AKD Quotidian about — Nov13 CPI Preview

Karachi, November 25, 2013 (PPI-OT): After registering at 9.1%YoY in Oct’13, AKD Securities expects headline CPI to accelerate to double digits in Nov’13 to clock in at ~10.5%YoY.

According to AKD Securities this translates into a 0.86%MoM increase which is lower than the 1.36%MoM CPI average increase in 4MFY14. The rise in sequential price pressures, corroborated by the SPI trend, is expected on the back of 1) increase in food CPI particularly perishable food items due to transporters’ strike and 2) base effect with 15.8% increase in electricity in Oct’13 and its pass-through impact. This should lead to 5MFY14 CPI averaging 8.75%YoY whereas the 12m moving CPI average still stands at 7.5%YoY.

That said, the SBP increased the DR by 50 bps to 10% in the Nov’13 MPS taking its cue from the increasing inflation trend (CPI deemed to remain at an elevated level: 10.5%-11.5%) and risks to the external front. Regarding the latter, the PkR/US$ parity has shed 8.8%FYTD and the PkR may further weaken in view of large repayments to IMF and sluggish release of foreign inflows.

AKD Securities believes the GoP faces a critical tradeoff between preserving reserves and defending the currency by intervening in the fx market ala Sep’13. Considering these risks, AKD Securities expects the SBP will further increase the DR by 100bps across the rest of FY14 to maintain real interest rates of +1%.

Nov’13 CPI Preview: AKD Securities expects headline CPI to accelerate to double digits in Nov’13 to clock in at ~10.5%YoY which will be the highest in 16 months. This translates into a 0.86%MoM increase which is lower than the 1.36%MoM CPI average increase in 4MFY14.

The rise in sequential price pressures, corroborated by the SPI trend, is expected on the back of 1) increase in food CPI particularly perishable food items due to transporters strike and 2) base effect with 15.8% increase in electricity in Oct’13 and its pass-through impact.

The former is attributed to the eleven day transporters strike where prices of perishable food items went up due to shortage in the market. This should lead to 5MFY14 CPI to average 8.75%YoY, whereas the 12m moving CPI average still stands at 7.5%YoY. Going forward, AKD Securities expects full year FY14 CPI to exceed 10%YoY.

Risks on the external front and DR outlook: Currently, SBP reserves stand at US$3.77bn implying import cover of just ~1 month. While foreign inflows (Etisalat/privatization proceeds etc.) and IMF second tranche of US$540mn (expected by mid-Dec’13) are still awaited, large repayments (US$600mn to IMF till Dec’13) will likely keep the currency under pressure. Given these risks, the SBP has already increased the DR by a cumulative 100bps in the first two monetary policy statements of the fiscal year, where AKD Securities expects the central bank to increase the DR by a further 100bps across the remainder of the fiscal year to maintain real interest rates of +1%.

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