Karachi, October 06, 2022 (PPI-OT): Views on PR shift from ‘higher for longer’ to ‘reversal’

We present takeaways from recent rounds of discussions with market participants, regarding their outlook on macros and Pakistan’s equation with IMF post the new Finance Minister.

General expectation regarding status quo to be announced in 10th Oct’s Monetary Policy is already being discussed. Interestingly more than one third of our sample base now does not rule out a Policy Rate cut on Monday, and/or cuts in the next MPS announcement in Nov-2022. The sample base earlier expected Policy Rate cuts from FY23-end.

Concerns on macro headwinds persist where normalization of imports and repatriation would be key. Repatriation has declined from an average of US$135mn/month during FY22 (total: US$1.6bn) to US$15mn/month during 2MFY23.Moreover, CPI readings is another data point investors would be keeping on the radar.

Money managers do not rule out rate cut

We made a round of discussions with sample base of market participants from all segments regarding their respective outlooks on various economic indicators and potential equation with IMF post changes in Finance Ministry. The most common response was Status Quo in Monday’s Monetary Policy. Having said that, we highlight a change in some views where now ~40% of our sample base did not rule out a Policy Rate cut to be announced on Monday, who had previously been expecting monetary easing 4QFY23 onwards. While money managers believe the cut may be symbolic in terms of magnitude, if any, it may act as a signal to financial markets re interest rates peaking at current levels.

We believe that yesterday’s T-Bill auction reflected mixed signals for a rate cut expectation on Monday as cut-off yields came in 24bp – 26bp lower as compared to previous auction results, however were 5bp – 34bp higher to prevailing secondary market yields. The auction raised Rs 772 billion, against participation of Rs 2,012 billion and target/maturity of Rs650bn/Rs543bn, respectively.

Change in finance regime fuels anticipation

The change in stance has been led by the evident strategy of the new Finance Minister prioritizing inflation control. Recent events such as cut in POL product prices and deferment of FCA lead to expectations of a faster decline in CPI, as compared to previous estimates, making room for a rate cut this month and/or next month. To recall, the new Finance Minister reduced POL product prices by Rs7-Rs17/litre, which included lower ex-refinery price and lower PDL charge. Moreover, deferment of Fuel Cost Adjustment charge was also implemented in Sep-2022 that supported a sequential decline in Sep-2022 headline inflation readings.

IMF’s stance expected to turn softer

The above-mentioned steps do not worry most money managers regarding how the same would be perceived by IMF despite these steps being in contradiction to guidance provided in the latest Staff Report released by the Fund last month. Money managers are of the view that IMF’s stance with regard to Pakistan may turn softer amid floods situation. The Fund may acknowledge additional inflationary pressures arising from the catastrophic event, hence may not raise concerns over any temporary reliefs on costs that would other-wise lead to higher inflation.

Still does not take away concerns at home

All said and done, concerns on macro headwinds persist, where money managers said they will be keeping data points regarding current account deficit and CPI numbers on their radar. While 1QFY23 trade deficit has contracted by 21% YoY, key support to this improvement has been recent administrative controls on imports. To recall, CAD for 2MFY23 has dropped by 21% YoY to US$1.9bn. In addition, deferment of repatriation has also supported SBP’s foreign exchange reserves in the recent months, where repatriation has declined from an average of US$135mn/month during FY22 (total: US$1.6bn) to US$15mn/month during 2MFY23.

In view of the above, money managers anticipate stability in PKR/US$ for a couple of months, and pin hopes on significant foreign aid/loans under floods and forex reserve support from friendly countries in order to avoid another sharp decline in PKR/US$ once imports and repatriation normalize.