Showing posts with label depreciating rupee. Show all posts
Showing posts with label depreciating rupee. Show all posts

Friday, 17 February 2023

Pakistan Stock Exchange witnesses 45.8%WoW decline in average daily trading volume

The benchmark index of Pakistan Stock Exchange (PSX) closed the week ended on February 17, 2023 at 41,119 points, down by 623 points or 1.5%WoW.

The lackluster performance during the week was despite the Supplementary Finance Bill presented to introduce PKR170 billion for mobilizing additional taxes—in line with the IMF’s conditions under the 9th review.

Foreign exchange reserves of the country inched higher by US$276 million to US$3.2 billion during the week, still the import cover remained below one month.

PKR gained 2.5% of its value against the greenback.

Participation in the market declined, with daily trading volume averaging at 153.91 million shares as compared to 284.07 million shares in the earlier week depicting a decline of 45.8%WoW.

Other major news flows during the week included:  1) Tax target raised to PKR7.64 trillion, 2) Debt, liabilities rose to historical-level of PKR63.9 trillion, 3) gas tariff  increased by 16.6% to 124% for different types of consumers, 4) July-December 2022 LSMI output declined by 3.68%, 5) monthly remittances slipped below US$2 billion, 6) Fitch downgraded Pakistan rating on worsening liquidity, policy risks, and 7) car sales plunged 65% in January 2023.

Top performing sectors were: Leasing Companies, Leather and tanneries, and Sugar and Allied industries, while the least favorite sectors were: Textile Weaving, Tobacco, Miscellaneous, and Pharmaceuticals.

Stock-wise, top performers were: PGLC, THALL, FABL, JVDC, and GHGL, while laggards were: PAKT, MUGHAL, KTML, and PSEL.

Flow wise, companies were the major buyers with net buy of US$4.12 million, followed by Banks/DFI US$2.3 million, while mutual funds were major sellers, with a net sell of US$6.11 million.

Any news regarding a successful Staff Level Agreement with the IMF would lead to euphoria in the market, with the GoP having already introduced the PKR170 billion additional taxation measures demanded by the international lender.

The market may remain jittery in the near future due to higher inflation readings, weakness in the PKR and the effects of the hike in utility tariffs. This has led to expectations of further hikes in interest rates in the country, which has the potential to continue to keep the market range-bound.

Analysts continue to advocate scrips that have dollar-denominated revenue streams to hedge against the currency risk, which include the Technology and E&P sectors.

Friday, 4 November 2022

Pakistan Stock Exchange benchmark index posts 1.74%WoW increase

Pakistan Stock Exchange witnessed an overall volatile week as the political instability raged on, dampening investors’ confidence. Participation in the market remained lackluster, with daily trading volume averaging 240 million shares. The benchmark Index gained 716 points during the week ending November 04 2022, depicting a 1.74%WoW rise in the index.

The PKR continued to lose value against the US$, depreciating by 0.25% over the course of the period. CPI once again came in higher on Wednesday, rising to 26.56%YoY for October 2022 as spikes from the unwinding of relief from fuel tariff adjustments and rising food prices impacted. Trade deficit for October 2022 was reported at US$2.3 billion, down 42%YoY. Foreign exchange reserves held by SBP were reported at US$8.9 billion on October 28, 2022.

On the international front, US FED increased its rates by 75bps on Thursday, which pushed the oil
back, as the global commodity continued to rage upwards due to lower than expected US inventory data and reports of Chinese pullback on COVID curbs.

Other major news flows during the week were: 1) Prime Minister Shehbaz Sharif on Monday announced Rs1,800 billion relief package for farmers, 2) PM arrived in Beijing on Tuesday to meet Chinese leaders and discuss plans for the China Pakistan Economic Corridor (CPEC), 3) The country's power sector's circular debt is reportedly touching PKR2.6 trillion mark at present as against PKR2.252 trillion at the end of last financial year, 4) Former Prime Minister Imran Khan was shot in the shin on Thursday when his anti-government protest convoy came under attack in the east of the country in what his aides said was a clear assassination attempt.

Company-wise, amongst main boards, BNWM, TRG and SNGP companies were amongst the top performers. AICL, NESTLE and IGIHL were amongst the worst performers.

Flow wise, substantial net selling was recorded by Insurance companies and Mutual funds totaling US$4.63 million. Individuals absorbed most of the selling with a net buy of US$4.68 million.

Top performing sectors were: Wollen, Tobacco, OMCs, Tech & Communication and Sugar, while laggards included: Vanaspati, Food & personal care, Leasing, Investment Banks/Investment Companies and Commercial Banks.

The market is expected to remain range-bound in the near future, as pressure on the PKR continues to be a cause of concern. The long march, and the ensuing political uncertainty, is expected to keep market movement in check. Moreover, the economic slowdown in the country, an intended outcome of the SBP's contractionary policies and the adverse effects of the floods are likely to keep corporate earnings subdued going forward. Analysts advise investors to remain cautious while building new positions.

Sunday, 31 July 2022

Pakistan: Strategy for Navigating FY23

Through a joint statement issued by Ministry of Finance and State Bank of Pakistan, all the stakeholders and public in general has been assured that the present trauma will ease. While one may not agree with some of the points, this is an official strategy and only wait and see stance could be adopted.

Pakistan’s problems are temporary and are being forcefully addressed

Pakistan’s foreign exchange reserves have fallen since February as foreign exchange inflows have been outpaced by outflows. The inflows mainly comprise of multilateral loans from the IMF, World Bank and ADB; bilateral assistance in the form of deposits and loans from friendly countries like China, Saudi Arabia, and the UAE; and commercial borrowing from foreign banks and through the issuance of Eurobonds and Sukuks. The paucity of inflows has happened in large part due to the delay in completing the next review of the IMF program, which has lingered since February due to policy slippages. Meanwhile, on the outflows side, debt servicing on foreign borrowing has continued as repayments on these debts have been coming due over this period.

At the same time, the exchange rate has come under significant pressure, especially since mid-June. It has been driven by general US dollar tightening, a rise in the current account deficit (exacerbated by a heavy energy import bill in June), the decline in foreign exchange reserves, and worsening sentiment due to uncertainty about the IMF program and domestic politics.

However, important developments have happened recently that will address both of these temporary issues. On July 13, the critical milestone of a staff-level agreement on completing the next IMF review was reached. As of today, all prior actions for completing the review have been met and the formal Board meeting to disburse the next tranche of US$1.2 billion is expected in a couple of weeks. At the same time, macroeconomic policies—both fiscal policy and monetary policy—have been appropriately tightened to reduce demand-led pressures and rein in the current account deficit. Finally, the government has clearly announced that it intends to serve out the rest of its term until October 2023 and is ready to implement all the conditions agreed with the Fund over the remaining 12 months of the IMF program.

In FY23, Pakistan’s gross financing needs will be more than fully met under the ongoing IMF program

The financing needs stem from a current account deficit of around US$10 billion and principal repayments on external debt of around US$24 billion.

In order to bolster Pakistan’s foreign exchange reserves position, it is important for Pakistan to be slightly over-financed relative to these needs.

As a result, an extra cushion of US$4 billion is planned over the next 12 months. This funding commitment is being arranged through a number of different channels, including from friendly countries that helped Pakistan in a similar way at the beginning of the IMF program in June 2019.

Important measures have been taken to contain the current account deficit

In addition to high global commodity prices, the large current account deficit in FY22 was driven by rapid domestic demand (growth reached almost 6 percent for two consecutive years leading to overheating of the economy), artificially low domestic energy prices due to the February subsidy package, an unbudgeted and procyclical fiscal expansion, and heavy energy imports in June to minimize load-shedding and build inventories.

To contain this deficit going forward, the policy rate was raised by 800 basis points, the energy subsidy package has been reversed, and the FY23 budget targets a consolidation of nearly 2.5 percent of GDP, centered on tax increases while protecting the most vulnerable. This will help cool domestic demand, including for fuel and electricity.

In addition, temporary administrative measures have been taken to contain the import bill, including requiring prior approval before importing automobiles, mobile phones and machinery. These measures will be eased as the current account deficit shrinks in the coming months.

These measures are working, the import bill fell significantly in July, as energy imports have declined and non-energy imports continue to moderate

Foreign exchange payments in July were significantly lower than in June. This is true for both oil and non-oil payments. Altogether, payments were a sustainable US$6.1 billion in July compared to US$7.9 billion in June.

The latest trade data indicate that non-oil imports continue to fall. Specifically, non-oil imports fell by 5.7%QoQ during Q4 FY22. They are expected to reduce further going forward.

Looking ahead, a considerable slowdown has been witnessed in LC opening in recent weeks, again for both oil as well as non-oil commodities. Based on market reports, there was an 11%MoM decline in Oil Marketing Companies sales volume in June.

After the surge in energy imports in June, a stock of diesel and furnace oil sufficient for 5 and 8 weeks, respectively, is now available in the country, much higher than the normal range of 2 to 4 weeks in the past. This implies a lower need for petroleum imports going forward.

With the recent rains and storage of water in the dams, hydroelectricity is also likely to increase and need to generate electricity on imported fuel is expected to decline going forward.

As a result of these trends, the import bill is likely to shrink going forward and should begin to manifest itself more forcefully in lower FX payments over the next 1-2 months.

Overall, imports are expected to decline in coming months due to a decline in global commodity prices, the higher oil stock, the unfolding impact of higher domestic prices of petroleum products, adjustments in electricity and gas tariffs, the removal of tax exemptions under the FY23 budget, administrative measures taken to curtail imports, and the lagged impact of the monetary and fiscal tightening that has been undertaken.

The Rupee has overshot temporarily but it is expected to appreciate in line with fundamentals over the next few months

Around half of the Rupee depreciation since December 2021 can be attributed to the global surge in the US dollar, following historic tightening by the Federal Reserve and heightened risk aversion.

Of the remaining half, some is driven by domestic fundamentals, in particular, the widening of the current account deficit, especially in the last few months. As noted above, the deficit is expected to narrow going forward as the temporary surge in the import bill is brought under control. As this happens, the Rupee is expected to gradually strengthen.

The remaining depreciation has been overdone and driven by sentiment. The Rupee has overshot due to concerns about domestic politics and the IMF program. This uncertainty is being resolved, such that the sentiment-driven part of the Rupee depreciation will also unwind over the coming period.

Where the market has become disorderly, the State Bank has continued to step in through sales of US dollars to calm the markets and will continue to do so, as needed in the future. Strong steps to counter any speculation have also been taken, including close monitoring and inspections of banks and exchange companies. Further additional measures will be taken as situation warrants.

Rumors that a particular level of the exchange rate has been agreed with the IMF are completely unfounded. The exchange rate is flexible and market-determined, and will remain so, but any disorderly movements are being countered.

Going forward, as the current account deficit is curtailed and sentiment improves, we fully expect the Rupee to appreciate. Indeed, this was the experience during the beginning of the IMF program in 2019, when the Rupee strengthened considerably after a period of weakness in the lead-up to the program.

Clearly, the Rupee can overshoot temporarily as it has done recently. However, it moves both ways over time. We expect this pattern to re-assert itself in the coming period. As a result, the Rupee should strengthen in line with improved fundamentals in the form of a smaller current account deficit as well as stronger sentiment.