The outgoing week witnessed lacklustre activity in the KSE-100 index largely due to economic uncertainty prevailing in the country. Despite a rise in fuel prices by PKR 30/litre last week, the subsidy on petrol and diesel prices remained at PKR 39/litre and PKR 53/litre, respectively. As a result, uncertainty around resumption of IMF program and depleting fiscal space took centre stage and dominated the investor sentiment.
The confidence was further weakened on the back of Moody’s report which changed Pakistan’s outlook from ‘Stable’ to ‘Negative’ on the back of rising external vulnerabilities, declining forex reserves (less than 2 months of import cover) and inflationary pressures which will become more visible over the next few months. This was further supported by Morgan Stanley, which reported that Pakistan’s external financing gap could reach USD 8Bn in the coming year.
Speculations regarding a pro-IMF budget, which will further burden the common man, also led to concerns of higher inflation in the coming months which was already reported at 13.8% in May-22. To mitigate the risk of default and fulfil the commitments of the IMF, the govt. increased fuel prices by a further PKR 30/litre and electricity base tariff by PKR 7.91/KwH hence, signalling to the market that economic remedy is on the cards.
The finance minister further stated that once IMF is on board, the country will be able to unlock further lending sources that will strengthen forex reserves. Moreover, he stated that terms and conditions with the Chinese have been agreed and roll over of USD 2.3Bn is around the corner thus easing some concerns. As a result, PKR showed signs of strength and appreciated by 0.9% WoW against the greenback to close at PKR 197.9/USD. As for performance of the local bourse, the index moved between highs and lows of 43,342pts and 41,145pts to conclude at 41,315pts (↓1,547pts or 3.6% WoW). Trading volumes, on the other hand averaged 94.4Mn shares (↓24.1% WoW) while daily traded value was reported at USD 23.6Mn (↓18.6% WoW).
With IMF back in the fold, inflation concerns take centre stage: Following govt.’s moves to reverse fuel and electricity subsidies, the upcoming budget has also raised serious concerns over inflation. As per news flows, IMF has demanded tax collection of PKR 7.3Tn in the upcoming budget, while advocating for PSDP cuts along with imposition of further taxes. This, coupled with a contractionary monetary policy and tight fiscal policy is bound to slow down demand in the near term and lead to slowing GDP growth in FY23. Moreover, with the ongoing commodity super cycle, weakening PKR and tough IMF conditions, inflation concerns have taken centre-stage, with leading economists projecting average inflation at ~15% in FY23. Furthermore, despite MoF’s assurance of rates being at their peak, the T-Bill auction conducted this week did not follow suit as yields across 3/6/12 month tenures rose by 75/55/75 bps to stand at 15.3/15.3/15.5%, hinting that inflation will stay elevated for the next 12 months.
Major data releases during the week included: 1) May-22 inflation arrived at 13.8% YoY (Apr 22: 13.4%), 2) Trade deficit widened 58% YoY in 11MFY22 to USD 43.3Bn, 3) Fiscal deficit recorded at 3.8% of GDP in 9MFY22, 4) SBP raised PKR 792Bn in T-bill auction as yields across 3/6/12 month tenures rose 75/55/75 bps respectively, 5) Fertilizer offtake jumped 34% YoY in April-22 and 6) FBR recorded tax collection at PKR 5.3Tn in 11MFY22 (↑28% YoY).
Outlook:
With the reversal of fuel subsidies, the resumption of IMF program now looks increasingly likely. However, inflation concerns along with ‘Negative’ outlook from Moody’s has dampened investor’s sentiment. Once the new budget is announced, there will be greater clarity on the fiscal front given inflation will cross 15% in the near term. That said, we advise adopting a ‘play it safe’ strategy and refraining from cyclicals and high beta stocks. We maintain our liking for Banks, E&P’s, Textiles and Fertilizer sectors.
Courtesy- BMA Research