AKD Quotidian about — CPI Preview Feb’13

Karachi, February 26, 2013 (PPI-OT): Having registered at 8.O7%YoY/1.67%MoM in Jan’13, the highest sequential increase in 2yrs, AKD Securities now expect CPI to depict a modest O.2%MoM uptick (SPI suggests MoM decline of -0.5%), which will lead Feb’13 CPI to clock in at 7.97%YoY.

According to AKD Securities this will result in a CPI average of 8.25%YoY in 8MPYI3, implying +ve real interest rates of 1.25%. However, trimmed core inflation has gradually trended up (9.9%Y0Y in Jan’13) providing reason for the SBP to pause monetary easing.

In this regard, AKD Securities believes that soft CPI readings have become largely irrelevant for monetary policy trajectory with risks to the external a/c taking precedence, particularly with escalating pressure on the currency (depreciation of 5.1%FYTD). As such, AKD Securities reiterates that Pakistan will likely enter a fresh IMF program in the near-term, with potential adjustments in interest rates and the exchange rate. Over the medium-term however, anticipated macroeconomic discipline should keep investor attention firmly on corporate fundamentals and valuations, where the Pakistan market offers exceptional bottom-up plays.

Feb’13 CPI Preview: AKD Securities expects Feb’13 CR to clock in at 7.97%YoY, translating into a O.2%MoM increase which would be significantly lower than the 1 .67%MoM increase in Jan13. This is corroborated by SPI trend which suggests O.5%MoM deflation (due to decline in food and fuel prices). As a result, SMEY1 3 CR1 should average 8.25%YoY. Assuming a relatively high 1.2%MoM increase in CR1 going forward, full-year FY13 CR1 will average -8.3%, still lower than the DR at 95%. That said, risks remain in view of 1) imported inflation with PkR depreciation of 5.1 %FYTD, 2) any increase in international oil price (Arab light at US$112.86/bb, up 1.1% MoM) and 3) deficit monetization ahead of elections amidst non- materialization of external funds.

Caution on the MPS front: Going by the previous MPS, AKD Securities believes that soft CPI readings have become largely irrelevant for monetary policy trajectory. Moreover, with risks to the external a/c coming to the fore within the backdrop of a likely re entry into an IMF program, AKD Securities believes the SBP is unlikely to further lower the DR. Alternatively, AKD Securities see monetary tightening resuming in 2HCY13, albeit at a gradual pace.

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