Karachi, December 02, 2021 (PPI-OT): External account pressures to trim equity market gains

Despite release of IMF’s Staff Concluding Statement on the Sixth Review under the Extended Fund Facility with Pakistan and agreement signed between the State Bank of Pakistan (SBP) and Saudi Fund for Development (SFD) to receive US$3bn, overall pressure in the equity markets post a sharp increase in the Policy Rate by SBP, taking it up by 150bps to 8.75%.

The KSE100 Index declined by 2.4% in Nov-2021, trimming YTD CY21 gains to 3%. Moreover, consistent PKR depreciation against the greenback took US$ based losses for Nov-2021 to 4%, while YTD CY21 losses in US$ terms extended to 6.4%.

MSCI related outflows also reflected during month as Pakistan was reclassified from MSCI EM to in MSCI FM. Thus, out of the total net foreign outflow of US$364mn accumulated in 11MCY21, US$141mn pertained to the month of Nov-2021 alone.

Going forward, woes on the external account of the country are expected to keep investors hesitant from fresh buying for at least the remainder of CY21. Recent reportedly provisional import bill number of ~US$7.7bn that may lead to trade deficit to balloon to ~US$4.5bn (+4x YoY) for Nov-2021 would further mount burden on the country’s external account. So far, SBP has already witnessed more than US$3.5bn decline in its foreign exchange reserves from its high in Aug-2021.

Following expanding trade deficit, continuation of PKR depreciation cannot be ruled out which would perpetuate pressures on inflation. By now, the higher CPI of 11.5% for Nov-2021 has led to cut offs in the recent T-Bill auction to increase to 10.79%/11.50%/11.51% for the 3M/6M/12M papers, respectively, which are 204bps – 276bps higher than the current Policy Rate; pricing in expectations of beyond 100bps increase in the upcoming Monetary Policy announcement this month.