State Bank of Pakistan leaves policy rate unchanged

State Bank of Pakistan (SBP) decided to leave the policy rate unchanged at 15% which was in line with market expectations. SBP had cumulatively raised the policy rate by 800bps to 15% since September 2021 to cool down overheating of economy and contain current account deficit.

Further, administrative measures for import control were also taken recently and fiscal consolidation is also planned for FY23.

Inflation in July 2022 increased to 25%YoY as against 21% in June 2022, but broadly remained in line with what SBP had anticipated earlier.

Trade deficit in July 2022 also fell sharply (halved to US$2.7 billion and global commodity prices have also started coming down which will improve our external account situation.

Pakistan also secured additional financing of US$4 billion from friendly countries over and above the available financing to Pakistan.  

After securing additional funding of US$4 billion, revival of IMF program is also in sight as its Board meeting for the approval of Pakistan’s next tranche is scheduled on August 29, 2022.

SBP keeping in view the impact of these decisions like moderation in domestic demand and improvement in external account, decided to keep the policy rate unchanged. 

SBP maintained its inflation forecast of 18% to 20% for FY23. It also anticipates it to improve to 5% to 7% by the end of FY24.

SBP expects GDP growth for FY23 to be in the range of 3% to 4% as against growth of 6% last year.

Current Account deficit is projected to be around 3% of GDP or US$10 billion) in FY23 as against US$17 billion or 4% of GDP in FY22. 

The SBP Monetary Policy Committee promises to continue to remain data driven and pay attention on inflation expectations, development on fiscal & external front, global commodity prices and interest rates decisions by major central banks.

Foreign exchange reserves are likely to increase to US$16 billion by FY23. This will be driven by additional financing that will be available to Pakistan in FY23. This will also be dependent upon Pakistan following key measures agreed with IMF and remaining on track with the program.

Pakistan’s gross financing needs would be around US$30 billion for FY23 which includes Current Account Deficit and debt repayments.

Available financing against this is estimated at US$37 billion for FY23, which has increased after Pakistan secured US$4 billion of financing from friendly countries.    

Financing of US$4 billion includes US$2 billion from Qatar, US$1 billion of deferred oil facility from Saudi Arabia, and US$1 billion investment from UAE. 

Pakistan’s short term external debt constitute around 6% of the total external debt hence maturity profile of Pakistan external debt is not an issue. However, low private sector flows like FDI and portfolio investment is a key concern. 

FY23 budget targets a primary surplus, on the back of significantly higher tax revenue. It envisages a strong fiscal consolidation of around 3% of GDP as per SBP.

 

Pakistan stock market continues upward move

Benchmark Index of Pakistan Stock Exchange continued its upward move and touched a high of 43,000 points for the week ended 25^th November 2016. The gain of 625 points (1.59%WoW) was primarily led by E&P companies (on the back of 4.25%WoW increase in crude oil price), cements (on receding coal prices and expectation of robust dispatches) and textiles (on expected announcement of incentive package for the industry).

Average daily traded volume inched up by 4%WoW to 475 million shares where volume leaders remained second tier scrips such as PACE, BOP, PIAA, SMBL and ANL. Leaders during the outgoing week included NCL, NML, HASCOL, ASTL and EPCL, while laggards included SSGC, MEBL, INDU, AKBL and HBL.

Following were the key developments during the week: 1) ECC approving reduction in gas prices for industrial consumers by Rs200/mmbtu, 2) PIA concluding a financing facility of US$130 million, 3) T‐bills yields in the recent auction remaining flat, 4) Pakistan securing an additional US$8.5 billion of investment from Beijing as part of the countries' joint energy, transport and infrastructure plan and 5) Summit Bank Limited announcing to initiate due diligence of Sindh Bank Limited for potential merger/acquisition.

The market is expected to remain volatile, taking direction from the following events in the upcoming week: 1) Panama case hearing scheduled on 29^th November, 2) Monetary policy Statement to be issued on 26^th and 3) OPEC’s meting by the end of this month to finalize output deal where inability of the producers to reach an agreement can keep Oil & Gas sector under pressure. Additionally, the recent trend of rising coal prices may keep cements under pressure while textiles are expected to remain in limelight upon expected announcement of the export incentive package.

After touching the year's high last month (4.2%YoY), CPI inflation is projected to revert back, coming in at 3.82%YoY during this month, implying a limited 0.21%MoM increase owing to muted rise in food inflation (0.2%MoM) and a high base effect. On the other hand, NFNE Core inflation is expected to inch up slightly to 5.3%YoY compared to 5.2%YoY in October this year. Consequently, 5MFY17 CPI/NFNE Core inflation average is expected at 3.91%YoY/4.87%YoY compared to 1.87%YoY/3.79%YoY in the corresponding periods last year. Inflation is expected to tread higher during the rest of the fiscal year, with projection for FY17 CPI inflation at 4.8%YoY, which eliminates room for further rate cut in the upcoming MPS. Moreover, rapid deterioration in current account strength (up 63%YoY in 4MFY17) and rising concerns on global front in the form of dollar and crude oil prices gaining strength are expected to keep the central bank cautious.

Inching up, current account deficit for October’16 was recorded at US$381 million as compared to US$174 million for September'16. Resultantly, 4MFY17 deficit accumulated to US$1.76 billion, higher than US$1.08 billion for the same period last year. The weakness has been led by slowdown in remittance flows and rapidly expanding trade deficit. Foreign investment dynamics have been unpromising so far in FY17, where FDI net inflows were reported at US$316 million ‐ half of US$610 million in 4MFY16. Relief has come in the form of the recent US$1.00 billion Sukuk issue, which has taken 4MFY17 total foreign investment to US$1.4 billion as compared to US$0.95 billion. Going forward, current account weakness is expected to continue where analysts reiterate their projection for deficit at 1.7% of GDP driven by trade deficit and slower remittance inflows.

Following below expected 3QCY16 earnings, AKD Securities revisited its investment case for national Bank of Pakistan (NBP), revising projected CY16/CY17 earnings down by 8.2%/7.6% on account of a higher than expected sequential downtrend in the bank's income streams, both funded and non‐ funded. While interest income was understandably lower on account of PIB maturities during the quarter, brokerage house has expressed its concerns regarding the decline in non‐interest income that was down 20%QoQ despite higher gains utilization. In this regard, fee income was down 28%QoQ followed by 34%QoQ decline in other income. While still appreciative of the bank's concerted efforts in improving its asset quality, higher provisions during the quarter were on account of changes in regulations on consumer financing by SBP (Rs783 million booked in this regard) along with seasonal impact of agri‐financing. Gaining 27%CYTD, the market has been quick in acknowledging the bank's fundamental turnaround. Valuation set is attractive and has room to expand once sentiments further improve on: 1) interest rate cycle reversal drawing close and 2) multiple re‐rating upon formal MSCI inclusion.

Pakistan equity market driven by rising oil prices

During week ended 18th March benchmark PSX-100 Index gained 411 points or 1.126%WoW to close at 33,080 points. The rally was driven by two factors: 1) corporate restructurings (divestments in EFOODS, EFERT, and acquisition of NIB) and 2) crude oil prices registering upward move. Material disclosures of corporate actions by ENGRO were received positively by investors. Foreign participation failed to sustain the trend (US$4.1 million inflows) witness a week ago where net outflows during the week amounted to US$7.6 million.

Key news flows for the week were: 1) US Fed maintained interest rate policy, while expressing concerns about global economic outlook adopting a dovish stance on future rate hikes, spurring performance in emerging market equities, 2) GLAXO announced details of its Sindh High Court approved divestment of its Consumer Health Care operations, with investors getting 10 shares for every 3 shares held in the parent entity, 3) HTL expressed its intention to apply for an OMC license from OGRA expanding into the retail fuels segment, 4) Auto Policy dominated news reports with conflicting details regarding greater incentives for domestic assemblers and, 5) National Assembly passed the Futures Market Bill, 2015 and Financial Institutions (Recovery of Finances) (Amendment) Bill, 2015 in a bid to promote investment avenues and facilitate recovery of bank loans.

Stocks exhibiting strong performance during the week included PPL, INDU, UBL and 4) KEL; conversely laggards were BAFL, HMB, MEBL and HCAR. Average daily turnover was down by a mild 4.76%WoW closing at 166.8 million shares. The volume leaders were NIB, KEL, BOP and TRG.

Approval of the Auto Policy (which has experienced its fair share of delays) may spur performance if planned incentives to current players are enacted. Strengthening commodity prices boosted largely by weakness in the US$ (Dollar Index down 1.8%WoW) are expected to follow through in the coming week. The central bank is scheduled to issue Monetary Policy Statement next week where a further easing remains unlikely.

Despite tapering input costs improving liquidity, burdensome overdue receivables in the power sector continue to plague HUBC's balance sheet, signified by: 1) Rs66.9 billion in overdue receivables from WAPDA & NTDC, down 18.6%YoY but up 6.4%QoQ, 2) increased reliance on short term borrowing where a 46.4%YoY and 57.3%QoQ jump in short term borrowing was witnessed during 1HFY16 and 3) decline in receivables failing to keep pace with declining revenues, raising Days Receivables to 271 days vs. 211 days for the corresponding period last year. On the other hand, a slide in payables (overdue payables to PSO recede 26.5%YoY, rising 6.8%QoQ) has improved the current ratio slightly. That said, income from Laraib and PCE + Bonus payments from the base plant continuing to drive payouts (making up Rs4.24/share of the Rs4.5/share payout declared in 1HFY15). Upcoming payments for new ventures include outlays for 660x2MW coal fired expansion and acquisition of 9.6% stake in SECMC, and a two month time period provisioned between receipt of term sheet from lenders and declaration of financial closure, analysts expect initiation of equity outflows worth Rs5.87 billion (at 49% equity stake on 80:20 leverage) from 1QFY17.