Trajectory of the equity market during Jan’23 strongly reflected all variables active in motion since the past year: abrupt change in economies policies, political instability and the IMF chase. Although potential circular debt resolution, and pledges of over USD 10bn secured by Pakistan at the climate conference held in Geneva, aided some early gains, political chaos soon took over. PTI dissolved its assemblies in Punjab and KPK, and as more external debt repayments loomed closer in the backdrop of depleting FX reserves, the incumbent government made the ultimate call to revive the IMF program.
On the economic front, the State Bank of Pakistan undertook another 100bps hike in its key policy rate amid rising CPI, while the Rupee was allowed to find its value as per market forces mid-month, which was one of IMF’s pre-requisites, and resulted in the PKR closing at near historic low level of 269.63 against the USD (depreciating by 16.02% MoM). Moreover, tailwinds to the narrative of mounting inflationary reading emanated from a hike in domestic fuel prices (PKR 35 per liter), while possible implementation of other tough measures (augmented electricity & gas tariffs, imposition of flood levy etc.) also shows the government’s resolve to mend ties with the IMF. With resumption of the stalled program key to avoid default, the stock market welcomed the IMF mission to Pakistan in the last week. The KSE-100 index closed at 40,673 points, up slightly by 252.6 points / 0.62% MoM during Jan’23, as the January euphoria could not be replicated this year. In USD terms, the KSE-100 index posted a negative return of 14.9%.
Major News
Urea, DAP sales surge by 39%, 37% YoY in December 2022, Petroleum products sales went down by 11% YoY to 1.33mn tons in December, Pakistan repays over USD 1bn external debt, Deal signed with SFD to finance oil derivatives worth USD 1bn, Jul-Nov LSMI output declines 3.58pc YoY, Pakistan gets lifeline rollover of USD 2bn loan from UAE, Rs200b mini-budget to appease IMF on cards, Govt to resolve LC issue of refineries & OMCs, Govt offers its SOE stakes to 2 UAE firms, Petrol, diesel prices hiked by whopping Rs35 a litre, Russian gasoline to be sent to Pakistan as EU import ban looms, and IMF identifies Rs2tr hole in budget estimates.
Outlook and Recommendation
It has become abundantly clear that Pakistan has to rely on the IMF program in order to dodge default. This belated realization however, comes at a heavy cost. With the recent hike in fuel prices (PKR 35/liter), and a market determined currency (PKR lost major ground in the past two weeks), the IMF mission has landed in Pakistan (31ST Jan’22 to 9th Feb’23).
While the bear minimum has been done to revive the stalled program, we believe the path to prudent decision making has more tests to follow. Increase in the gas and electricity tariff, as well as additional revenue collection measures such as imposition of flood levy, and GST / PDL on petroleum products, will soon be undertaken. This poses upside risks to upcoming inflationary forecast, with hawkish monetary policy stance in the near term.
Albeit, there seems to be no choice in the matter. These decisions have been long pending, and delay will only cause more harm to the country. Pakistan’s reserves, at critically low levels with import cover of just 3 weeks, need immediate help from the IMF, and other bilateral and multilateral partners. Therefore, these measures, will put the country on a much-needed path of stability.
However, corporates and public at large will need to build more resilience to survive these tough times. We believe aggregate demand will remain slow, on the back of high inflation, low affordability and weak access to consumer credit. Whereas corporate sectors may also be hit by high input costs, slow demand and increased borrowing costs.
Albeit, we highlight some silver lining. Weakness in international commodities, such as coal, will be positive for the cement sector. USD appreciation will benefit sectors with dollar denominated revenue streams such as E&P’s, Technology, and Chemical. Hike in gas tariff will improve the energy chain valuation as it will curb the future accumulation of circular debt. High interest rates will aid earnings of the banking sector. Whereas increase in domestic fuel prices will augur well for the margins of OMC’s.
The KSE-100 is currently trading at a PER of 3.9x (2023) compared to Asia Pac regional average of 12.2x while offering a dividend yield of ~10.4% versus ~2.8% offered by the region. Our preferred stocks are OGDC, PPL, MARI, MCB, FABL, MEBL, BAFL, LUCK, MLCF, FCCL, ENGRO, FFC, HUBC, PSO, and SNGP.
Courtesy- AHL Research