AKD Quotidian about — June’12 Monetary Policy Review

Karachi, June 11, 2012 (PPI-OT): SBP in its recent June’12 Monetary Policy Statement has kept the Discount Rate unchanged at 12% for the next two months. This is in line with AKD Securities’ expectation where AKD Securities had highlighted risks to monetary easing emanating from inflation outlook due to fiscal profligacy, concerns over the balance of payments (BOP) position and persistent structural shortcomings. Specifically, the SBP has noted that 1) inflation remains endemic (CPI up 12.3%YoY in May’12) despite lack of demand pull pressures, 2) the CA deficit at US$3.4bn in 10MFY12 with insufficient financing by foreign flows, 3) reserve depletion will continue with IMF repayments ahead and 4) crowding out of private sector credit off take remains subdued. Going forward, AKD Securities broadly agrees with economic policymakers that the onus of policy tilt must be towards growth and structural reforms (particularly circular debt), which are an acute necessity to increase private sector participation where the FY12 pvt. Investment to GDP ratio stood at just 12.5%. Going Forward, current decline in global oil/commodity prices should provide comfort to the external account, especially considering the US$2.8bn repayment to IMF in FY13. While Pakistan has positive real interest rates, increasing borrowing for budgetary support and uncertain materialization of foreign inflows (leading to deficit monetization and a weak PkR/US$) remain the key risks to the interest rate outlook.

DR unchanged at 12%: In view of an uncertain operating environment, and risks to inflation due to fiscal slippages and concerns over the BOP position, the SBP has decided to play it safe and keep the DR unchanged at 12% over the next two months. Specifically, the SBP has noted that 1) sequential inflation remains endemic (CPI up 12.3%YoY in May’12), 2) the current account deficit (FDI down 49% YoY in 10MFY12), 3) reserve depletion will continue with repayments ahead and 4) increase GoP borrowing from SBP. Being and election year and expected fiscal slippages leading to deficit monetization; AKD Securities does not an uptick in interest going forward.

Inflation outlook: While CPI has shown an uptick to 12.3%YoY in May’12 (from 11.2%YoY in Apr’12), it is biased towards further increase (with Ramazan in Jul-Aug’12). In this regard, continued weakness in PkR/US$ (so far 10% depreciation vs. the US$) poses risk for imported inflation, although the recent sell off in oil may provide some breathing space (MS and HSD to be reportedly reduced by PkR9/ltr and PkR5/ltr respectively in the next price review on 16th Jun’12). AKD Securities expects CPI to average at 11.5%YoY in FY12, however, limiting fiscal borrowing from SBP in AKD Securities’ view will remain challenging. Should external financing fall below target and with fiscal slippages, AKD Securities estimates deficit monetization will increase average CPI inflation to 12.5%YoY from budgeted 9.5%YoY in FY13.

Dollar index up 11%FYTD: The dollar index has strengthened significantly by 11% FYTD, while PkR/US$ has depreciated by 10% FYTD. The PkR/US$ parity is sensitive to the oil import bill as well as the upcoming IMF repayments (US$2.8bn for FY13). The recent appreciation of the US dollar has eased oil prices to US$98/bbl down 29% from FYTD peak level. That said, considering once third of Pakistan’s total import bill is oil payments, falling oil prices (Arab light) is a significant positive with uptrend in remittances and should ease concerns on nearterm reserve erosion.