Oil price slips to five week low on US default worries

Oil prices sank 4% to a five-week low on Tuesday along with a drop in Wall Street stocks on worries about a US bond default, weak economic data from China and expectations the US and Europe will raise interest rates again this week, reports Reuters.

Brent futures fell 4.0% to US$76.15 a barrel by 1444 GMT, while US West Texas Intermediate (WTI) crude fell 4.2%, to US$72.47. That put both Brent and WTI in technically oversold territory and on track their lowest close since March 24, 2023.

Wall Street's main indexes DJI, SPX, IXIC fell after Treasury Secretary Janet Yellen said the US government could run out of money within a month, while investors awaited the Federal Reserve's policy decision.

The cost of insuring against a US default hit fresh highs after Yellen said the government will be unlikely to meet all payment obligations by early June, prompting President Joe Biden to summon four top congressional leaders to the White House next week.

Oil prices also came under pressure after official data at the weekend showed manufacturing activity in China, the world's top crude importer, fell unexpectedly in April. This marks the first contraction in the manufacturing purchasing managers' index since December 2022.

"Most sub-indicators show that this might not be a short-term aberration," said Iris Pang, Greater China chief economist at financial services company ING, pointing to a weakening export market, lower imports in March and falling wages.

A cloudy economic outlook in other parts of the world also weighed on prices, analysts said.

"The unpredictable action of central banks in their mission to tame elevated consumer and producer prices, the rhetoric and action of consuming and producing nations have all cast a rather long shadow of doubt on prospects going forward," oil broker PVM's Tamas Varga said.

Investors will look for market direction from expected interest rate hikes by inflation-fighting central banks, which could slow economic growth and dent energy demand.

The US Federal reserve is expected to increase interest rates by another 25 basis points on Wednesday.

The European Central Bank is also expected to raise rates at its regular policy meeting on Thursday.

On the supply side, the market shrugged off news that the Organization of the Petroleum Exporting Countries' (OPEC) oil output fell in April, as sanctioned countries Russia and Iran continued to find outlets for their crude.

Iran's oil production has surpassed 3 million barrels per day (bpd), the country's oil minister said on Tuesday.

Iran pumped 2.4 million bpd on average in 2021 and has been under US sanctions since 2018.

Iraq, meanwhile, produced 3.938 million bpd of crude in April, down by 262,000 bpd from March, a source at state-owned crude marketer SOMO told Reuters.

Another factor that should provide some support for oil prices, a Reuters poll showed US crude oil stockpiles declined about one million barrels last week, putting inventories down for a third week in a row for the first time since December 2022.

The poll was conducted ahead of reports from the American Petroleum Institute on Tuesday and the US Energy Information Administration (EIA) on Wednesday.

 

First Republic Bank may be next to collapse

The San Francisco-based bank could be the next financial institution to collapse, signaling that last month's banking crisis isn't over yet. Its shares plummet 43% on Friday and 75% on the week as investors feared it would be shuttered by regulators.

Since Silicon Valley Bank’s (SVB) failure last month, First Republic’s stock is down roughly 97%.

Federal regulators are reportedly trying to figure out ways to prevent First Republic, which is headquartered in San Francisco, from failing — including asking other banks to step in and make bids.

The regional bank may ultimately be taken over by the Federal Deposit Insurance Corporation (FDIC), like SVB and New York's Signature Bank.

The selloff was triggered by a terrible earnings report revealing that First Republic lost more than US$100 billion in deposits following the SVB collapse. The outflow came even as a group of megabanks attempted to rescue First Republic by depositing US$30 billion. 

First Republic’s depositors were concerned that the bank would get hit with a similar bank run. The bank also had large unrealized losses on its balance sheet that raised the risk of a collapse.

The extended banking crisis has ramifications for the US economy.

Regional banks such as First Republic are key lenders for area businesses. Even banks that aren’t struggling are pulling back their lending to reduce risk, hurting employers’ ability to hire and grow.

 

Business community slams hike in interest rate

While slamming another 100 basis points (bps) hike in the benchmark interest rate to a record 21%, the business community on Tuesday questioned the government’s approach of fighting inflation by jacking up lending rates saying the strategy has failed to produce desired results but slowed down economic activities.

“The entire business community has refused to accept the 100 bps hike in the policy rate to an all-time high at 21%,” announced Federation of Pakistan Chambers of Commerce and Industry President Irfan Iqbal Sheikh.

In a statement, he said the benchmark interest rate has risen by a whopping 1125 bps in the last 14 months but failed to check inflation. “If that is not the governance and regulatory failure, then what would the failure look like to move the government for a course correction? he asked.

The trimming of growth projections by both the World Bank and the Asian Development Bank to less than half a percent for FY23 is the direct outcome of the regressive, IMF-dictated and recessionary monetary policy which has dried out the access to finance for businesses, the FPCCI chief lamented.

The country’s exports have posted negative growth for the seventh month in a row and the two major industries like textile and IT have persistently been facing a decline.

He said the 21% interest rate is far higher compared to what is prevailing in China, India and Bangladesh at 2.75%, 6.5% and 6% respectively.

Inflation in Pakistan, however, appears to be deep-rooted and it mainly stems from substantial exchange rate depreciation, unprecedented hike in international commodity prices, multiple rounds of hikes in energy tariffs and other prescribed measures under the IMF program, he noted.

Despite raising the SBP policy rate to 21% in the current month, inflation remained stubbornly high and a further surge is a manifestation of an utter failure of the monetary policy, the FPCCI president observed.

Pakistan Business Council chief executive Ehsan Malik said the latest hike in the policy rate, much like other recent rises, would do nothing to control cost-push and devaluation-led inflation.

“Nor in this politically turbulent time will it buffer the value of the rupee,” he added. On the other hand, he said it would raise the cost of borrowing for the formal sector already suffering from low capacity utilization due to an import crunch.

“It is time that the State Bank of Pakistan (SBP) adopts a more differentiated stance on the use of monetary policy,” Ehsan said.

SITE Association of Industry President Riaz Uddin said the hike in the interest rate would further increase the cost of doing business which is already hit by rupee devaluation against the dollar, rising gas and power bills, dollar crisis, shutdowns of various industries due to raw material shortage, etc.

Courtesy: Dawn

Pakistan: Takeaways from central bank briefing after 300bps hike in interest rate

The State Bank of Pakistan (SBP) on Thursday increased the benchmark policy rate by 300bps to 20%. It noted that the recent fiscal adjustments (mini-budget) and exchange rate depreciation have significantly deteriorated near-term inflation outlook. The SBP also revised its headline inflation target for FY23 to 27-29%.

It was highlighted that despite the drastic decline in current account deficit (CAD) in 7MFY23, upcoming debt repayments and a decline in financial inflows continue to exert pressure on foreign reserves and the exchange rate.

The recent fiscal adjustments i.e. hike in GST and FED, reduction in subsidies are expected to help contain the otherwise widening fiscal and primary deficits.

It is believed that after the interest rate hike decision, real interest rates have been pushed into positive territory on a forward-looking basis. This will help anchor inflation expectations and steer inflation to the medium-term target of 5 – 7% by end FY25.

The central bank also arranged a briefing and the takeaways are:

Of the US$23 billion in expected principal repayments at the start of FY23, about US$15.8 billion has been settled by: USD$9.8 billion repayments and US$6 billion rolled-over. Remaining US$7.2 Billion includes US$3 billion which is expected to be rolled-over also and US$4.3 billion, of which US$1.3 billion would be re-financed. Hence, US$ 2.9 billion in repayments are required over April-June 2023.

Pakistan has no intention of restructuring Eurobonds as all commitments are expected to be met on time with the next repayment tranche of US$1 billion due next year. Similarly, most of the external debt pertains to bilateral and multilateral borrowing which can be rolled-over. A small portion relates to commercial bank loans and the Government is already in contact with bilateral partners to secure further support.

Overall, inflationary pressures remain high across all groups following recent fiscal adjustments and depreciation of PKR. The rise in core inflation is much sharper compared to the previous episode. In particular, services core inflation (excluding house rent and transportation) has risen more sharply.

Global economic prospects have improved slightly with international commodity prices seem to be peaking. Accordingly, export values have come down. However, import volumes have fallen drastically. Pakistan’s CAD has also improved, but official FX reserves cover is still much below the adequate level. Nevertheless, the reserves position is expected to improve following conclusion of the 9th EFF review.

Demand compression measures include ongoing monetary tightening and fiscal adjustments coupled with PKR depreciation, are bringing down economic growth momentum towards sustainable levels. This is evident from the moderation seen in high frequency growth indictors, broader decline in LSMI and fall in private sector borrowing.

There have been no demands from the IMF to implement a ‘border exchange rate’. However, the IMF has recommended narrowing the difference between the inter-bank and open-market PKR/USD rates.

Current amount of outstanding OMO injections is PKR 6.5 Trillion. Its main objective is to keep short-term interest rates aligned with the policy rate.

 

Pakistan: Bank deposits reported at PKR22.5 trillion at end December 2022

According to State Bank of Pakistan (SBP) data, banking sector deposits increased by slightly more than 7%YoY to RKR22.5 trillion by end December 2022.

Analysts cited multiple plausible explanations for the rise in bank deposits, the biggest being, increase in the rate of return on deposits on the back of persistent hike in the policy rate.

In the face of difficult macroeconomic circumstances, such as bearish stock market activity, keeping surplus funds in the banks remained one of the preferred choices.

Analysts also attribute the increase to robust inflow of remittances on the back of depreciating Pak rupee (PKR).

Roshan Digital Accounts also helped in attracting funds, supporting banking sector’s deposits.

Due to consumers' increasing preference for using digital payment methods, cash was allowed to remain in the bank accounts.

Since the policy rate remains on the higher side, banks remained focused on mobilizing current accounts and extend their branch networks in order to protect net interest margins.

Banking sector succeeded in maintaining asset quality despite uncertain politico-economic landscape, according to analysts, which is despite that banks have indicated in recent briefings that they have provided enough for any unforeseen event.

Banks’ advance-to-deposit ratio increased by 463 basis points (bps) to 53%, while the investment-to-deposit ratio rose by1,233 bps to 79.7% in December 2022..

Banks’ advances were up 17%YoY to PKR11.9 trillion as of December 31, 2022. The advances rose by 7.4%MoM.

The investments by banks jumped 26.7%YoY to PKR18 trillion.

 

 

 

 

Pakistan Stock Exchange benchmark index closes flat

The uncertainty stemming from the appointment of the next Chief of Army Staff kept Pakistan Stock Exchange under pressure during the week ended on November 25, 2022. The benchmark index ended the week at 42,937, posting 0.48%WoW gain.

Participation in the market remained lackluster, with daily average trading volume at 159.58 million shares, as compared to 186.3 million shares traded in the earlier week.

All eyes had been on the Monetary Policy announcement scheduled for Friday; the State Bank of Pakistan (SBP) decided to increase the policy rate 100bps to 16%.

Other major news flows during the week were: 1) Pakistan’s foreign exchange reserves declined by
US$134 million to US$7.8 billion, 2) fertilizer offtakes plunged by 50.3%YoY in October, 2022, 3) revenue collection target for December 2022 set at PKR 965 billion, 4) FDI dropped 52% to US$348 million during first four months of current financial year, 5) World Bank approved soft loan of US$200 million for Pakistan for green project, 6) Credit default swap shoots up to 92.53% on political unrest and 7) SBP failed in setting up US$400 million oil fund.

The top performing sectors were: Jute, Technology & Communication and Transport, while the least favorite sectors were: Power generation & distribution, Vanaspati & Allied Industries and Cable & Electrical.

Stock-wise, top performers were: INDU, SYS, ENGRO, DAWH and PSEL, while laggards included: HUBC, MUREB, FCEPL, FATIMA and KEL.

Flow wise, Individuals were major buyers with net buy of US$4.8 million, followed by Foreign Investors (US$1.1 million), while Mutual Funds were major sellers during the week, with a net sell of US$2.8 million. Insurance continued to be a seller, with a net sell of US$1.4 million during the week.

The market is expected to remain range-bound in the near future. The 100bps increase in policy rate announced on Friday does not bode well and likely to dampen the outlook for equity markets.

Furthermore, the upcoming maturity of the International
Sukuk of US$1 billion will be in focus, with a positive outcome possibly restoring sentiment regarding Pakistan's external position that would follow the same.

Any development regarding the 9th review by the IMF would remain in the limelight. The market could come under further pressure due to political uncertainty from the continuing long march slated to reach Rawalpindi by November 26, 2022.

Analysts advise clients to stay cautious while building new positions in the market.

State Bank of Pakistan raises policy rate by 150bps to 13.75 percent

In its meeting on May 23, 2022, the Monetary Policy Committee (MPC) decided to raise the policy rate by 150 basis points to 13.75%. This action, together with much needed fiscal consolidation, should help moderate demand to a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability.

Since the last MPC meeting, provisional estimates suggest that growth in FY22 has been much stronger than expected. Meanwhile, external pressures remain elevated and the inflation outlook has deteriorated due to both home-grown and international factors.

Domestically, an expansionary fiscal stance this year, exacerbated by the recent energy subsidy package, has fueled demand and lingering policy uncertainty has compounded pressures on the exchange rate. Globally, inflation has intensified due to the Russia-Ukraine conflict and renewed supply disruptions caused by the new Covid wave in China.

As a result, almost all central banks across the world are suddenly confronting multi-year high inflation and a challenging outlook.

After contracting by 0.9% in FY20 in the wake of Covid, the economy has rebounded much more strongly than anticipated, growing by 5.7% last year and accelerating to 5.97% this year, as per provisional estimates. At 13.4%YoY, headline inflation unexpectedly rose to a two-year high in April and has now been in double digits for six consecutive months.

Inflation momentum was also elevated, at 1.6%MoM, and core inflation rose further to 10.9% and 9.1% in rural and urban areas, respectively. On the external front, notwithstanding some encouraging moderation in the current account deficit during April, the Rupee depreciated further due both to domestic uncertainty as well as recent strengthening of the US dollar in international markets following tightening by the Federal Reserve.

The MPC’s baseline outlook assumes continued engagement with the IMF, as well as reversal of fuel and electricity subsidies together with normalization of the petroleum development levy (PDL) and GST taxes on fuel during FY23. Under these assumptions, headline inflation is likely to increase temporarily and may remain elevated throughout the next fiscal year. Thereafter, it is expected to fall to the 5 to 7% target range by the end of FY24, driven by fiscal consolidation, moderating growth, normalization of global commodity prices, and beneficial base effects.

Considering the balance of risks around this baseline, the MPC felt it was important to take effective action to anchor inflation expectations and maintain external stability. In addition to today’s policy rate increase, the interest rates on EFS and LTFF loans are also being raised.

Going forward, to strengthen monetary policy transmission, these rates will be linked to the policy rate and will adjust automatically, while continuing to remain below the policy rate in order to incentivize exports. At the same time, the MPC emphasized the urgency of strong and equitable fiscal consolidation to complement today’s monetary tightening actions. This would help alleviate pressures on inflation, market rates and the external account.

Real sector

Unlike most emerging markets, Pakistan experienced a relatively mild contraction after the Covid shock in 2020, followed by a sustained and vigorous rebound. As a result, output is now above its pre-pandemic trend, such that tightening of macroeconomic policies that is necessitated by the presently elevated pressures on inflation and the current account is also warranted from the perspective of demand management. Most demand indicators have remained strong since the last MPC—including sales of POL and automobiles, electricity generation, and sales tax on services—and growth in LSM accelerated in March. Both consumer and business confidence have also ticked up. With the output gap now positive, the economy would benefit from some cooling. On the back of monetary tightening and assumed fiscal consolidation, growth is expected to moderate to 3.5% to 4.5% in FY23.

External sector

The current account deficit continues to moderate. In April, it fell to US$623 million, less than half the average for the current fiscal year, on the back of lower imports and record remittances. Based on PBS data, the trade deficit shrank by 24% relative to its peak last November. These developments are in line with SBP’s projected current account deficit of around 4% of GDP this year.

Next year, the current account deficit is projected to narrow to around 3% of GDP as import growth continues to slow with moderating demand and the recent measures taken by the government to curtail non-essential imports, while exports and remittances remain resilient.

This narrowing of the current account deficit together with continued IMF support will ensure that Pakistan’s external financing needs during FY23 are more than fully met, with an almost equal share coming from rollovers by bilateral official creditors, new lending from multilateral creditors, and a combination of bond issuances, FDI and portfolio inflows.

As a result, excessive pressure on the Rupee should attenuate and SBP’s FX reserves should resume their previous upward trajectory during the course of the next fiscal year.

Fiscal sector

Instead of the budgeted consolidation, the fiscal stance in FY22 is now expected to be expansionary. At 0.7% of GDP, the primary deficit during the first three quarters of the year compares unfavorably with the primary surplus of 0.8 percent of GDP during the same period last year. This slippage was driven by a sharp rise in non-interest expenditures, led by higher subsidies, grants and provincial development expenditures.

The resulting demand pressures have coincided with the sharp rise in costs from the surge in global commodity prices, exacerbating inflationary pressures and the import bill. Timely action is needed to restore fiscal prudence, while providing adequate and targeted social protection to the most vulnerable. Such prudence enabled Pakistan’s public debt to decline from 75% of GDP in FY19 to 71% in 2021 despite the Covid shock, in sharp contrast to the average increase of around 10% of GDP across emerging markets over the same period.

Monetary and inflation outlook

In nominal terms, private sector credit growth remained robust through April, reflecting strong economic activity and higher input prices which have enhanced working capital requirements of firms. Since the last MPC meeting, secondary market yields, benchmark rates and cut-off rates in the government’s auctions have risen, particularly at the short end. The MPC noted that the market rates should be aligned with the policy rate and in case of any misalignment after today’s policy decision, SBP would take appropriate action.

Headline inflation rose from 12.7%YoY in March to 13.4% in April, driven by perishable food items and core inflation. The rise in core inflation reflects strong domestic demand and second-round effects of supply shocks.

At the same time, measures of long-term inflation expectations have also ticked up. As electricity and fuel subsidies are reversed, inflation is likely to rise temporarily and may remain elevated through FY23 before declining sharply during FY24. This baseline outlook is subject to risks from the path of global commodity prices and the domestic fiscal policy stance. The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth.