AKD Securities Limited – Off the Analyst’s Desk

Karachi, June 11, 2018 (PPI-OT): BoP imbalance necessitating currency depreciation

In a surprise move today, SBP allowed the currency parity to drift further reportedly reaching at PkR121/US$ (implying ~4.5% intraday depreciation). This marks the third round of currency adjustment during the ongoing fiscal year with cumulative depreciation at ~13.6% in FY18TD. This is likely on the back of mounting external pressures (CAD at US$14.0bn- up 50%YoY in 10MFY18) accompanied by lack of timely materialization of financial inflows (disbursements of loans standing at US$9.2bn in 10MFY18) which has led to a sharp drawdown in FX reserves (SBP reserves down US$6.1bn to US$10.0bn in FY18TD) limiting its ability to maintain the parity at current levels.

Currency volatility is likely to remain limited in the short term with parity expected to settle below PkR120/US$. That said, elevated external pressures and widening external financing gap are expected to keep FX reserves strained where the GoP scrambles to utilize commercial borrowing in the short run while another IMF financing facility seems imminent in FY19. Post a financing facility, likely through a bailout program, currency devaluation is likely to be limited (also in line with historical trend) while REER is also down to 111x (excluding today’s devaluation move) from 125x in Nov’17, likely near its equilibrium levels. However, delay in materialization of a financing facility can keep the currency under pressure in which case we expect currency parity to end at PkR124/US$ during FY19F.

From the market’s vantage, this is likely to lift KSE100 index due to it’s inherit skewness towards sectors benefitting from rupee depreciation. In this regard, the banking sector gains traction on the back of higher inflationary pressures and consequent more aggressive stance by the MPC in setting the policy rate. Additionally, the Energy sector (E and P and IPPs) with dollar based revenues and export based sectors (Textile and IT) should receive a boost from a sustained weakness in the PkR.

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