AKD Quotidian about — Pakistan Economy: SBP to wait and see

Karachi, March 17, 2014 (PPI-OT): In a not unexpected move, the SBP has kept the Discount Rate unchanged at `10% for the next two months.

According to AKD Securities, in this regard, while the central bank has cited lower inflation and rebound in LSM growth as positive factors, it wishes to see further comfort on the external front before decisively moving to cut interest rates.

The latter is contingent upon 1) timely materialization of foreign inflows, 2) reduction in fiscal borrowing, and 3) meeting the NDA target given by IMF while sustained stability in the exchange rate is also likely to be a key factor, provided this Is achieved and inflation remains in check, AKD Securities believes the SBP may have room to cut the DR by as much as 100bps in the May14 MPS. In the interim, with the SBP maintaining status quo in the Mar’14 MPS.

AKD Securities expects Banks to outperform this week. On the flipside. leveraged Cements and selected Fertilizers EFERT) may see near- term weakness. At the same time, any fresh depreciating pressure on the PKR (slippage of 15% vs. the US$ in the two days before MPS announcement} may cause a switch from Autos into IPPs.

Status quo in DR: The SBP has kept the Discount Rate unchanged at 10% in the Mar14 MPS effective for the next two months. Despite positives such as lower inflation (8MFy I4 CPI average: 8.65%YoV) and rebound in [SM growth (1 HIFYI4: 6.7%yoy) the central bank has opted for a cautious stance where it wishes ID see further comfort on the external front and stability in the PKR/US$ exchange rate (which slipped by 1.5% in the Iwo days before MPS announcement). Specifically, the SBP has alluded to 1) timely materialization of foreign inflows (3G auction/Eurobonds/loans from multilateral and bilateral agencies, 2) desired reduction in fiscal borrowing and 3) the need to meet the NDA target by IME as the key factors that may influence its decision to reduce the DR going forward.

What about the May MPS? Inflation remains in cheek where AKD Securities’ expected FY14 CPI average of 8.5%YOY implies real interest rates of +ve 1.5%. At the same time! Impetus from the manufacturing sector (energy reforms + GSP Plus) should allow LSM to boost GDP growth. Finally, the recent Uptick in FX reserves has taken import cover to 2.5month. not excessively high but a significant improvement over the < 2 month import cover in early Feb'14. Within this backdrop, stability in the PKR will likely be the key overarching factor behind the central banks' decision on interest rate trajectory In AKD Securities’ view, provided targeted foreign flows materialize on time (market rumours also point to possibility of further trenches n the Pakistan Development Fund) and there is no spike in international oil prices, the SBP may have room to cut the DR by as much as 100bps to 9% in the May'14 MPS.

Investment perspective: While some quarters called for an unchanged DR AKD Securities believes the market had priced in a 50bps cut last week. With the SBP maintaining status quo, AKD Securities expects Banks to outperform this week. On the flipside, leveraged Cements and selected Fertilizers (EFERT) may see near-term weakness. At the same time, any fresh depreciating pressure on the PKR may cause a switch from Autos into lPPs. At current levels, AKD Securities’ preferred plays include DGKC. ENGRO. HUBC and UBL.

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