Karachi, September 01, 2023 (PPI-OT): Aug-2023: Plummeting PKR captures attention

Aug-2023 closes down 6%

Wiping out partial Jul-2023's gains, Aug-2023 closed down 6%, while a sharp 6% PKR depreciation against US$ took US$-based losses to 12% this month. While the month witnessed key events with Parliament undergoing dissolution and Caretaker government taking charge till the next General Elections, slipping PKR drove investor sentiments in the second half of the month.

On the macro data front, the month reported 1) FY23 fiscal deficit at 7.7% of GDP, and 2) Current account balance breaking its streak of surplus to report a deficit of US$809mn for Jul-2023.

Plummeting PKR to impact inflation...

The depreciation of PKR simultaneously widened gap between open market and interbank rates. Since FY24 YTD, PKR has depreciated 6.4% in the interbank against 10.8% in the open market, widening the gap to 4.4% between both rates (IMF recommendation of 1.25%). On the other hand, with POL prices already witnessing 15% increase in Aug-2023, another ~6% increase was announced for the first half of Se-2023. Depreciating PKR and rising POL prices are beginning to alter the shape of inflation expectations.

Given Pakistan's status as a net importer, the movement of PKR/US$ holds a significant influence on its CPI basket, where inflation estimates have begun to revise upward. Aug-2023 CPI reading is expected at 28.77%, which would be following Jul-2023's reading of 28.3% - higher than street estimates of ~26% (driven by higher food and electricity).

And sectors in varied manners

While the rupee direction would give a sense of upcoming inflation readings, a number of sectors would once again come on radar from its respective positive and negative impacts in their Sep-2023 quarter results. We highlight US$-revenue sectors such as Oil and Gas Exploration and Production and export-oriented sectors such as Textiles and Technology, benefitting from any PKR depreciation. From sectors that may have a relatively higher adverse impact, we highlight Autos and Steel. While some chemical companies may benefit from PKR depreciation, they may witness some margin contraction from the rising global oil prices. Banks may remain on radar for higher dividend yields as defensive bets in the ongoing macro challenges.

Energy sector remains in limelight

During the month, various segments of the energy chain remained in limelight. Cabinet Committee on Energy approved local refineries' upgradation policy to encourage cleaner fuels. Moreover, news flows regarding government revisiting gas circular debt settlement emerged during the month, however fizzled out in some days as no official statement was released. News flows suggest the new government set-up is in touch with IMF, suggesting core focus revolves around energy sector, especially reducing circular debt during the ongoing fiscal year. We expect the Caretaker set-up to continue complying with IMF recommendations.