AKD Quotidian about — Nov’12 CPI Preview

Karachi, November 26, 2012 (PPI-OT): Headline CPI has averaged in double digits over the past 5 years but is expected to average in single digits in FY13.

According to AKD Securities, with CPI consistently on a downtrend since Jul’12, AKD Securities expects Nov’12 CPI to clock in at 7.9%YoY, implying 0.5% MoM increase. In this regard, the SPI data suggests a 0.06% MoM increase. AKD Securities attributes the soft SPI reading to 1) subdued Food inflation (particularly perishable food items) and 2) decline in transport group. However, AKD Securities expects the housing component in CPI to register an increase (based on quarterly rent surveys). Going forward, AKD Securities trims AKD Securities’ FY13F average CPI forecast to 9%YoY, below the GoP target of 9.5%YoY. Single digit CPI average across FY13, particularly in the near-term, strengthens the case for the last leg of monetary easing cycle. With +ve real interest rates at 1% (assuming FY13 CPI of 9%), SBP has room to cut the Discount Rate by at least 50bps in the next MPS in Dec’12. In this regard, it is interesting to note that the PBS has downward revised Oct’12 Core inflation numbers to 9.7%YoY from 10%YoY earlier supporting a DR cut (as SBP targets core (trimmed mean) CPI). That said, risks to inflationary pressure in the medium term remains in view of 1) fading out of high base effect, 2) increasing pressure on PKR /US$ parity (depreciation of 1.6% FYTD) due to IMF repayments, 3) repercussions of potential fiscal indiscipline ahead of general elections (wheat support price increase to PKR 1200/bag and 4) an uptrend in Core (NFNE) inflation.

Nov’12 CPI preview: AKD Securities expects Nov’12 CPI to clock in at 7.9%YoY, implying a 0.5%MoM increase. This bring 5MFY13 CPI to average at 8.6%YoY comfortably below the Discount Rate. AKD Securities expects housing rent and other fuels to depict an uptrend but food inflation to stay subdued. Going forward, AKD Securities expects FY13 CPI to average around 9%, below the GoP target of 9.5%YoY. With +ve real interest rates at 1%, AKD Securities expects the GoP target of 9.5%YoY. With +ve real interest rate at 1%, AKD Securities expects a last leg of monetary easing in Dec’12 despite risk to inflationary pressures over the medium term. It is also interesting to note that PBS has downward revised Core CPI numbers further to 9.7% of Oct’12 from 10%YoY earlier, supporting a DR cut. Risks to inflationary pressures remain on the back of 1) BoP risks coming to the forefront, 2) higher global food prices, 3) uptick in oil prices and oil imports (due to seasonal factors), and 4) intensifying weakness in the PKR against the US$.

Implications on KSE! The KSE is trading at its all time high and crossed the 16,000 barrier recently. AKD Securities expects the SBP may take one last shot at reviving private sector credit offtake and thus cut the DR by at least 50bps in the upcoming MPS. AKD Securities sees obvious benefits for leveraged plays (Textiles and Cements in particular) that are likely to extend their bull run. Beyound Dec’12 however, AKD Securities believes macroeconomic risks will come to the forefront and Pakistan will potentially re enter and IMF program in the near term. That said, materialization of foreign inflows (3G auction and bilateral flows) remains a key swing factor to AKD Securities’ base case.