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Exchange of trade and investments in Yuan likely to benefit stocks index

The total liquid foreign exchange reserves held by the country for the week ended 29th December 2017 were reported at US$20,154.3 million by State Bank of Pakistan (SBP). The reserves held by SBP decreased by US$26 million to US$14,106.7 million due to payments on account of external debt servicing. Net foreign reserves held by commercial banks were reported at US$6,047.6 million. In an attempt to contain depletion of foreign exchange reserves the SBP has informed that the trade in local currencies between Pakistan and China is already in place and businesses from both the countries are free to choose yuan for bilateral trade and investments. The central bank, in the capacity of the policy maker of financial and currency markets, has taken comprehensive policy related measures to ensure that imports, exports and financing transactions can be denominated in CNY (Chinese yuan). Both public and private sector enterprises (i.e. both Pakistanis and Chinese) are free to choose CNY for bilateral trade and investment activities. The central bank’s policy decision came apparently a response to one of the briefings of Ahsan Iqbal, Minister for Planning in which he said the government was considering a proposal to replace US dollar with yuan in bilateral trade with China.

The lust of incumbent government for borrowing is on the rise. The SBP has announced to auction Rs4.925 trillion worth of Market Treasury Bills (MTBs) and Pakistan Investment Bonds (PIBs) during January-March period of 2018 to help the government fund its budget deficit. The SBP said it plans to offer Rs4.725 trillion worth of 3, 6 and 12 month treasury papers at the auctions to be held during the quarter. The central bank would also sell Rs200 billion PIBs, 5, 10 and 20 year tenor. The targeted amount in the latest SBP auction calendar indicates the government could cover a bulk of the budget deficit from raising money through the local market. Banks have continued to invest in short-term T-Bills and have divested from low yielding government bonds.

Pakistan’s textiles and clothing sector that contributes over 60% to country’s total export has remained under pressure due to the rising inputs cost. Despite offer of various incentives under Prime Minister’s export package, the sector has witnessed significant erosion in margins. Rising input costs particularly fuel, power and manpower in the backdrop of static final product prices have dented the sector’s margin. In a bid to ease pressures on the export sector especially textiles, the government has finally allowed rupee to depreciate against the greenback, textile sector is expected to emerges as a key beneficiary, resulting in easing off competitive pressures from regional countries in the export market, leading to higher volumes going forward.

 

However, recent spike in cotton prices (up 23%FYTD) touching 6-year high may limit earnings upside. Despite expectations of bumper crop in MY18, the country’s cotton crop merely witnessed an increase of 7%YoY with total cotton production rising to slightly more than 11 million bales until 3rd January 2018. This along with fog impacting crop quality has led to rallying cotton prices in 2HCY17, surging to Rs8100/40kg (up 23%FYTD), a level last seen in July 2013. With local industry’s heavy reliance on natural fiber, rising cotton prices could lead to further decline in margins. However, supportive prevailing domestic yarn prices may limit adverse impact for low value added players.

According to the recent data cement dispatches growth slowed down a little during December 2017, registering growth of 1.5%YoY to reach 3.61 million tons. Coming off a high base, domestic dispatches were recorded at 3.29 million tons in December 2017 as compared to 1HFY18 avg. of 3.28 million tons, growing by 3.2%YoY. On the other hand, exports continued to slide by 13.3%YoY to 0.320 million tons during the period. On a cumulative basis, total dispatches growth reached 11.7%YoY in 1HFY18 led by domestic demand growth of 16.7%YoY in 1HFY18. Post end of seasonal slowdown along with the commencement of election year, analysts anticipate total dispatches growth to remain healthy going forward. This projection is based on: 1) strong PSDP and provincial spending in 2HFY18 ahead of national polls (68% unutilized federal PSDP by end December 2017) and 2) impressive growth in private sector credit related to construction activity up 38.0%YoY in November 2017. While risk of pricing indiscipline prevails with upcoming expansions, analysts believe current price levels offer attractive entry points especially when growth dynamics remain intact. Going forward analysts expect exports to remain under pressure due to worsening relation with the neighboring countries (Afghanistan & India). Besides, rising fuel prices/other input costs and import/anti-dumping duties also makes it more challenging for local manufactures to grow on the export front.

Khyber Pukhtunkhwa Oil and Gas Company Limited (KPOGCL), in joint venture with OGDCL has made massive oil and gas discovery at Baratai Well, Kohat. A statement issued here stated that although well testing is in progress but it is estimated that the well will produce about 30mmcfd gas and 700 barrels crude oil. The Chief Executive Officer of KPOGCL took initiative for drilling projects and signed agreement with OGDCL in Baratai Block. Seismic data was acquired, processed and interpreted by the mutual working of KPOGCL & OGDCL technical teams. After several technical meetings, workshops and seismic reinterpretation, drilling commenced on 24th May, 2017. The well was drilled to a depth of 5014 meters in a record time of 199 days. During drilling operations, several complications were encountered but KPOGCL and OGDCL solved all the problems as a one team by conducting regular meetings and technical workshops.

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