Pakistan cautious ahead of key IMF talks

The State Bank of Pakistan (SBP) maintained the policy rate at 22%, on April 29, 2023. Market expectations were divided between no-change and a cut.

CPI had decelerated to 20% in March from a recent peak of 38% (May 2023), and the CA balance in March was a surplus of US$619 million, with 9MFY24 current account deficit of only US$0.5 billion – both, along with ongoing fiscal contraction, supported a rate cut.

However, the SBP overweighed the risks to inflation emanating from – a volatile geopolitical backdrop due to tensions in the Middle East and its impact on global oil prices, other global commodity prices likely to have bottomed out, and perhaps more importantly, the terms of the next IMF program.

Despite the tight monetary conditions, the SBP’s outlook for GDP growth for FY24 of 2-3% remains intact, supported by a robust agricultural sector. Most major crops (rice and maize) are projected to exceed the targets for the year. LSM growth in 8MFY24 was negative 0.5% as against negative4% last year, but it is expected to perform better in the remaining months.

Core inflation continued to decline in March – to 15.7% from 18.1% in February 2024. Encouragingly, the contribution of wage growth to overall CPI has also diminished considerably in recent months. These reinforce the outlook for continued disinflation in the coming months. However, risks to inflation emanate from volatile geopolitics, global commodity prices and the extent to which the next fiscal budget will be inflationary.

External financial inflows in Pakistan have been weak in recent months, as global central banks have adopted a cautious policy stance. The SBP wants to build-up further FX buffers (in the face of above uncertainties) before adopting an accommodative stance.

Outstanding debt repayments until June 2024 are US$1.8 billion (principal only), while Pakistan is likely to receive the final tranche of IMF SBA program, of US$1.1 billion.

Monetary aggregates (M2 growth) is expected to decelerate in the coming months to under inflation (from 17.1% in March), and the SBP expects the government to maintain the primary surplus of around 1.8% of GDP until year-end.

Analysts believe even if inflation and the external account continue to improve in the coming months, the June announcement would be mainly influenced by IMF conditions for a new program – any further adjustments in energy tariffs and the budgetary measures that the Fund will demand.

 

 

Pakistan Stock Market Receives Higher Foreign Investment

During the week ended 29^th July 2016, the benchmark of Pakistan Stock Exchange PSX-100 closed at 39,529 levels – marking another record high level as results season commenced this week. Average daily trading volumes tapered slightly during the week to 182 million shares as compared to slightly more than 207 million a week ago. Foreign participation improved with an inflow of US$10.94 million as compared to an outflow of US$11.5 million a week ago. Leaders at the bourse were SHEL, NCL, LUCK, NML and ABL; while laggards included POL, PSMC, PPL, OGDC and EPCL. Volume leaders were DCL, AGL, SNGPL, DFML and TRG.
Key news flows for the week included: 1) SBP scheduled to announce its first monetary policy review on 30^th July, 2) the GoP and IMF commenced staff level discussions for the twelfth and last review under the EFF program, 3) Pakistan and Russia to start negotiations for laying 1,100km LNG pipeline with an estimated cost of US$2 billion next week where the first phase of the project is scheduled to complete by December next year, 4) ECC allowed BAFL to remit US$27.2 million to set up branch in UAE, 5) DRAP approved price increments for scheduled drugs, non‐scheduled drugs and lower priced drugs under the Drug Pricing Policy and 6) Mari Petroleum’s Managing Director stated that the company plans to establish a 400MW power plant at Dharki/Sadiqabad with an estimated cost of US$400 million.

The key event to track for next week will be the monetary policy announcement on the weekend. The expectations remain split between status quo and 25bps reduction in the policy rate. CPI inflation for July’16 to be released next week will also help to set expectations for further monetary policy action. Earnings season is likely to be the guiding factor over the near term with key results likely to be announced in the coming month. On the global front the further decline in international crude oil prices can keep the pressure on the Oil & Gas sector.

Reflecting a slowdown in revenues and tighter gross margin (GM), EFOODS is likely to post profit after tax of Rs793 million (EPS: Rs1.04) for 2QCY16 earnings, down 13%YoY/28%QoQ. This will effectively take 1HCY16F earnings to Rs1.90 billion (EPS: Rs2.48) as against Rs1.97 billion (EPS: Rs2.58) for 1HCY15. In this regard, intensifying competition in the dairy sector is likely to lower revenues by 6%YoY and remain flat sequentially. GM is also anticipated to take a hit (expected to go down by 140 bps YoY in 1HCY16F) on account of higher raw milk prices in lean season. Going forward,the pace of earnings growth is likely to come off for EFOODS (3-year earnings CAGR of 11%) where volume saturation in the industry along with recovery in dairy prices poses downside risks to earnings. Analysts believe price performance will more be a function of EFOODS' performance ipost acquisition by Royal Friesland Company.

The listed banking sector has shed 14.9% CYTD struggling on account of lower interest rate with reversal expectations now pushed forward beyond 1HCY17. Banking spreads continue to remain at their multi‐year lows, while advances growth has also failed to pick up any significant pace. In addition, the continuation of super tax is another impediment in earnings growth in an already challenging operating environment. These factors are likely to manifest in the upcoming 1HCY16F results where analysts expect earnings surprise can come from higher utilization of capital gains (as seen in 1QCY16) and lower than expected credit costs (particularly in case of National Bank of Pakistan). In the backdrop of lower earnings expectations, analysts continue to look favorably towards fundamentally resilient HBL and UBL, based on: 1) a superior ROE profile, 2) keen focus on growing low cost current accounts, 3) diversified income streams and 4) ability to capture CPEC related investments.