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FOREX RESERVES FALL AND RUPEE’S DEPRECIATION LIKELY TO MAKE INVESTORS JITTERY

The benchmark index of Pakistan Stock Exchange (PSE) posted a decline of 2.88% WoW, shed 1,343 points and close the week ended 7th June at 45,222 points. Average daily traded volume dropped by 36% WoW to around 166 million. The volume leaders were: TRG, EPCL, BOP, KEL and ASL. The news affecting the market included: 1) GoP slashing retail fuel prices, 2) PACRA maintaining Bank Al Habib’s long-term and short-term entity ratings, 3) commencement of trading in Ittefaq Steel shares, 4) fertilizer manufacturers resuming sales of urea after the government’s assurance to issue a subsidy payment notification and 5) long awaited operations of PIBTL commenced.

The major gainers were: PPL, SSGC, MLCF, HMB and HUBC; while laggards included: HCAR, LUCK, FFBL, UBL and PSMC.

Selling by foreign investors continued with an outflow of US$5.84 million as compared to a net inflow of US$34.12 million a week ago. Political uncertainty is expected to continue to bother the investors during the upcoming week. Barring any unforeseen outcome, the market may consolidate with investors hunting for dividend yielding scrips.

A substantial percentage of shares of companies listed in Pakistan, particularly blue-chips, is owned by the foreign investors. At present the market is experiencing roller coaster ride and two more bumps have been added, fall in the foreign exchange reserves held by the country and depreciation in the value of PKR. The two factors are likely to make the foreign investors jittery and result in accelerating selling by them. Two points are very clear: 1) with rising imports and declining imports and remittances foreign exchange reserves are likely to decline and rupee to witness further depreciation in its value and 2) erosion in rupee value will further increase the prices of energy products (POL and electricity) and push up inflation rate in the country. This will impair the competitiveness of the local manufacturers. However, the bigger fear is that foreign debt servicing will become unsustainable and Pakistan will be forced to once again approach the lender of last resort, International Monetary Fund (IMF) to bail it out, despite the tall claims of the incumbent government.

Two news reinforces this perception: 1) during the week ended 30th June 2017, also the last day of the financial year, foreign exchange reserves held by the State Bank of Pakistan (SBP) decreased by US$233 million to US$16,143 million due to payments on account of external debt servicing and 2) on 5th July 2017, the SBP announced that PKR-US$ exchange rate in the inter-bank market depreciated by 3.1 percent to Rs108.25 per US$, from Rs104.90 per US$ a day earlier. The State Bank of Pakistan (SBP) announced, “while almost all macroeconomic indicators have been showing encouraging picture, such as decade-high real GDP growth, increase in investment and lending to the private sector and subdued inflation. However, the deficit in external account has been rising for some time. Accordingly, the exchange rate adjusted in the market and SBP is of the view that this depreciation in the exchange rate will address the emerging imbalance in the external account and strengthen the growth prospects of the country. The SBP believes that the current exchange rate is broadly aligned with the economic fundamentals. SBP will continue to closely monitor the developments in the foreign exchange markets and stands ready to ensure stability in the financial markets”.

According to a report by AKD Securities, the spillover effects of a weaker PKR are likely to emanate in the form of direct pressures on the fiscal account with enhanced external debt servicing. Moreover, the increasing import bill of energy products and machinery implies inflationary pressure, particularly in the form of higher domestic fuel prices. However, support is expected from persistent weakness in global crude prices. While real interest rates remain in the positive zone, SBP may be in a position to hold interest rates at current levels till the end of current financial year. However, higher than expected PKR depreciation may necessitate a nominal hike during CY18. It sounds a bit amusing that export-oriented sectors, particularly textile, would be the key beneficiary of PKR depreciation. One just can’t ignore that import-dependent sectors, including automobiles, cements and steel face negative implications. In addition, listed companies with high share of foreign borrowing also face currency risks in the form of higher repayments.

According to another brokerage house report, during June’17 OMCs sold over 2 million tons of POL products, taking the full year FY17 sales volume to 25.59 million tonnes, the highest on record depicting growth of 9%YoY. MOGAS offtake posted a 5-year CAGR of 19% as compared to 6.2% for the total industry. FO sales remained resilient, posting an increase of 6%YoY, having posted a 3%YoY decline for FY16. PSO’s focus on retail sales boosted FY17 volumes by 8%YoY, taking its market share to 56%. PSO sold over 14 million tonnes of POL products during FY17.

Exposure to multiple business lines and continuing emphasis on FO offers the state owned OMC a stable basis to capture retail fuels market share. HASCOL has attained the status of Pakistan’s second largest OMC by end June’17 with volumes exceeding 2 million tonnes. The company attained 10% market share. HASCOL has now surpassed APL and SHELL in terms of overall volumes handled during FY17.

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