In line with market consensus, MPC of the SBP increased policy rate by another 1% to 17% mainly driven by inflationary pressures. The SBP highlighted that the cost of short-term corrective measures seems lower than longer-term implications in case inflation gets out of hand.
Three key areas that supported the MPC’s stance included 1) upwelling core inflation that has consistently been on the rise over the past 10 months, 2) limited foreign inflows and consistent external repayments have put the external account under pressure and 3) bleak global economic outlook that has exposed countries like Pakistan to risk of lower remittances and exports.
The SBP also indicated that production decline and supply-side pressures could further hamper the LSM which has already gone down by 3.6% YoY in 5MFY23. Similarly, weaker than expected cotton arrivals are expected to offset the improved performance of sugarcane and wheat and likely keep agri growth in check thereby taking a toll on the overall GDP estimates (2% of GDP expected initially).
CAD has undergone a sizable 60% YoY contraction in 1HFY23 on the back of administrative controls and reduced domestic demand and resultantly the SBP expects to close the year at less than USD 9Bn (previous estimate: USD 10Bn).
The SBP admits that the external account continues to remain under pressure owing to weaker than expected foreign inflows, lumpy debt repayments and political noise escalation. In the current backdrop, earliest resumption of the IMF program is essential to pave the way for materializing related multilateral/bilateral flows.
Out of the total expected external account requirements of USD 23Bn (excluding CAD), the SBP has thus far settled USD 15Bn (USD 9Bn repayments + USD 6Bn rollover) while the remaining ~USD 8Bn is to be paid over the next 5 months.
Fiscal slippages clocked-in at 1.5% of GDP in 4MFY23 and expected slowdown in economic activity and administrative controls on imports pose likely downside risks to tax collection. Current fiscal policy does not seem to support the MPC stance and fiscal consolidation is needed to keep inflation under control.
In the light of today’s development and limited guidance from the SBP regarding the way forward, we expect economic indicators to continue to pose threats to recovery in the index and in the near term, a defensive strategy with focus on high yielding, low-beta and mature sectors should be maintained. Our preferred picks are Banks, E&P’s, Fertilizer and Power.
Courtesy: BMA Capital Management