JS Securities Limited – JS Research Beep

Karachi, December 08, 2017 (PPI-OT): PKR/USD shoots up in Inter-Bank market

As per various channel checks, PKR/USD in the inter-bank market has shot up to around 109-110 levels from yesterday’s closing of 105. However, as per our discussions, there is significant ambiguity in the market with respect to the outlook of PKR/USD rate. We believe movement in PKR/USD has been triggered by the latest decline in foreign exchange reserves (excluding bond issues).

As per SBP latest press release, total foreign exchange reserves have declined to US$18.74bn as at Nov 30, 2017 from US$19.69bn as at Nov 24, 2017 with reserves held by SBP declining to US$12.66bn from US$13.55bn during the same period. While details are not clear for the decline, we speculate repayment of short-term debts taken to support foreign exchange reserves with Eurobond and Sukuk proceeds forthcoming has led to such a fall.

Recall that in Jul-2017, PKR had declined by 3.1% to 108.095, but the government acted swiftly and PKR/USD reverted back to 105.5 one day later. However, we believe the absence of Mr. Ishaq Dar as Finance Minister lowers the possibility of such reversal this time round.

We highlight depreciation of the currency as a positive for the equity market, as over 25% of market capitalization directly benefits from PKR depreciation where we flag E and Ps, IPPs, Textiles and IT-related companies as major beneficiaries. Sugars are also likely to benefit with exports of surplus stock expected in the near-term. We believe Banks (weight of 15%) are also indirect beneficiary of PKR depreciation.

On the other hand, sectors like Autos, Pharmaceuticals, Cements (importers of coal while share of exports have declined), OMCs (due to outstanding L/Cs) and select Chemicals are likely to be adversely affected. In some cases like Autos, we expect the additional cost burden to be passed on to the consumers. We also believe sectors under expansions (importing machineries) like Power, Cements, and Steels etc. Could potentially see cost overruns.

In terms of flows, we believe adjustment in PKR/USD could potentially give some comfort to foreigners, who have remained on the sidelines due to potential erosion in returns because of expected PKR/USD depreciation.

You May Also Like

JS Securities Limited – JS Research Beep

Karachi, December 08, 2017 (PPI-OT): PKR/USD shoots up in Inter-Bank market

As per various channel checks, PKR/USD in the inter-bank market has shot up to around 109-110 levels from yesterday’s closing of 105. However, as per our discussions, there is significant ambiguity in the market with respect to the outlook of PKR/USD rate. We believe movement in PKR/USD has been triggered by the latest decline in foreign exchange reserves (excluding bond issues).

As per SBP latest press release, total foreign exchange reserves have declined to US$18.74bn as at Nov 30, 2017 from US$19.69bn as at Nov 24, 2017 with reserves held by SBP declining to US$12.66bn from US$13.55bn during the same period. While details are not clear for the decline, we speculate repayment of short-term debts taken to support foreign exchange reserves with Eurobond and Sukuk proceeds forthcoming has led to such a fall.

Recall that in Jul-2017, PKR had declined by 3.1% to 108.095, but the government acted swiftly and PKR/USD reverted back to 105.5 one day later. However, we believe the absence of Mr. Ishaq Dar as Finance Minister lowers the possibility of such reversal this time round.

We highlight depreciation of the currency as a positive for the equity market, as over 25% of market capitalization directly benefits from PKR depreciation where we flag E and Ps, IPPs, Textiles and IT-related companies as major beneficiaries. Sugars are also likely to benefit with exports of surplus stock expected in the near-term. We believe Banks (weight of 15%) are also indirect beneficiary of PKR depreciation.

On the other hand, sectors like Autos, Pharmaceuticals, Cements (importers of coal while share of exports have declined), OMCs (due to outstanding L/Cs) and select Chemicals are likely to be adversely affected. In some cases like Autos, we expect the additional cost burden to be passed on to the consumers. We also believe sectors under expansions (importing machineries) like Power, Cements, and Steels etc. Could potentially see cost overruns.

In terms of flows, we believe adjustment in PKR/USD could potentially give some comfort to foreigners, who have remained on the sidelines due to potential erosion in returns because of expected PKR/USD depreciation.

You May Also Like