Morning Shout released by KASB Securities Limited and Economics Research

Karachi, July 04, 2012 (PPI-OT): Macro: Increased possibility of near term DR cut?

According to KASB Securities Limited,

• Pakistan-US compromise on Salala incident resulting in opening of NATO supply routes should lead to near term realization of pending CFS flows to the tune of US$1.1billion.

• Combined with softer inflation numbers in June and future direction (details below), suggests increased possibility of a near-term cut in discount rate despite govt. borrowing being at an all time high levels.

• However any possible respite in DR could be short-lived in KASB Securities Limited’s view, due to (1) possibility of Pakistan’s re-entry to IMF program, and (2) higher govt. borrowing from the central bank in the mid-term.

• KASB Securities Limited is also trimming KASB Securities Limited’s FY13E inflation target by 40bp to 11.6% to account for lower than expected FY12 inflation (actual was 11% vs. KASB Securities Limited’s estimate of 11.5%) and complete pass-through of int’l oil prices.

Increased possibility of a near term DR cut?
After an 8-month standoff, Pakistan and the US have reached a compromise, as the apology sought by Pakistan from the US has come through and Pakistan has reciprocated the gesture by announcing re-opening of NATO supply routes. The compromise on the issue should lead to near-term realization of pending CSF flows to the tune of US$ 1.1billion. Media reports quoting US officials highlighted that the said amount has already gone through the approval process and is expected to be released soon. Likely CSF inflow and expected softer inflation numbers suggest increased possibility of a near term cut in discount rate despite govt. borrowing being at all time high levels. However any possible respite in the DR could be short-lived as Pakistan still appears to be on track for needing another IMF program due to pressure on external account and scheduled debt repayments. This coupled with heavy government borrowing from the central bank could stall or reverse any near term DR relief.

Trimming FY13E Inflation target to 11.6%
KASB Securities Limited has lowered KASB Securities Limited’s inflation projection for FY13E down to 11.6% from 12.0% on account of (1) complete pass-through of international oil prices, and (2) lower than expected average FY12 inflation of 11% (vs. KASB Securities Limited’s estimate of 11.5% and govt. target of 12%). KASB Securities Limited’s revised CPI estimate is still ahead of government forecast of 9.5%.

Positive surprise in June CPI reading
Pakistan Bureau of Statistics reported a benign CPI inflation reading for the month of June quoted at 11.26%, much lower than KASB Securities Limited’s expectation of 11.9-12%. The trends in monthly inflation and core inflation are encouraging and helped in containing full year inflation at 11.01%, well within government target of 12%. KASB Securities Limited has fine-tuned KASB Securities Limited’s FY13 inflation estimate by 40bps to 11.6%.

Divergent monthly trends ahead
Monthly trends in both headline (0.04% vs. 1.1% in May) and core inflation (non-food-no energy; 0.7% vs. 0.8% in May) measures are positive. KASB Securities Limited attributes the decline in CPI to (1) sharp reduction in prices of perishable food items (-7.9% MoM) led by poultry items and fresh vegetables, (2) stable prices for non-perishable food items (up 0.58% MoM) which has higher weight in CPI basket and (3) up to 7% decline in petroleum product prices (POL). Interestingly, PBS has recorded average POL prices in June, implying that the June data does not show the full impact of drop in POL prices. PBS has incorporated 5-7% drop in POL prices versus actual drop of 10-13% in June excluding 4-6% downward revision in prices effective 1st July. Expected soft POL prices in July may help in subsiding likely pressure on food inflation due to higher prices in Ramadan season (falling in July as per Gregorian calendar).