JS Securities Limited – Morning Briefing

Karachi, October 02, 2017 (PPI-OT): SBP maintains status quo again, but is it time to open up to change?

On Friday evening, the State Bank of Pakistan (SBP) released its Monetary Policy Statement (MPS) for the next two months, where it kept the Policy Rate intact at 5.75% – in line with our and street expectations.

In its press release, the Central Bank focused on expected GDP growth, which it believes is likely to clock-in at 6.0% in FY18. On inflation, the Central Bank expects it to clock-in below 6.0% for the year.

We believe SBP’s assessment of the economy is over optimistic. While we opine to a certain extent on GDP growth, which we expect to clock in at 5.6% in FY18, the Central Bank in our opinion failed to address the growing concerns on the external account front.

SBP believes exports outlook appears encouraging based on the first two months of the fiscal year but we believe the decent growth witnessed during the said period is mainly due to low base of last year.

Everything put together, we believe SBP is underestimating pressures on the economy given recent increases in international commodity prices, lack of foreign inflows, pressures on currency, exports etc.

We, in our base case, have incorporated increase in Policy Rate by 50bps in May-2018; however, we believe there is a strong case for the Central Bank to increase Policy Rate earlier and begin/allow gradual devaluation/deprecation of the currency to fill the recent cracks emerging in the economy.

SBP maintains status quo

On Friday evening, the State Bank of Pakistan (SBP) released its Monetary Policy Statement (MPS) for the next two months, where it kept the Policy Rate intact at 5.75% – in line with our and street expectations. In its press release, the Central Bank focused on expected GDP growth, which it believes is likely to clock-in at 6.0% in FY18, in line with governments target for the year. The Central Bank’s thesis appears to be on (1) favourable initial estimates of major crops, (2) growth in manufacturing sector amidst higher development spending, growing investments in CPEC-related projects, low cost of borrowings and (3) positive spillovers of upbeat agriculture and industrial outlook on the services sector.

The Central Bank also remains optimistic on credit to private sector (+21% YoY during Jul 01 to Sept 15, 2017) led by historic low interest rates, availability of good liquidity given healthy deposit growth and growing domestic demand. On inflation, the Central Bank expects it to clock-in below 6.0% for the year as it anticipates food inflation to remain under check given comfortable wheat and sugar stocks and no major supply disruptions expected in the coming months of FY18.

But we believe it is time for proactive decisions

We believe SBP‟s assessment of the economy is over optimistic. While we opine to a certain extent on GDP growth, which we expect to clock-in at 5.6% in FY18, the Central Bank in our opinion failed to address the growing concerns on the external account front. SBP believes exports outlook appears encouraging based on the first two months of the fiscal year but we believe the decent growth witnessed during the said period is mainly due to low base of last year. On the other hand, SBP attributed Current Account deficit in 2MFY18 to higher imports of productive goods, but we highlight that it is also the massive increase in oil and related products increasing the overall imports.

With the recent increase in oil prices and expected increase in LNG imports, the same is likely to grow further. Everything put together, we believe SBP is underestimating pressures on the economy given recent increases in international commodity prices, lack of foreign inflows, pressures on currency, exports etc. We, in our base case, have incorporated increase in Policy Rate by 50bps in May-2018; however, we believe there is a strong case for the Central Bank to increase Policy Rate earlier and begin/allow gradual devaluation/deprecation of currency to fill the recent cracks emerging in the economy.

   

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