Pakistan: Central Bank Reduces Policy Rate

The State Bank of Pakistan (SBP) announced its monetary policy statement today (September 12, 2024) decreasing the policy rate by 200bps to 17.5%. After the announcement, the SBP Governor made the following remarks in the analyst briefing:

The SBP's policy rate decision is influenced by a greater than expected decline in inflation and favorable trends in global oil and food prices. However, given the uncertain nature of these developments, the committee has adopted a cautious stance.

Real interest rates remain sufficiently positive to achieve the SBP's medium-term inflation target of up to 7%.

The SBP is not focused on a specific interest rate level but considers various factors, including the external account and future inflation, when making rate decisions.

Governor was hopeful that the IMF board will review Pakistan’s agenda for the approval of the 37-month Extended Fund Facility (EFF) program this month, as the government has secured all required external financing assurances.

Moving forward, the SBP will publish semi-annual data on central bank interventions in currency markets, as well as projections for foreign exchange reserves and upcoming debt obligations over the next six months.

Data on currency market interventions will be published with a three-month lag due to the sensitivity of the information.

In June 2024, the SBP purchased US$573 million from the open market.

By the end of March 2025, country’s foreign exchange reserves are projected to reach US$12.0 billion despite debt repayments.

The government is obligated to pay US$14.2 billion by March 2025, of which US$8.3 billion will be rolled over, while the remaining amount consists of debt repayments.

To date, the government has cleared US$4 billion in debt, including US$2.3 billion in rollovers. The remaining debt repayments of US$5.8 billion will be spread evenly until March 2025.

For FY24, the government has US$26 billion in debt obligations, including US$12 billion in rollovers and US$4 billion in commercial bilateral loans, which are also expected to be rolled over.

Of the US$8.3 billion repayments due this year, US$1.7 billion has already been settled.

According to audited accounts, the SBP earned a profit of PKR2.5 trillion in FY24 and is expected to disburse this amount as a dividend to the government in the coming days.

Non-oil imports are at levels seen in FY22 and early FY23, with the reduction primarily driven by a significant decline in oil imports.

 

 

Resilience of Russian Economy, beyond doubt

Bloomberg reports that Russian government has touted robust domestic demand in boosting its 2024 growth forecast on Tuesday. While some might be tempted to dismiss the move as geopolitical bravado in the face of the US stepping up Ukraine aid, Russian economic strength is real.

In fact, Moscow’s new 2.8% GDP projection weighs in under the IMF’s latest ‑ also upgraded forecast, of 3.2%, released last week.

It might be tempting to put this resilience down to a massive defense build-up. But the Washington-based IMF had much the same assessment as President Vladimir Putin’s team: a strong job market and swift wage rises are helping to power consumer spending. The fund even cautioned “there are some signs of overheating,” with unemployment at a record low.

What about all the Western sanctions, the mass emigration of Russian talent and the departure of a number of global corporate giants? Alexander Isakov at Bloomberg Economics offers some insight.

The sanctions on Russian energy aren’t as tight as they were for, say, Venezuela and Iran, thanks in large part to the West not wanting to worsen its own cost-of-living shock with a further surge in oil prices.

Some financial sanctions had already been imposed in 2014 after the Crimea invasion, and Russia had already amortized that cost.

Russian households remain confident thanks to a tight labor market, with the jobless rate at 2.8%. A largely voluntary military recruitment model, using monetary incentives, has let consumers keep calm and carry on.

Since some large multinationals have stayed in place, will Russia’s economy just keep on ticking?

Isakov notes that part of job market’s tightness is indeed a side effect of fiscal outlays tied to the war, funded in part by energy exports. Moscow needs crude prices to stay around the current US$90 a barrel levels to keep the budget balanced — a slump to, say, US$60 could make things difficult.

The IMF sees growth slowing to 1.8% next year, and cautioned that Russia’s potential growth rate has dropped to around 1.25% from 1.7% before the war.

This would mean that Russia’s income per capita may no longer converge toward Western European levels in the medium to long term, but for now, Russia’s chugging right along

 

Transition from OPEC to OPEC Plus

OPEC was founded in 1960 in Baghdad by Iraq, Iran, Kuwait, Saudi Arabia and Venezuela with an aim of coordinating petroleum policies and securing fair and stable prices. Now, it includes 13 countries, which are mainly from the Middle East and Africa. They produce around 30% of the world's oil.

There have been some challenges to OPEC's influence over the years, often resulting in internal divisions, and a global push towards cleaner energy sources and a move away from fossil fuels could ultimately diminish its dominance.

OPEC became OPEC Plus in 2016 after joining hands with 10 of the world's major non-OPEC members, including Russia.

OPEC+ Plus represents around 40% of world oil production and its main objective is to regulate the supply of oil to the world market. The leaders are Saudi Arabia and Russia, which produce around 10 million barrels per day (bpd) of oil each.

OPEC member states' exports make up around 60% of global petroleum trade. In 2021, OPEC estimated that its member countries accounted for more than 80% of the world's proven oil reserves.

Because of the large market share, the OPEC decisions affect oil prices. Its members meet regularly to decide how much oil to sell on global markets.

As a result, when they lower supply when demand falls, oil prices tend to rise. Prices tend to fall when the group decides to supply more oil to the market.

On April 02, 2023 OPEC Plus agreed to deepen crude oil production cuts to 3.66 million barrels per day (bpd) or 3.7% of global demand, until the end of 2023, which helped to push up oil prices by about US$9 a barrel to above US$87 per barrel over the following days, but Brent prices have since lost those gains.

During the 1973 Arab-Israeli War, Arab members of OPEC imposed an embargo against the United States in retaliation for its decision to re-supply the Israeli military, as well as other countries that supported Israel. The embargo banned petroleum exports to those nations and introduced cuts in oil production.

The oil embargo pressured an already strained US economy which had grown dependent on imported oil. Oil prices jumped, causing high fuel costs for consumers and fuel shortages in the United States. The embargo also brought the United States and other countries to the brink of a global recession.

In 2020, during COVID-19 lockdowns around the world, crude oil prices slumped. After that development, OPEC Plus slashed oil production by 10 million barrels a day, which is equivalent to around 10% of global production, to try to bolster prices.

The current members of OPEC are: Saudi Arabia, United Arab Emirates, Kuwait, Iraq, Iran, Algeria, Angola, Libya, Nigeria, Congo, Equatorial Guinea, Gabon and Venezuela.

Non-OPEC countries in the global alliance of OPEC Plus are represented by Russia, Azerbaijan, Kazakhstan, Bahrain, Brunei, Malaysia, Mexico, Oman, South Sudan and Sudan.

OPEC to welcome Iran’s return to oil market

OPEC will welcome Iran’s full return to the oil market when sanctions are lifted, the secretary general of the Organization of the Petroleum Exporting Countries (OPEC) told the Iranian oil ministry's website SHANA on Monday.

Iran is an OPEC member, although its oil exports are subject to US sanctions aimed at curbing Tehran's nuclear program.

Secretary General Haitham Al Ghais, who is visiting Tehran for the first time, added that Iran has the capacity to bring on significant production volumes within a short period of time.

"We believe that Iran is a responsible player amongst its family members, the countries in the OPEC group. I’m sure there will be good work together, in synchronization, to ensure that the market will remain balanced as OPEC has continued to do over the past many years," SHANA's English-language website cited him as saying.

Asked about OPEC’s voluntary production cut and its effect on oil prices, Ghais said, "In OPEC...we don’t target a certain price level. All our actions, all our decisions are made in order to have a good balance between global oil demand and global oil supply."

In a surprise move in early April, Saudi Arabia and other members of OPEC Plus, which comprises OPEC and allies including Russia, announced further oil output cuts of around 1.2 million barrels per day, bringing the total volume of cuts by OPEC Plus to 3.66 million barrels per day, according to Reuters calculations.

Saudi Arabia, the kingpin of OPEC, and Iran announced in March that they would restore diplomatic relations after years of hostility, in a deal brokered by China, the world's second largest oil consumer.

US House committee to consider bill on pressuring OPEC

The House Judiciary Committee was set to consider a bill on Wednesday to pressure the OPEC oil production group to stop making output cuts that can result in higher fuel prices for US drivers.

The committee was expected to vote on No Oil Producing and Exporting Cartels (NOPEC) bill, which would change US antitrust law to revoke the sovereign immunity that has protected OPEC Plus members and their national oil companies from lawsuits over price collusion. OPEC Plus members include Saudi Arabia and Russia.

In March, a group of bipartisan senators introduced a similar bill in the Senate.

Analysts were skeptical that the NOPEC bill would pass Congress while oil prices were relatively low as the market fears a recession.

"House Judiciary Committee passage of NOPEC is more a biennial tradition than a sign of momentum," Rapidan Energy Group said in a note to clients. The committee has passed the bill in 2018, 2019 and 2021, Rapidan said.

The bill would have to pass the committees, both chambers of Congress and be signed by President Joe Biden to become law.

 

Pakistan: OGDC profit down 22%QoQ

Pakistan’s largest exploration and production company, Oil & Gas Development Company (OGDC) has reported its 2QFY23 financial results, posting profit after tax of PKR 41.7 billion (EPS: PKR9.70), lower by 22%QoQ, higher by 18%YoY.

Net sales were PKR97.2 billion for the period, down 8.3%QoQ but up 22%YoY basis, mainly on the back of declining oil prices (down 15%QoQ) during the period. Overall, total hydrocarbon production declined by 1.7% during the quarter.

Exploration expenses were reported at PKR5.1 billion on account of two dry wells: Shahpurabad-1 (OGDCL stake: 50%) and Sundha Thal-1 (OGDCL stake: 50%).

Furthermore, operating expenses increased to PKR21.4 billion (up 15%QoQ) from PKR18.63 billion in the previous quarter.

Finance & other income for the quarter were reported at PKR9.2 billion, likely due to higher income on lease holdings and bank deposits.

Along with the result, company also announced an interim cash dividend of PKR2.25/share, taking total 1HFY23 dividend payout to PKR4.0/share.

 

Xi calls for oil trade in yuan

President Xi Jinping told Gulf Arab leaders that China would work to buy oil and gas in yuan, a move that would support Beijing's goal to establish its currency internationally and weaken the US dollar's grip on world trade.

Xi was speaking in Saudi Arabia where Crown Prince Mohammed bin Salman hosted two milestone Arab summits with the Chinese leader which showcased the powerful prince's regional heft as he courts partnerships beyond close historic ties with the West.

Top oil exporter Saudi Arabia and economic giant China both sent strong messages during Xi's visit on non-interference at a time when Riyadh's relationship with Washington has been tested over human rights, energy policy and Russia.

Any move by Saudi Arabia to ditch the dollar in its oil trade would be a seismic political move, which Riyadh had previously threatened in the face of possible US legislation exposing OPEC members to antitrust lawsuits.

China's growing influence in the Gulf has unnerved the United States. Deepening economic ties were touted during Xi's visit, where he was greeted with pomp and ceremony and met with Gulf states and attended a wider summit with leaders of Arab League countries spanning the Gulf, Levant and Africa.

At the start of Friday's talks, Prince Mohammed heralded a historic new phase of relations with China, a sharp contrast with the awkward US-Saudi meetings five months ago when President Joe Biden attended a smaller Arab summit in Riyadh.

Asked about his country's relations with Washington in light of the warmth shown to Xi, Foreign Minister Prince Faisal bin Farhan Al Saud said Saudi Arabia would continue to work with all its partners. "We don't see this as a zero sum game," he said.

"We do not believe in polarization or in choosing between sides," the prince told a news conference after the talks.

Though Saudi Arabia and China signed several strategic and economic partnership deals, analysts said relations would remain anchored mostly by energy interests, though Chinese firms have made forays into technology and infrastructure sectors.

"Energy concerns will remain front and centre of relations," Robert Mogielnicki, senior resident scholar at the Arab Gulf States Institute in Washington, told Reuters.

The Chinese and Saudi governments will also be looking to support their national champions and other private sector actors to move forward with trade and investment deals. There will be more cooperation on the tech side of things too, prompting familiar concerns from Washington."

Saudi Arabia agreed a memorandum of understanding with Huawei this week on cloud computing and building high-tech complexes in Saudi cities. The Chinese tech giant has participated in building 5G networks in Gulf states despite US concerns over a possible security risk in using its technology.

Saudi Arabia and its Gulf allies have defied US pressure to limit dealings with China and break with fellow OPEC Plus oil producer Russia over its invasion of Ukraine, as they try to navigate a polarized world order with an eye on national economic and security interests.

Riyadh is a top oil supplier to China and the two countries reaffirmed in a joint statement the importance of global market stability and energy collaboration, while striving to boost non-oil trade and enhance cooperation in peaceful nuclear power

Xi said Beijing would continue to import large quantities of oil from Gulf Arab countries and expand imports of liquefied natural gas, adding that their countries were natural partners who would cooperate further in upstream oil and gas development.

China would also make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade, he said.

Beijing has been lobbying for use of its yuan currency in trade instead of the U.S. dollar.

A Saudi source, speaking before Xi's visit, told Reuters that a decision to sell small amounts of oil in yuan to China could make sense in order to pay Chinese imports directly, but it is not yet the right time.

Most of Saudi Arabia's assets and reserves are in dollars including more than US$120 billion of US Treasuries that Riyadh holds, and the Saudi riyal, like other Gulf currencies, is pegged to the dollar.

Earlier, the Chinese leader said his visit heralded a new era in relations, voicing hope the Arab summits would become "milestone events in the history of China-Arab relations".

 

Interruption in Libyan oil supply: A cause of concern or bluff only

Contrary to the wishes of US fund managers price of crude oil could not be jacked up. The United States caused a war like situation in Ukraine to keep oil prices at an elevated level. When the strategy failed US supported forces in Libya caused virtual shut down of production and loading facilities.

I have preferred to term this strategy a bluff only because Libya’s share in global oil markets is paltry. Export or no export is hardly of any consequence. Dissemination of such reports by the Western media facilitates the fund managers to drive the market and make windfall profit.

 Reportedly, Libyan National Oil Company (NOC) has declared force majeure on another key Libyan oil field, the 300,000 bpd Al Sharara, amid protests that had shut down production at two ports and the El Feel oilfield on Sunday.

NOC said, “A group of individuals put pressure on workers in the Al-Sharara oil field and forced them to gradually shut down production and made it impossible for the NOC to implement its contractual obligations”. 

The NOC said it was “obliged” to declare a state of force majeure on Al Sharara “until further notice”. 

Al-Sharara is Libya’s biggest oilfield, and the move effectively suspended all Libyan oil production and exports. 

On Sunday, the NOC said that loadings of crude oil at two Libyan ports had been suspended amid anti-government protests that were interfering with oil industry operations.

Loading from the Mellita terminal was suspended following a shut down in production at the El Feel oil field, with the NOC stating that individuals were preventing the field’s workers from continuing production. 

Also on Sunday, the NOC shut down operations at the Zueitina export terminal over protests calling for the resignation of incumbent Prime Minister Abdul Hamid Dbeibah.  

The NOC has been eyeing a ramp-up in production to 1.4 million bpd for Libya, but a new political battle is setting the stage for potential return to civil war. Libya has been producing around 1million bpd since the beginning of this year. 

Two rival governments have now emerged in Libya, with incumbent Prime Minister Deibah refusing to step down for newly sworn-in eastern Prime Minister Fathi Bashaga, who last week said his forces would take over the capital Tripoli peacefully. 

The latest protests that have led to force majeure appear to be engineered by supporters of the Bashaga to gain control of the oil industry from supporters of the incumbent Dbeibah. 

Early on Monday, the initial force majeure declarations pushed oil prices higher, with Brent trading above US$111 per barrel.

With the latest force majeure declaration for Al-Sharara, oil prices are pushing higher still, with Brent at US$113 at the time of writing and WTI above US$108. 

 

Saudi Arabia chooses Putin over Biden on Ukraine to keep oil Prices high

I have selected an article by David Ottaway dated March 02, 2022 and want to share it with readers of my blogs.  This may help them understand that the United States and Saudi Arabia don’t share ‘same oil policy’. 

In my opinion only United States can be held responsible for the widening breach between the two countries. 

Saudi Arabia has decided to side with Russia and spurn cries of United States for help as the Ukraine crisis sends the price of oil sky high even though it is the only country with sufficient spare oil production to stop the spiraling to its highest level in eight years. 

Saudi Arabia, Russia, and the United States are the world’s top three oil exporters, supplying collectively 30% of world demand. But Saudi Arabia is the only one with the capacity to increase production quickly, by as much as two million barrels per day, more or less immediately.

The Saudi government has come under increasing pressure from US President Joe Biden to use its leverage to lower prices. But the Saudi de facto ruler, Crown Prince Mohammed bin Salman (MBS), has just re- committed to working with Russia to keep them high. Prices have reached over US$100/barrel; up dramatically from the onset of the coronavirus pandemic two years ago, when prices at one point in April 2020 fell below zero.

The crown prince clearly feels he owes nothing personally to President Biden, who has refused to talk to him due to their falling out over the former’s involvement in the assassination of the prominent Saudi journalist Jamal Khashoggi.

Saudi Arabia has shown less and less interest in cooperating with the United States on oil matters as it has become a rival oil exporter to the Saudi kingdom.   The US companies presently export around three million barrels a day as compared to Saudi Arabia’s 6.8 million barrels. But they currently produce roughly a million barrels more because the Saudis deliberately limit their output to keep upward pressure on prices.

On the other hand, oil has brought MBS and Russian President Vladimir Putin closer than ever before – at least on oil matters. Saudi Arabia and Russia each lead a group of oil producers that have figured out how to work together to keep prices high.  The former heads the 13-Member Organization of Oil Exporting Countries (OPEC) and the latter a grouping of ten non-OPEC producers.  Together, they are referred to as OPEC+ Plus.

The Saudi prince’s siding with Putin over Biden has also been reflected in Saudi silence on the Russian invasion of Ukraine. This may be partly explained by Saudi Arabia’s own invasion of neighboring Yemen. Both leaders have said their action was motivated by historic ties and national security concerns.

At an emergency meeting Wednesday, the 23 producers voted to stick to their plan to increase their collective production by only 400,000 more barrels a day each month. By this they signaled no interest in seeing prices fall or in coming to the rescue of Western European nations facing a drop in their Russian oil imports, which account for about 30% of their total consumption.    

When it comes to oil, US-Saudi relations have turned from being more or less cooperative to outright antagonistic as the US companies have developed new methods of extracting oil and gas from shale deposits known as fracking. 

This has seen US crude oil production shoot up from 5.2 million barrels a day in 2005 to more than 12 million barrels just before the pandemic cratered the world economy in early 2020. 

This happened just as Saudi Arabia and Russia were in a standoff over increasing production. In a power play, the Saudis decided in March of that year to swamp the market with more oil to force its will on Russia, increasing their production from 9.7 million barrels a day to 12.3 million.

At the same time, they decided to try to put those US companies involved in fracking out of business.  In March 2020, they hired twenty supertankers carrying 40 million barrels of oil to the United States where it was dumped on an already saturated market. Its effect was dramatic.

On April 20, 2020 the price for a barrel of oil on the New York Mercantile Exchange actually fell to negative US$37.63, a theretofore unheard of low. The oil dump plus the pandemic-induced recession achieved the Saudi objective, scores of small fracking companies went out of business and US production dropped by more than two million barrels a day.

Biden even made a rare phone call to King Salman in early February to plead his case for more Saudi oil.

Ever since, the Saudi crown prince and his oil minister, Prince Abdulaziz bin Salman, who is his half-brother, have chosen to work with Russia and OPEC+ Plus over heeding any pleas for help from the White House. Even before the Ukraine crisis, Biden was pressing Saudi Arabia to open up its oil spigot to help relieve the ever-rising price of gasoline in the United States – one of the main causes of high inflation helping to undermine his standing in the polls. Biden even made a rare phone call to King Salman in early February to plead his case for more Saudi oil. According to the White House account of their conversation, the two leaders committed to ensuring the stability of global energy supplies.

A week later, the Saudi Oil Minister made clear his country was sticking to the agreement first worked out in July 2021 among the 23 members of OPEC+ to slowly only restore their monthly collective production at the rate of 400,000 more barrels a day. This agreement has been renewed again and again ever since.

At its meeting which lasted just 15 minutes, OPEC Plus issued a statement washing its hands of any responsibility for spiraling oil prices.  It declared the oil market well-balanced and blamed the volatility in prices on current geopolitical developments. There was no mention of Ukraine.

 

Bangladesh Forex Crisis threatens macroeconomic stability of the country

According to The Bangladesh Chronicle, like other countries of the world, Bangladesh too is facing volatility in the foreign exchange market. This was initially caused by the demand recovery and supply chain disruptions as battered economies began recovering from the coronavirus pandemic.

The volatility has exacerbated in the last one month because of Russian invasion of Ukraine. This is not only likely to derail the rebound from the health crisis but also bringing about a bigger macroeconomic challenge for Bangladesh.

Maintaining a stable exchange rate of the taka against the US dollar is a populist idea that prevailed in the mindset of both the government and commoners. The same thinking might still be dominating, although the country seems to be facing a far bigger crisis than the pandemic.

Bangladesh Bank seems to be indecisive whether it would go for gradual depreciation of the local currency or opt for a quick devaluation. The situation has been created by the dwindling flow of foreign exchange.

Bangladesh Bank injected a record US$3.78 billion between July 1, 2021 and March 23, 2022 to stop the freefall of the taka, but the initiative has hardly resolved the crisis faced by the dollar-strapped banks.

Although, export earnings are on the rise, this has not been enough to offset the instability in the foreign exchange market led by a steep increase in import payments and a sharp decline in remittance.

Between July 2021 and January 2022, imports grew to US$46.67 billion, up 46%YoY. As against this exports increased 29% to US$27.97 billion. Remittance declined 19.4% to US$16.68 billion.

The imbalance between the inflow and outflow of US dollars has compelled many banks to purchase the greenback from Bangladesh Bank to settle letters of credit for imports.

The central bank is providing dollars to the banks with utmost generosity as the taka would face a major fall if the support is not extended.

The exchange rate now stands at Tk 86.20 per US dollar compared to Tk 84.80 a year ago. This means the central bank has allowed the taka to depreciate in a certain range.

But Ahsan H Mansur, an economist who earlier worked at the International Monetary Fund, describes the central bank’s move as insufficient to ensure macroeconomic stability from the current global turmoil.

“Bangladesh Bank will have to devalue the local currency by Tk 3 against the dollar immediately,” he said.

Higher imports against moderate exports brought down Bangladesh’s foreign exchange reserves to US$44.29 billion on March 23. This is way down from the US$48 billion recorded in August last year.

Economists think the worse is yet to come. This is because the impact of the global supply chain disruption stemming from Russia’s invasion of Ukraine has not fully hit Bangladesh yet.

Businesses usually open letters of credit two to three months before the arrival of imported products. So, the effect of the war will be visible a couple of months later.

 “The crisis in the foreign exchange regime will deepen if the increasing imports cannot be contained,” Mansur said.

He suggested bringing down the country’s import growth below 30% from 46% now or else the reserves will be hit hard by the ongoing instability.

The depreciation risks stoking inflationary pressure to some extent. The official figure of the Consumer Price Index surged to a 16-month high in Bangladesh in February driven by soaring costs of essential food ranging from staples such as rice, edible oil and vegetables to protein items.

“Inflation will increase, but you will have to embrace it for the time being,” said Mansur when asked how the government would tackle the situation.

“We don’t want to become Sri Lanka, which has long been facing a foreign exchange crisis,” he added.

Sri Lanka has been hit with the financial crisis because of a shortfall of foreign currencies. As a result, traders cannot finance imports.

On Tuesday, the country was forced to order troops to petrol stations as sporadic protests erupted among the thousands of motorists that queue up daily for scarce fuel.

“Any delays in taking initiatives to address the existing crisis will deal a fatal blow to the macroeconomic stability,” said Mansur.

Remittance flow through the official channel may reduce further as the exchange rate in the kerb market, an illegal trading spot, is higher than in the banking sector.

A foreign currency trader says that people now have to count Tk 91.80 per dollar, way higher than the Tk 86.20 interbank rate.

The foreign exchange regime volatility has even forced a bank to stop publishing US dollar rates in the last few days since the rates are fluctuating abnormally, said an executive of the lender requesting anonymity.

“If the kerb market continues to offer a higher rate, remitters will opt for the informal channel,” Mansur said.

“This will bring the reserves to a critically low level. So, the central bank should narrow the gap as the subsidy of 2.5% given by the government to beneficiaries of remittances is not adequate,” he added.

Md Habibur Rahman, Chief Economist of Bangladesh Bank, says the central bank has decided to gradually depreciate the local currency.

He thinks the exchange rate gap between formal and informal markets should be Tk 2.50 per dollar to ride out the ongoing situation.

If his view translates into reality, the exchange rate will have to be depreciated to at least Tk 89 per dollar, which is also supported by Mansur.

“The central bank will bring about quick depreciation of the taka to a certain degree since injecting dollars to keep the exchange rate stable is not an ideal stance for long,” Rahman said yesterday.

However, he has not given any hint as to how much depreciation will be allowed.

Another central bank official said the government would try to keep inflation in check in order to protect people from higher prices since the next general election is not far away.

Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, says the reserves could cover import payments for more than nine months a few months ago, but now it can finance imports for about 5 and a half months.

He calls the gradual depreciation of the taka a time-befitting move.

“The depreciation will bring imported inflation. The government can lessen the woes of the common people by giving fiscal supports such as waiving or reducing taxes and value-added taxes, and providing subsidies to expand open market sales,” he said.

“But such fiscal measures will have an implication on drawing up the next budget,” Rahman added.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, says the imports of non-essential and luxury items have to be discouraged as some banks now face foreign currency shortages.

Will crippling Russian economy stop Putin?

A week since Russian forces invaded Ukraine; President Vladimir Putin's economy is feeling the effects of global condemnation. Matthew Boesler reports in Bloomberg Businessweek today, the world has weaponized finance to punish Russia, slapping it with sanctions and limiting its access to capital and currency.

That leaves the country facing what Bloomberg Economics calls “four intersecting crises”, which they predict will unite to tip Russia into a deep recession and cool growth elsewhere.

Crisis 1: A bank run provoked by concern over the safety of deposits

Crisis 2: A credit crunch as lenders retrenches amid losses

Crisis 3: A freefalling ruble amid the freezing of reserves, diminished trade and a rush to safety

Crisis 4: A debt default as assets held abroad are frozen and Russia retaliates

 Just how much pain there will be is hard to say, but this chart shows the implications of each shock:

“Historical comparisons illustrate the difficulty of making a precise estimate of the impact on Russia’s economy,” said Bloomberg economists Scott Johnson, Jamie Rush and Tom Orlik. “What’s clear is that it will be big.”

Capital Economics reckons Russia’s gross domestic product will slide to become the 14th-largest economy from 11th.

The National Institute for Economic and Social Research of UK estimates the conflict could knock US$1 trillion off the value of the world economy and add 3% to global inflation. 

There will also likely be new chapters especially given it's hard to tell how long the conflict will last. Foreign governments may ultimately impose curbs on energy exports and Russia may slow the supplies itself. China could become a backdoor source of money. Moscow also has US$150 billion of external debt due in the next 12 months, which it may choose not to pay.

As for the rest of the world, Bloomberg Economics says Eastern Europe will be especially hurt, while US$120 oil will pose a material hit to growth in the euro-area. Central banks will face even more complicated choices.

For now though, the people of Russia appear more resigned than panicked, as this story from Moscow shows.

Many Russians, who have seen numerous bank runs over the last three decades, are for now approaching the descending hardship with fatalism. 

“As strange as it sounds, in general there’s no panic at stores or ATMs,” said Elmira, who works in education in Ufa in the Urals region. She declined to give her last name.

“There’s clearly no easy solution, but I wasn’t about to run and buy up EUR or US$ or get something just to spend money,” she said.

 

Shipping fallout post Ukraine invasion

According to Seatrade Maritime News, the hike in cost of fuel reflects the most immediate impact on shipping of the Russia-Ukraine conflict. However, in the weeks ahead, analysts predict broad fallout from Russia’s aggression which has generated widespread condemnation and protests too from ordinary Russian people.

There is the thorny issue of food prices. Between them, Russia and Ukraine produce about 30% of the world’s wheat and about a fifth of its corn. Disruption to the supply chain could produce extra ton-miles for bulk carrier owners but will inevitably mean higher food prices. This development follows a spell in which consumers in many countries have watched with dismay as living costs spiral. Supply disruption, fuel price hikes, longer voyages, and more expensive sea transport will only add to these inflationary pressures.

The bunker price hikes did not mirror the leap in spot crude prices which saw Brent breach US$105 and West Texas Intermediate flirt with US$100, increases of around 8%. Global average bunker prices across 20 bunkering ports, compiled by Ship&Bunker, clocked the price of very low sulphur fuel oil (VLSFO) at US$774, up almost 3% on Wednesday’s US$752 figure. Conventional heavy fuel oil (HFO) prices rose by a similar margin, with the 20-port average climbing to US$597.

However, the averages disguised marked regional differentials. VLSFO prices in Rotterdam shot up 4.5% to hit US$731.50, but only 2.3% in Singapore, settling at US$769. Corresponding HFO prices rose by close to 6% in Rotterdam, ending up at US$559, but climbed 3.6% in Singapore, to US$597.  

Spot oil prices at 1000 hrs London time on Friday morning had eased back, with Brent pitched at about US$100 and West Texas Intermediate at US$93.50. However, these are still the highest energy prices since 2014 and reflect an increase of more than 60% since February 2021 when the average price of Brent crude was US$62.

Meanwhile, amid increasingly hostile tit-for-tat moves by Russia and its NATO opponents, LNG prices are set to rise significantly, some say dramatically. Europe relies on Russia for about a third of its gas. Experts point out that there may be some scope to import more gas from the US and other producers in the Middle East, for example, but not on a scale that will compensate.

The result should prove beneficial for owners of LNG tankers that are not already committed on long-term contracts. Vessels trading spot or short-term are likely to benefit from very high rates in the months to come, and possibly longer. Moreover, there is almost no scope to raise LNG tanker supply before the middle of the decade because specialist builders are fully booked.

There is the thorny issue of food prices. Between them, Russia and Ukraine produce about 30% of the world’s wheat and about a fifth of its corn. Disruption to the supply chain could produce extra ton-miles for bulk carrier owners but will inevitably mean higher food prices. This development follows a spell in which consumers in many countries have watched with dismay as living costs spiral. Supply disruption, fuel price hikes, longer voyages, and more expensive sea transport will only add to these inflationary pressures.   

 

OPEC plus decides fate of energy market in 16 minutes

The Ministers of the OPEC plus, who met via video conference, rubber-stamped in just 16 minutes the monthly production hike by 400,000 bpd. In the shortest meeting so far in its history, OPEC+ decided on Wednesday to increase the collective production by 400,000 barrels per day (bpd) in March 2002. 

This left production plan unchanged and pushed Brent price above US$90/barrel.

Some analysts, and traders, had expected a higher production increase, considering the recent rally that has frustrated major oil-consuming nations, including the United States.

Earlier this week, Goldman Sachs had expressed the view that OPEC plus might decide to announce a larger production increase for March than the usual 400,000 bpd, keeping in view the recent oil rally to and the potential for renewed discontent from major oil importers at these high price levels.

OPEC plus confirmed the 400,000-bpd increase in record time and didn’t even plan a press conference after the meeting. 

Brent Crude prices returned to US$90 per barrel just after news of the modest production increase and the record-short meeting broke.

While the nominal increase is modest, as in the previous seven months, many producers within the OPEC+ group are struggling to pump to their quotas, leaving an increasingly large gap between production increase on paper and actual growth in output, which leaves the market tighter than many analysts and forecasters, had anticipated just a few months ago.

Going forward, the market will be closely looking at how much of that increase OPEC plus can actually deliver, considering that half of its members have lagged in ramping up output to their quotas so far, while more producers­—with few exceptions such as Saudi Arabia and the UAE—will be struggling to raise production.

According to the production table provided by OPEC, Saudi Arabia and Russia will each have a quota of 10.331 million bpd in March 2022.

The next OPEC plus meeting is scheduled for March 02, 2022.

US accuses OPEC Plus jeopardizing global economic recovery

The White House has said OPEC Plus is risking imperiling the global economic recovery by refusing to speed up oil production increases and warned the United States was prepared to use "all tools" necessary to lower fuel prices.

The move came after Saudi Arabia-led Opec and its allies such as Russia rejected US calls to help tame rising oil prices, insisting they would stick with a plan of only gradually increasing output, even as demand roars back from the depths of the pandemic.

"Opec+ seems unwilling to use the capacity and power it has now at this critical moment of global recovery for countries around the world," said a spokesperson for Biden's National Security Council.

"Our view is that the global recovery should not be imperilled by a mismatch between supply and demand."

Oil prices are close to seven-year highs despite economic activity not yet fully recovering to pre-pandemic levels and higher energy costs stoking concerns about inflation. Brent crude oil prices slipped about 2 per cent after the meeting towards $80 a barrel.

US President Joe Biden has blamed Russian and Saudi oil supply restraint for a surge in US petrol prices, which have risen 60 per cent in the past 12 months.

Jennifer Granholm, the US energy secretary, told the Financial Times last month that a release of oil from the country's strategic stockpiles was among "tools" the Biden administration could deploy to cool crude prices that have more than doubled in the past year.

Saudi Arabia defended its stance on Thursday saying the producer group was acting as a "responsible regulator" by only gradually increasing oil output by 400,000 barrels a day (bpd) each month.

"What we have seen over the past few months again and again and again is that energy markets must be regulated otherwise things will go astray," Prince Abdulaziz bin Salman, Saudi energy minister, said in an extended press conference.

The group sought to present a united front to the US, with energy ministers from Mexico to the UAE lining up to support the decision.

Opec+ said in a statement it wanted to "provide clarity to the market at times when other parts of the energy complex outside the boundaries of oil markets are experiencing extreme volatility and instability".

Abdulaziz repeatedly referenced gas and coal markets, the prices of which have risen faster than oil this year, to justify the group's actions but the explanation failed to satisfy the White House.

Saudi Arabia has long been one of Washington's most important Middle Eastern allies but tensions are increasing with the Biden Administration.

Biden has refused to speak with Crown Prince Mohammed bin Salman, the heir to King Salman and day-to-day ruler of the country. The US released a declassified intelligence report in March that said the Crown Prince authorised the murder of Washington Post journalist Jamal Khashoggi.

Abdulaziz is the half brother of the Crown Prince and is seen as frustrated by the push by western countries to cut their reliance on fossil fuels while also asking the kingdom to raise oil production.

"The relationship between Saudi Arabia and the US is at risk of being strained as the latter is going full-bore to tackle climate change," said Christyan Malek, head of oil and gas research at JPMorgan.

"But Saudi Arabia in this context needs to fund its own energy transition. And it's looking for an oil price and a relationship which is conducive for that."

The White House has also said it is monitoring Russia's actions in natural gas markets, as prices in Europe and Asia have soared fivefold this year. Some lawmakers in Europe and the US have blamed Moscow for exacerbating the gas price surge by restricting supplies to Western Europe.

Bob McNally, head of Rapidan Energy Group and a former adviser to the George W Bush White House, said the decision by Opec+ could prompt a response from consumer countries.

"Given the complete rebuff by Opec+ and President Biden's clear threats to respond, odds of a US if not an International Energy Agency strategic stock release are rising fast along with other retaliatory options," he said.

Under the current plan, Opec+ will add 400,000 bpd every month until the end of 2022, restoring oil supply removed last year after the US cajoled Saudi Arabia and Russia to make record deep cuts to prop up an industry devastated by the pandemic.

Pakistan Stock Exchange Witnesses Quantum Jump in Average Daily Trading Volume

During the week ended 20^th April, 2017, Panama case verdict cleared political uncertainty along with upcoming MSCI inclusion, positive sentiments are likely to prevail going forward. Ongoing results season is likely to accelerate momentum, while budgetary proposals can direct market performance accordingly. The key news flow during the week included: 1) Net foreign direct investment (FDI) soared 12.4%YoY to US$1.6 billion during first nine months of current financial year, 2) FY18 federal budget would be presented on May 16’17 as announced by Finance Minister, 3) Current account deficit increased by 161%YoY to US$6.13 billion during nine months of current financial year, 4) ASTL announced expansion in steel melting/rolling mill capacity by 200,000/270,000 tons per annum and 5) GoP rejected all bids in the latest PIB auction held on 19^th April. Average daily trading volume increased by 62.44%WoW to 277.66 million shares where volume leaders of the week were: EPCL, TRG, KEL, ASL (63.4mn shares), and 5) BOP (48.5mn shares).Top performers during the week were: SNGP, ASTL, CHCC, HASCOL, and HCAR, while from the main board only MCB ended up in the red zone.

The current account deficit (CAD) reduced to US$562 million in March’17 from US$822 million in February’17 (down 32%MoM). Despite slight increase in trade deficit (+0.85%MoM), the monthly improvement came on the back of higher remittances in March’17 amounting to US$1.69 billion, recording sequential rise of 20%MoM. However, current account dynamics remain considerably weaker on YoY basis, with US$122 million surplus recorded in March'16, due to continued escalation in imports (+34%YoY to US$4.3 billion) particularly on higher auto/machinery imports and higher crude oil prices. The cumulative CAD for 9MFY17 surged to US$6.1 billion, posting an increase of 161%YoY bringing the deficit close to 1.9% of the GDP. This reflects weak trade dynamics. Going ahead, current account is expected to continue its downward slide on account of falling exports, rising imports and remittances remaining flat.

FFBL is scheduled to announce earnings for 1QCY17 on Monday, 24^th April where AKD Securities expects the company to post net loss of Rs97 million (LPS: Rs0.10) as compared to a net loss of Rs514 million (LPS: Rs0.55) for 1QCY16. This reduction in loss is expected on the back of: 1) a 19% YoY increase in topline to Rs5.24 billion reflecting 54%YoY likely increase in DAP off‐take to 109,000 tons and 2) improvement in gross margin (GM) to 12.7% for 1QCY17 due to significant decline in phosphoric acid prices diluting the effect of significant reduction in DAP prices due to depressed international prices.

EFERT is also scheduled to announce its quarterly financial results on the same day. The brokerage house expects EFERT's earnings to nosedive to Rs1.19 billion (EPS: Rs0.90), down 44%YoY. The decline in earnings is expected on the back of: 1) GM declining to 33.2% on account of reduction in urea prices (down 9%YoY) due to depressed farm economics and low international prices, down  by 10%YoY to an average of US$210/ton in 1QCY17.

Pakistan Stock Market Remains Lackluster

Trading at Pakistan Stock Exchange remained lackluster evident from benchmark index sliding by 1.7%WoW and closing the week at 48,156 points. The average daily trading volume also declined by 3.5%WoW to 248.7 million shares.The lack of investors’ interest can be attributed to political volatility and absence of market triggers. News flows for the week included: 1) SECP in its press release dated 29th March apprised that its constituted committee (for reviewing in‐house financing) had submitted a report which focused on introducing reforms in Margin Financing (MFS) to improve banks' funding to investors through brokers, 2) GoP released total Rs505 billion (63% of total Rs800 billion allocated) inclusive of Rs122 billion from foreign aid, 3) GoP allowed PTA to auction a next generation mobile services (NGMS) license with a base price of US$295 million from the frequency spectrums left unsold in the previous two auctions, 4) NML announced selling of 40% stake of its auto assembling business to the Japanese giant Sojitz Corporation and 5) OGRA proposed an increase of POL products for April. Stocks leading the bourse include: SHEL, MTL, ASTL and MEBL, whereas laggards were: HASCOL, AKBL, KEL, NML. Volume leaders were: BOP, ANL, KEL and ASL. Headline inflation is expected to guide expectations for monetary policy and may trigger a rally in banks. Additionally, the much awaited outcome of Panama case hearings could alleviate political pressures.

Circular debt and overdue receivables remain a usual element in cash strapped liquidity dynamics for the power sector. Taking a comprehensive approach, AKD Securities map the timeline of developments and quantum of circular debt build up since the one‐time clearance of Rs480 billion in June 2013. Its analysis show that in a large number of cases the GoP has been asked by independent arbitrators (foreign and domestic) and high courts to clear the pile‐up. This perception gains further strength based on increasing reliance on IPPs in power generation mix particularly in the backdrop of 10,663MW of gross capacity additions coming online by CY20. Also, with its political agenda hinging on resolving the prevailing power deficit of over 5,000MW, it is believed that a limited clearance of overdue payables to them is more likely. The Rs48 billion being claimed by 13 IPPs currently is a minor hiccup whereas IPPs with planned CAPEX outlays have increased pressure to free up liquidity tied in GoP receivables (case in point being HUBC where the room for leverage falls from Rs71.7 billion in FY16 to Rs27.8 billion in 1QFY17 and Rs1.8bn in 2QFY17).

Inconsistent with previous month's improved performance, Pakistan’s exports remained lackluster in February 2017, declining by 8.0%MoM/8.6%YoY to US$1.64 billion. Total exports registered a decline across all segments, with highest impact coming from the heavyweight Food and Textile sectors amounting to US$318.9 million and US$995.3 million, sliding 12.7% MoM/24.6%YoY and 6.5%MoM/2.7%YoY respectively. On a cumulative basis, 8MFY17 textile exports were 1.6%YoY lower at US$8.23 billion, largely contributed by 9.2%YoY decline in the low value segment diluting the impact of 1.6%YoY growth in the value added segment. Contrary to expectations, inclusion in zero rated regime and recently announced export incentive package worth Rs180 billion (textile sector's share estimated at close to 90%) has so far failed in generating positive momentum in export trend, giving way to fresh concerns regarding the export‐oriented industry's competitiveness over regional players. Going forward, analysts expect textile exports to remain under pressure due to: 1) weak Chinese demand outlook and concerns of economic slowdown in the European Union following Brexit and 2) lack of currency competitiveness. Moreover, continuous rise in international and local cotton prices has also aggravated concerns about textile industry.

ASTL has recently raised its re‐bars prices per ton by Rs2,000 (up 2.5%) to Rs79,000 likely due to: 1) increase in scrap steel prices and 2) rise in Chinese re‐bar prices due to higher domestic demand as a result of improvement in Chinese property sector and continuous decline in steel production. The recent price increase is likely to improve the bottom line. That said, current re‐bar prices still remain below FY16 average of Rs83,000/ton resulting in reduced gross margin/earnings for FY17F. While the upcoming expansion is to aid earnings growth, analysts believe the current price level is already reflects that.

Pakistan Stock Market Witnesses Return of Foreign Investors

The benchmark index of Pakistan Stock Exchange closed the week ended 24^th March 2017 at 48,971, up paltry 1.16%WoW. Investors remained cautious and activity remained lackluster with average daily traded volume at 257.8 million shares. KEL led volume charts with 140.9 million shares) as NEPRA determined the company’s multi‐year tariff  (MYT) reducing its base tariff from PkR15.57/kWh to PkR12.07/kWh which was followed by news reports of PM Sharif forming a committee to review the tariff after a meeting with Chairman of SPIC (Shanghai Electric’s parent company). Other key developments for the week included: 1) current account deficit for February 2017 was reported at US$744 million, taking cumulative 8MFY17 deficit to US$5.47 billion, up 120%YoY, 2) PIB yields remained flat at the latest auction with GoP raising PkR28.5 billion, 3) February 2017 fertilizer off‐take declined by 19%MoM/2%YoY to 491,000 tons, 4) HBL announced plan to sell its Kenyan branches in exchange for 4.18% holding (13.28 million shares) in Diamond Trust Bank Kenya and 5) PSMC considering shelving its planned US$450 million investment in spare parts plant and capacity expansion. Stocks leading the bourse were: SNGP, AGTL, MEBL and EFERT and laggards were: KEL, ICI, UBL and APL. Foreign interest was positive during the week with inflows of US$3.47 million compared to US$11.07 million net outflow a week earlier. Little surprise is expected at the Monetary Policy announcement scheduled on 25^th March as marker expects rates to remain unchanged. On the global front, representatives of the five monitoring OPEC/Non‐OPEC countries will meet to review compliance with the members’ deal to curb supply by 1.8 million bpd. Market is likely to remain volatile till clarity about the upcoming FY18 federal budget.

Current account continues to steadily deteriorate with 8MFY17 cumulative deficit to 1.7% of GDP or US$5.47 billion. This reflects rising imports (+11.2%YoY) this fiscal year on the back of higher oil prices (8MFY17 oil imports up 15.4%YoY) along with greater machinery (12%YoY) and auto (36%YoY) imports. This has been exacerbated with weak exports (down 2%YoY in 8MFY17) and tepid remittance flows (down 2.5%YoY). In February 2017 deficit was registered at US$744 million, lower than US$1.2 billion recorded in January 2017 helped by lower imports for the month ( down 6.2%MoM) and US$350 million CSF inflows under service exports received earlier. Going forward, unfavorable trade dynamics will prompt further weakness in the deficit, with additional CSF inflows of US$200 million received in March 2017 and expected recovery on the remittance in 4QFY17 based on seasonal trends.

NEPRA has released KEL's MYT for the years FY17‐23 with numerous details still to be sorted. Salient features of the tariff include: 1) seven year period covered under the determination as opposed to the request for ten years, 2) raising of T&D benchmark, 3) allowance for passing through of increased O&M expense with inclusion for WPPF and WWF, 4) allowance of write-offs up to 1.78% of Electricity sales revenue in any given year, and 5) planned CAPEX of PKR237.6 billion allowed for in the tariff and adjusted in the base tariff. Contrary to increased allowances and benchmarks, the base tariff for the utility has been decreased to PkR12.00/ KwH (after adjusting for T&D and fuel), a reduction of PkR0.94/KwH over FY16's tariff, raising concerns of a tapered bottom‐line. Analyst from ADK Securities believes that  KEL may approach NEPRA for a Review, with specific aspects being highlighted.

Pakistan Stock Market remains laclkuster

Due to political uncertainty and regulatory pressures the benchmark of Pakistan Stock Exchange index remained unexciting. The week ending 17^th March 2017 closed at 48,409 points, down 1.6% WoW. Soft global oil prices, SECP’s action to curtail in-house badla financing and political uncertainty kept the market under pressure. Key news flows during the week were: 1) SBP raised Rs284 billion through short‐ term government papers, 2) in line with expectations, the US Fed raised interest rates, 3) in addition to independent power producers’ claims of over Rs414 billion, non‐payments to oil companies were reported at more than Rs300 billion, 4) Ministry of Finance approved payment of Rs6 billion on Thursday for the state owned PSO to avoid an international default, and 5) HUBC and FFC announced in separate notices the offer and receipt of an equity divestment plan relating to Thar Energy Limited. (TEL), a 330MW mine mouth coal fired project in Thar Block II. Stocks leading the bourse were: MEBL, ASTL, FATIMA, and ICI. On the other hand, laggards were: HMB, PPL, and FFBL. Volume leaders were: KEL, BOP, TRG and ASL. Subdued global oil prices, strengthening US$ and global trade related developments over the upcoming G‐ 20 summit may impact the domestic markets. At home, any clarity on the political front could trigger bullish sentiment, while policies and budgetary developments for the Finance Bill FY18 can be expected to sway markets.

The PRK has remained stable over the last year, weathering the worsening external account position. While current account deficit is up 90%YoY during 7MFY17 and reserve position (down US$1.75 billion from its peak) has deteriorated, PkR/US$ has remained stable at PKR104.8/US$, which is reflective of GoP's resolve to keep exchange rate stable. Going forward, analysts see little pressure on the PRK over the short term, primarily supported by an expected recovery in forex reserve position. In this regard, analysts see support from expected inflows including: 1) up to US$1.0 billion from planned Eurobond/Sukuk issue, 2) US$550 million under CSF disbursement and 3) likely US$4.0 billion from project lending and commercial loans budgeted for the year along with room for greater accretion from CPEC related inflows. Incorporating this,

AKD Securities has recently revisited its investment case for PIOC, incorporating recent cement price increase and expected continuation of clinker sales. While rally in coal price is expected to shrink gross margins (GM) and dampen earnings, recently installed 12MW WHR is expected to partially make up for the above. In this regard, the brokerage house expects an after‐tax operational savings of PKR1.11/PKR1.82 in 2HFY17/FY18. Besides, the company revealed its plans of: 1) revising up its cement expansion capacity from 2.21 million tpa to 2.52 million tpa, 2) installing separate line of 12MW WHR for the expansion and (3) setting up 24MW coal CPP. The total capex associated with the projects is expected to be around PKR25 billion. Though, the brokerage house has not incorporated the aforementioned projects due to awaited details, it expects the expansion to result in increase in FY20‐23 average earnings. Moreover, the new line of WHR and coal CPP are together expected to result in incremental earnings.