FLASHNEWS:

JS Securities Limited – JS Research (15 Sep 2023)

Karachi, September 15, 2023 (PPI-OT): PR unchanged over declining inflation expectations

In yesterday's Monetary Policy meeting, the State Bank of Pakistan (SBP) decided to keep the Policy Rate unchanged at 22%. Contrary to market estimates, SBP's decision was mainly based on expectations of inflation trend declining in the coming months.

SBP Governor apprised SBP's inflation estimates suggest Pakistan is still in the positive zone of real interest rates on a forward-looking basis, where prevailing global oil prices have been factored in as well.

In the briefing, SBP Governor also updated about Pakistan meeting with the required performance criteria, and remained confident on meeting this year’s debt obligation through rollovers and fresh lending.

Out of the US$19bn remaining debt payments for FY24, US$8bn of rollover commitments have been received, where Pakistan expects another US$3bn of rollovers. SBP also expected fresh lending of US$14bn for the year.

Policy Rate unchanged at 22%...

In yesterday’s Monetary Policy meeting, the State Bank of Pakistan (SBP) decided to keep the Policy Rate unchanged at 22%. To recall, Pakistan has been in a monetary policy tightening cycle since 4QCY21, where the Policy Rate has been increased from 7% to 22%. The State Bank of Pakistan has maintained current rates since Jun-2023.

The decision came as a surprise to markets where expectations of around 150bp increase had been embedded through the latest T-Bill auctions and secondary market yields. In the ongoing quarter, yields across all tenors have jumped at least 100bp. The expectations of an increase had been building from prospective inflationary pressures amid PKR depreciation until some days ago, and the ongoing rising global oil prices.

As inflation trend expected to decline despite higher oil prices

In contrary, SBP’s decision was mainly based on expectations of inflation trend declining in the coming months. In yesterday’s post monetary policy briefing, the SBP Governor apprised SBP’s inflation estimates suggest Pakistan is still in the positive zone of real interest rates on a forward-looking basis, where prevailing global oil prices have been factored in as well. Moreover, the output gap is also expected to remain negative in the near term, with modest recovery in real sector and subsided flood concerns.

Confident about meeting US$19bn debt payments

In the briefing, SBP Governor also updated about Pakistan meeting with the required performance criteria, including ceiling on SBP's stock of net foreign currency swaps/forward position. Moreover, on other external funding related matters, it was briefed out of the US$21bn scheduled debt payments for FY24, US$2.2bn have been serviced. Out of the US$19bn remaining debt payments, US$8bn of rollover commitments have been received, where Pakistan expects another US$3bn of rollovers. This would bring down debt payments down to US$8bn, which are expected to be paid through planned inflows of US$14bn for FY24. From the US$14bn, the key lenders are multilaterals, where some inflows are also expected from bilateral lenders and commercial banks.

With Current Account Deficit clocking in at US$935mn for 2MFY24, SBP’s FY24 CAD projections remain intact, estimating it in the range of 0.5% to 1.5% of GDP.

Recent uptick in T-Bill yields also discussed

Among the discussions during the briefing was the recent T-Bill auction (8 days from today) where cut off yields had come in 119 – 144bp higher than prevailing secondary market yields. While Finance Ministry held certain funding requirements that led to some uptick in yields, SBP Governor apprised the auction being held under circumstances which have changed today, especially in light of reforms taken against money exchange sector that has led to PKR appreciation in the last one week.