Sep 30, 2015 - While current real interest rates are on the higher side, we foresee the same to may dip below 150bps in
Pakistan Economy Sep’15 CPI estimated at 1.5% Select Economic Indicators CPI Inflation
Aug‐15 YoY
1.7%
SPI Inflation
Aug‐15 YoY
‐1.5%
NFNE Inflation
Aug‐15 YoY
4.0%
Reserves
18‐Sep‐15
Remittances
2MFY16
USD3.2bn
Trade Balance
2MFY16
USD(3.2bn)
6 Month KIBOR (Offer Rate)
29‐Sep‐15
6.6%
10 Year PIB
29‐Sep‐15
9.3%
Policy Rate
USD18.5bn
6.0%
DR vs. CPI DR
CPI
12.0% 10.0% 8.0% 6.0% 4.0% 2.0% Jul‐15
Sep‐15
May‐15
Jan‐15
Mar‐15
Nov‐14
Jul‐14
Sep‐14
May‐14
Jan‐14
Mar‐14
0.0%
Source: SBP, BMA Research
Wednesday September 30, 2015 We foresee inflation to remain below 2.0% mark for the third consecutive month as we expect CPI for Sep’15 to clock in at 1.5%, bringing 1QFY16 average inflation to 1.7%. The depressed trend in CPI, can be primarily attributed to receding trend in food and fuel basket which will keep the MoM trend in CPI muted at 0.1% compared to an average of 0.3%MoM in 2MFY16. It is pertinent to note that during previous three weeks, SPI reported a receding trend of 0.8%‐1.1% over the corresponding weeks of same period last year. Gas price increase remained limited to 3.8% for domestic consumers thereby limiting any adverse direct impact of gas price hike on CPI in Sep’15. With Sep’15 CPI announcement, the real interest rate of the country in Sep’15 and 1QFY16 will stand at ~4.5% and 4.3%, respectively. While current real interest rates are on the higher side, we foresee the same to may dip below 150bps in 3QFY16 as high base effect fades away. Nevertheless, the central bank may opt for a wait and see approach and keep policy rate unchanged given a bearish outlook on global commodities. We believe the upcoming CPI number at 1.5% will remain neutral from market’s vantage as evident from the lack of reaction of the market against recent 50bps policy rate cut in Sep’15 MPS. Given limited participation in the market due to lack of positive triggers, bearish sentiment may continue to prevail. Thus, we advise investors to stay on sidelines. Sep’15 CPI to remain below 2.0%: Given ~42% weight in the CPI basket, we expect the receding trend in food and fuel basket may keep CPI constrained at 1.5% in Sep’15, below 2.0% mark for three consecutive months. As per weekly SPI releases in Sep’15, the prices of key foods items depicted a flattish to receding MoM trend while petrol and diesel prices declined by ~4%. Thus, we foresee MoM trend in CPI to remain muted at 0.1% in Sep’15 compared to an average 0.3%MoM in first two months of FY16. The impact of PKR/USD depreciation and gas price hike will remain limited in Sep’15 and will be countered by sustained decline in commodity/petroleum prices. With regards to the latter, gas price hike remained limited to 3.8% for domestic consumers thereby limiting any adverse direct impact of gas price increases on CPI in Sep’15. Cumulatively, we expect 1QFY16 average CPI to clock in at 1.7%, translating into real interest rate of 4.3%. Outlook contingent on commodity prices: Given a bearish outlook on commodity prices courtesy possible US interest rate hike by CY15 end and weak global economic health, we expect inflationary pressure to remain muted in FY16. In 1HFY16, we expect CPI to average at ~2.2%, keeping real interest rate at a comfortable level of 3.8%. Thus, we expect State Bank of Pakistan (SBP) to maintain policy rate unchanged at current level in its Nov’15 MPS, a stance further supported by strengthening external account position. Though real interest rate may dip below 150bps in 3QFY16 as high base effect fades away, the central bank may opt for a wait and see approach and keep policy rate unchanged given a sustained bearish outlook on global commodities in FY16.
Muhammad Affan Ismail, CFA
[email protected] +92 111 262 111 Ext: 2058
Investment Perspective: With easing cycle completed, we believe the upcoming CPI number at 1.5% will remain neutral from market’s vantage as it will only assure investors of delay in policy rate hike by SBP. Overall economic outlook remains positive where marked improvement in current account deficit to 0.6%‐0.7% of GDP in FY15 and buildup in forex reserves will negate any steep run on the PKR. Given limited participation in the market due to lack of positive triggers, bearish sentiment may continue to prevail in KSE100 in the near term. However, long term outlook of the market remains positive given strengthening macros and steady corporate fundamentals.
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