State Bank of Pakistan keeps interest rate unchanged

State Bank of Pakistan (SBP) chose to keep policy rate unchanged and the announcement came through a Press Release. The announcement was disappointing because the business community was expecting a reduction of 50 basis points, at least. This perception emerged after the recent decision of Reserve Bank of India (RBI) to cut the policy rate.

RBI decision was in line with the policy of many central banks around the world and also the US Fed which deferred increase in policy rate due to faltering domestic as well as global economy. All the central banks are curtailing policy rates to boost their economies. One completely fails to understand the logic behind not reducing the rate, especially after the constitution of a new Monetary Policy Board at the central bank.

According to the central bank all the key indicators hints towards improving state of the economy of the country. However, it also warns about the future challenges that include stagnant growth of exports, looming energy crisis and subdued GDP growth rate.

Earlier, many of economic analysts were shocked to read a statement of Finance Minster that the country no longer needs the help of International Monetary Fund (IMF). They could recall a report on Bloomberg that Pakistan was inching towards default due to non-sustainability of its debt servicing obligations.

It may be true that he was upset due to inclusion of the names of sons of Prime Minister Nawaz Sharif in the list of Panama Leaks. But no one expected that he could go insane and say that Pakistan does not need the IMF.

Next General Elections are due in 2018 and it was expected that the incumbent would prefer to maintain even more cordial relationship with the IMF but spending more money on developmental programs for boosting confidence of its vote bank.

Pakistan needs to boost its GDP growth rate and the IMF has rightly suggested focusing on improving supply side. This demands spending more on creation of productive facilities and improving capacity utilization of existing manufacturing facilities. Curtailing developmental expenditures is likely to further widening of ‘confidence deficit’ being faced by the PML government.

State Bank of Pakistan should reduce interest rate

State Bank of Pakistan (SBP) is scheduled to announce its Monetary Policy Statement on this Saturday (April 9th). While analysts are making all sorts of speculations certain quarters insist that SBP should reduce interest rate by 50 basis points at least. This demand is being raised after Reserve Bank of India (RBI) announced to cut the benchmark repurchase rate to 6.5 percent from 6.75 percent, the lowest since March 2011. This decision has been made despite many odds only to creating more room to face the upcoming challenges.

The options, in terms of priority, being talked about in Pakistan are: 1) maintaining status quo, 2) an increase and 3) a reduction. Some analysts fear that most probably the newly constituted Policy Board may opt for increasing the rate by bowing down before the IMF pressure. The effort will be to avoid any criticism by the lender of last resort, which is yet to release the last tranche. Keeping the IMF happy is most important because the incumbent government will have to enter into another agreement to meet its debt serving obligations.

To be honest I am fascinated by the decision of RBI chief of reducing the rate, though it may be termed notional. The logic being offered is simple, accelerating the GDP growth rate. He is not following any rocket science but the footsteps of many central banks, even the US Fed is not convinced about the interest rate hike.

The chief stated categorically that the stance of monetary policy would remain accommodative and RBI would continue to watch macroeconomic and financial developments with a view to respond with further policy action as space opens up. The present RBI chief has cut rate five times since January 2015. His option for further easing is limited due to the risk of a third straight year of below average rainfall.

It is true that pressure from the IMF is mounting on Pakistan for missing some key targets and the country may face even more stringent conditions under the new arrangements. However, the incumbent government has to come up with some home grown solutions rather than following IMF recipe blindly. This demands reduction in interest rate to facilitate fresh investment, creation of new jobs and above all improving Pakistan’s competitiveness in the global markets. The cost of doing business has to be brought down.

The cost of doing has to be brought down by reducing interest rate, bringing down electricity and gas tariffs and above all coming up with ‘business friendly policies’. The incumbent government has been enhancing tax on everything rather than catching tax evaders. Energy crisis is the outcome of blatant pilferage and non-payment of bills by certain groups.

Pakistan’s economy is plunging deeper into crisis and needs ‘out of box policies’. The focus must shift from collecting revenue to creation of new production facilities and jobs. Following the IMF recipe will not bring the country out of vicious circle of borrowing. The pace of economic activities has to be accelerated by bringing down cost of doing business and reduction in interest rate is the first step.

Are Pakistani politicians the only corrupt?

After having read the latest news about wealth of Pakistani politicians kept abroad I am neither surprised nor dismayed. Over the years many people in the country have highlighted this issue and some were even assassinated as the politicians never wanted this Pandora’s Box to open. One can still recall the statement of a famous columnist of Dawn newspaper who had once said ‘all are thieves’. A storm was created in a cup of tea and soon business was run as usual.

My own analysis of the situation is that around the world many politicians who are corrupt are made part of ruling junta because internal and external forces pick them to follow an agenda. History is full of such names but even a closer look at some of the politicians who were termed ‘corrupt’ was picked up, groomed and assigned specific tasks. Once the ‘mission’ was accomplished each one faced a fate as described by the spy agencies and underworld ‘eliminate an agent when he becomes redundant’.

I will begin the analysis from my own country, Pakistan. I will not talk about history spread over more than six decades but the present situation. Nawaz Sharif and Asif Ali Zardari, the chives of country’s two leading political parties have been accusing each other of corruption. Many references were filed and cases were brought to the apex courts but neither was convicted.

Three military dictators, installed by external forces were also not spared. The external forces bribed the dictators for towing their policies. These developed countries, who claim to be the champions of democracy kept them in power to attain their ulterior motives. One can say with reasonable confidence that the amounts they received from the super powers were also kept outside Pakistan.

The most notorious name of recent history is Saddam Hussain of Iraq, who fought war with Iran, after the Islamic Revolution for a decade and also attacked Kuwait. Once he became redundant he was hanged and no one has any clue of his wealth kept outside Iraq.

One just can’t ignore Anwar Sadat of Egypt; he played a key role in recognition of Israel by many Muslim countries after ‘successful’ negotiation at Camp David. Once the objective was achieved he was assassinated while taking salute on the National Day.

Many mysteries are associated with the sudden death of Indian Prime Minister after Tashkent Agreement, assassination of Sheikh Mujeeb-ur-Rehman soon after creation of Bangladesh, killing of King Faisal of Saudi Arabia by his own nephew after formation of OIC, shooting of Indian Prime Minister Indra Gandhi by her own guard after Shimla Agreement, assassination of Benazir Bhutto and alleged ‘judicial murder’ of Zulfikar Ali Bhutto.

One has all the reasons to believe that the rulers are installed, toppled and even assassinated by the super powers to achieve their vested interest. They use different jargons for bringing the select in power and get rid of them in the name of ‘regime change’. The only regret is that the champions of democracy indulge in these ‘dirty politics’ but people of their own country hardly raise voice against them.

Declining fertilizer sale in Pakistan

Fertilizer sales continued downward trend during first two months of calendar year 2016. Reportedly offtake during these months was exceptionally low. While urea sales plunged to 656,000 tons (down 40%YoY), total fertilizer offtake was 982,000 tons (down 228%YoY). The declining trend in sales is attributable to lower crop prices (depressed agricultural commodity cycle) and weather-related crop shortfalls resulting in low farmer income.

According to the latest figures released by NFDC, cumulative fertilizer offtake during the Feb'16 was recorded at 491,000 tons as compared 606,000 tons in Feb'15, a decline of 19%YoY. Specifically, urea sales during Feb'16 have declined to 315,000 tons from 340,000 tons in Jan'16, down by 7%MoM/31%YoY.

On the other hand, DAP sales showed strength, registering an increase of 12%YoY to 71,000 tons and 9%YoY to 148,000 tons in Feb'16 and 2MCY16 respectively, however remaining lower by 7%MoM.

Imported urea sales went down by 98%YoY/87%MoM to only 1,533 tons in Feb'16 on account of weak demand and increase in production from the local players particularly EFERT and FFC that enhanced their production levels by 16%YoY to 172,000 tons and 70%YoY to 209,000 tons respectively.

Near-term checkpoints for the fertilizer industry remain: 1) international pricing dynamics where urea prices are down 26%FYTD to currently stand at US$236/tons, 2) Upcoming kharif season to drive demand and 3) increase in local gas prices (expected in Jun'16). In this regard, with no major volumetric growth in CY16, depressed farmer income and weak pricing power does not bode well for the sector.

Urea market share FFC (26%), EFERT (41%) and FATIMA (5%) in Feb'16. FFC sold 146,000 tons (down 21%YoY0, EFERT sold 128,000 tons (down 13%YoY) and FATIMA sold 15,000 tons (down 50%YoY) of urea. With the month under review remaining slightly better for DAP offtake, FFBL sold 24,900 tons of DAP (up109%MoM) while imported DAP sales rose by 33%YoY to 46,400 tons, however, declined by 28%YoY. After a sluggish start in CY16, NP and CAN sales improved to 36,700 tons and 52,400 tons respectively in Feb'16. 

Weak demand on account of poor farm incomes and increase in production from local players has led to high inventory levels in the system. In Feb'16 inventory levels for Urea (800,00 tons), DAP (269,000 tons), CAN (306,000 tons) and NP (180,000) tons. Consequently, end of Feb'16 inventory levels were relatively high for all four basic types of chemical fertilizers. In this backdrop, fertilizer producers are offering hefty dealer discount to clear out huge stockpile of inventory, affecting their margins.

In line with market volatility and depressed fertilizer outlook, the sector shed 14.2% CYTD. With little respite in sight for global commodity prices along with depressed farmer incomes, analysts believe the country's urea demand in CY16 is likely to fall to as low as 5.2 million tons. This alongwith inability to pass on any sharp increase in cost from further gas tariff rationalization (expected in Jun'16) given the continuously narrowing gap between local and international prices is likely to keep price under pressure.

Poor commodity prices, rising gas price, declining urea international prices, high carryover stock

Pakistan Stock Market Witnesses out flow of US$9.5 million

Pakistan market regained some momentum after the PXE-100 index crossed 33,000 level during the week ended 1^st April 2016, up 1.74%WoW despite volatility from global crude trends. Activity at the market showed sharp recovery, where average traded volumes for the week rose to 140 million shares as compared to 113 million shares a week ago. Key news flows guiding the market during the week included: 1) MARI announced crude oil discovery at exploratory well Halini Deep-1 in Karak block, 2) OGRA determined price of the LNG delivered on ex-ship (DES) basis at US$8.99/MMBTU exclusive GST and allowed increase in PSO margin to 2.5% on DES price from the previous 1.98 level, 3) CDWP approved Rs218.2 billion worth of development projects including Rs129.7 billion worth of motorway construction from Halka-Burhan on M-1 to Dera Ismail Khan as part of CPEC, 4) IMF's Executive Board approved disbursement of US$502.6 million after the completion of the tenth review under the EFF arrangement, 5) MSCI released its reclassification proposal with regard to migration of Pakistan index from frontier to emerging markets, where formal is expected to take place in May’17 and 6) GoP increased the price of petroleum products taking refuge behind the recent hike in global crude oil price. Performance leaders during the week were MTL, AGTL, ABL, HCAR and DAWH, while laggards included NCL, OGDC, HASCOL, UBL and ICI. Lack of foreign interest persisted during the week with net outflows of US$9.56 million, higher than US$2.31 million recorded in the previous week.

MSCI has released its reclassification proposal with regards to migration of Pakistan index from frontier to emerging markets. While consultation with market participants will be carried out in May'16 to be followed by a decision in Jun'16, formal inclusion is likely to take place in May'17. As per the proposal, the MSCI Pakistan Index would have a potential weight of 0.19% in Emerging Markets (significantly lower than the current 9% weight in the Frontier space) with nine companies making the cut. Out of the total, three companies (OGDC, HBL and MCB) will be placed in the large cap index whereas the rest (UBL, LUCK, FFC, ENGRO, HUBCO and PSO) are likely to be placed in the Mid-cap index. Broadly meeting the set graduation criteria, minor problem areas particularly with reference to market accessibility highlighted in the document include: 1) inability of foreign investors to undertake short selling/stock lending or borrowing and 2) stability of institutional framework. Moreover, continuous shrinking of volumes during the year (1QCY16 average volumes at 134 million shares as compared to 236 million shares during 1QCY15) can potentially raise concerns on meeting the size and liquidity criteria, altering the number of constituents and weights accordingly. Hopeful for an inclusion, the market is eyeing increased visibility on the global front as a key benefit especially in the backdrop of continuous foreign selling (CYTD FIPI outflow registered at US$98 million). Also, precedence (recent entrants of other markets) indicates that market multiples can sharply expand once graduated in the Emerging Markets category.

According to the latest provisional dispatches data, cement demand remained less than impressive. Contrary to the prevailing trend, export dispatches posted the best month of the year so far with domestic demand remaining flat. On a cumulative basis, dispatches reached a record high level of +9.0%YoY in 9MFY16 as compared to +8.6%YoY in 8MFY16. Companies outperforming the industry during the month included DGKC, ACPL, MLCF and PIOC, while KOHC, FCCL, FECTC and LUCK were underperformers. On cumulative basis, KOHC, PIOC, FCCL, DGKC and MLCF continued to outpace the industry while LUCK, ACPL, CHCC and FECTC were laggards on account of loss of exports to some markets (South Africa/Iraq). While March'16 failed to keep up with the momentum, analysts expect domestic demand to pick up pace going forward on the back of higher construction activity in summers where additional positive surprise can come from any aggressive utilization of remaining PSDP funds (unutilized FY16 federal PSDP: 50%). While exports continue to decline, experts believe the recent uptick in dispatches during March'16 is encouraging. With demand expected to remain robust alongwith lower operating costs, brokerage houses maintain an Overweight stance on the sector where their top picks include LUCK and DGKC due to their ability to catch up with anticipated rising domestic demand.

Following below expected CY15 financial results and adjustment in NIMs, there is a need to revisit Bank Alfalah (BAFL). While CY15 earnings depicted the swiftest pace of growth for BAFL (earnings grew by 33% YoY), analysts do not expect such momentum to sustain as pressure on NIMs from its investment portfolio (upcoming PIB maturities worth Rs50 billion) is likely to take a toll on earnings considering lending rates are already at their multi-yearr lows.  That said, BAFL's focus on attracting current accounts (37% of deposit mix in CY16F), efficient management of its staff cost (employee/branch to go down to 15.5 in CY16 as compared to 17 in CY14) and improvement in asset quality (credit cost to come down by 21bps to 0.45% in CY16) are key factors restricting earnings decline to some extent. Additionally BAFL's push towards expanding the high margin consumer segment business (5% of loan book in CY15) can also come in handy. While dividend curtailment in CY15 was not received too well by investors, strengthening of CAR by 60bps to 13.4%, as a consequence, is encouraging making room available for BAFL to participate in the credit up-cycle. BAFL's valuation can catch up with peers through: 1) sustainable and visible improvement in the cost structure, 2) an adequate CAR buffer and 3) higher payouts.