33 51 39 Corporate tax rate (%) 4.0 5.5 46 23 Regulation of security exchanges 4.6 4.0 14 25 Equity Markets Development 3.1 3.8 49 38 Domestic financial sector liberalization 1 1 46 46 Capital account liberalization 3.5 3.6 34 31 Financial Development Index 2008 Pakistan India Pakistan India Score (1-7 scale) Rank (out of 52)

27. Corporate Governance 5 5.3 26 21 Protection of minority shareholders’ interests 4.3 4.2 32 34 Ethical behavior of firms 5.0 5.0 1 1 Shareholder rights index 4.9 5.7 34 21 Strength of auditing and accounting standards 3.7 4.5 44 23 Willingness to delegate 3.9 5.4 50 21 Reliance on professional management 3.6 5.0 52 25 Efficacy of corporate boards 3.6 4.5 52 32 Extent of incentive-based compensation 4.5 5.2 35 20 Corporate governance (overall) Pakistan India Pakistan India Score (1-7 scale) Rank (out of 52)

28. Competitiveness Scores in Public Policy Related Fields 5.33 5.88 4.93 6.65 5.83 5.51 Germany 4.55 6.08 4.46 3.91 3.77 4.36 Italy 5.38 6.31 4.93 6.46 5.09 5.18 France 2.72 4.09 4.37 3.22 3.66 3.77 Pakistan 5.68 6.00 4.78 6.1 4.76 5.67 United States 5.42 6.16 5.18 5.71 5.31 5.41 United Kingdom 2.65 4.46 4.64 1.96 3.1 3.38 Nepal 3.77 5.65 3.71 3.21 3.85 3.99 Sri Lanka 2.47 4.71 4.62 2.19 2.87 3.55 Bangladesh 4.13 4.92 4.21 3.45 4.32 4.33 India Higher Education Health & Primary Education Macroeconomic Stability Infrastructure Institutional Governance Overall Business Competitiveness Index Country

29. Competitiveness Scores in Private Sector Related Fields 5.46 5.93 5.9 5.05 5.64 4.45 5.29 Germany 3.45 4.91 5.61 4.37 3.96 3.5 4.32 Italy 4.69 5.47 5.66 4.88 5.2 4.06 5.03 France 2.56 3.41 4.41 2.25 4.09 4.21 3.84 Bangladesh 5.77 5.6 6.83 5.43 5.68 5.71 5.32 United States 4.79 5.41 5.74 5.27 6.17 5.29 5.3 United Kingdom 2.49 3.29 3.06 2.41 3.64 3.62 3.73 Nepal 3.58 4.26 3.74 2.84 4.39 3.71 4.35 Sri Lanka 3.15 3.85 4.56 2.77 4.32 3.86 3.95 Pakistan 3.90 4.81 6.16 3.17 4.93 4.07 4.66 India Innovation Business Sophistication Market Size Technology Readiness Financial Market Sophistication Labor Market Efficiency Goods Market Efficiency Country

30. Business Environment 16.2 0.5 16.3 5.1 3.5 Sri Lanka 3.6 0.1 57 4.2 8.7 Pakistan 19.4 0.1 47.5 3.1 6.7 India 11.6 1.2 82.2 1.4 3.2 Bangladesh Firms using banks to finance investment % of firms Losses due to theft, robbery vandalism and arson % of sales Unofficial payments to public officials % of firms Average number of times management with tax officials Time dealing with officials % of management time Finance Crime Corruption Regulations and tax Countries

31. Doing Business Indicators 1.4 6 591 31 45 190 14 70 6 7.4 22 7 Euro area 3.0 5 605 38 34 223 18 81 6 61.1 44 9 World 5 4 1,047 44 27 247 16 134 6 40.7 33 8 South Asia 5 6 735 39 52 424 15 5 3 73.9 31 7 Nepal 1.7 4 1,318 40 27 214 22 83 8 8.5 39 5 Sri Lanka 10 7 1,420 46 30 224 20 62 6 74.6 33 13 India 4 6 1,442 41 35 252 14 425 8 46.2 74 8 Bangladesh 2.8 6 880 47 43 223 12 50 6 14 24 11 Pakistan Time to resolve insolvency years Disclosure index 0 (less disclosure) to 10 (more disclosure) Time required days Number of procedures Rigidity of employment index 0 (less rigid) to 100 (more rigid) Time required to build a warehouse days Number of procedures to build a warehouse Time required days Number of procedures Cost % of per capita income Time required days Number of procedures Closing a business Protecting Investors Enforcing contracts Employing workers Dealing with licenses Registering property Starting a business COUNTRY

32. From Cross Boarder Investment to Common Stock Exchange

41. Stock Market Index – (1969=100) 985.72 1615.90 1511.33 1012.91 1928.18 830.33 2004 496.16 665.08 771.71 566.17 1142.43 365.48 2008 1187.98 1955.97 1335.25 1257.64 1031.24 143.72 1998 608.04 4317.16 383.88 543.78 659.59 192.76 1989 100.00 100.00 100.00 100.00 100.00 100.00 1969 India Pakistan 15.39 167.81 13.57 40.29 238.23 1939 4.25 431.05 9.47 45.66 600.43 1919 37.62 -- 6.54 77.68 -- 1899 Germany Japan USA Britain United India Year

42. Value of National Currencies in Term of the US Dollar 0.80 116.30 0.54 45.31 60.27 2006 0.80 110.22 0.55 44.10 59.51 2005 0.67 103.58 0.53 43.319 70.64 2008 0.69 112.25 0.49 39.44 61.22 2007 0.81 111.00 0.56 45.80 60.20 2004 1.67 112.88 0.60 42.50 49.02 1998 1.74 143.68 0.63 16.93 21.39 1989 3.68 376.00 0.42 11.10 10.25 1969 India Pakistan 2.49 4.27 0.25 3.33 1939 4.19 2.02 0.20 3.08 1909 4.20 2.03 0.20 3.07 1899 -- -- 0.21 1.30 1880 -- -- 0.21 0.76 1858 -- -- 0.21 0.41 1825 Germany Japan Britain United India Year

43. Annualized Inflation (%) 2.4 1.9 3.1 4.6 9.2 21.5 2008 3.1 0.7 4.1 2.0 5.5 7.0 2007 2.3 0.2 3.2 1.4 4.6 8.5 2004 2.1 -0.4 3.7 2.1 5.3 8.7 2005 1.4 0.3 2.2 2.8 6.7 7.6 2006 3.38 1.61 3.75 4.75 14.13 14.75 1990-1998 3.15 6.90 5.15 12.05 5.55 9.80 1970-1990 0.73 259.33 2.30 1.00 5.27 5.27 1940-1970 India Pakistan 1.29 4.67 3.43 4.63 -0.70 1910-1940 1.84 1.77 2.50 0.33 0.10 1900-1910 -- -- -- -0.12 2.88 1880-1900 -- -- -- -0.65 1.71 1858-1880 -- -- -- 2.37 0.77 1825-1857 -- -- -- 0.14 0.36 1782-1825 -- -- -- 0.96 1.78 1758-1782 -- -- -- 0.19 0.02 1750-1758 Germany Japan USA Britain United India Duration

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