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Market springs back, fresh foreign flows can induce another short term rally

The benchmark index of Pakistan Stock Exchange (PSX) for the week ended 22nd March 2018, posted an increase of 3.84%YoY to close the short trading week at 45,030 points. The rise has been attributed to erosion in Rupee value and improvement in international prices of crude oil. An erosion of 4.3% in Rupee value since December 2017 seems to have led foreigners to come back to Pakistan resulting in buying by them equities worth US$9.77million in the last trading session alone. Banks, E&Ps, Power and Textiles companies emerged as the key beneficiaries.

Average daily trading volume rose to 192.85 million shares, up 10.29%WoW. The top volume leaders for the week were LOTCHEM, TRG, NRSL, UNITY and FFL. The key news flow driving the market were: 1) Government of Pakistan (GoP)official reportedly hinting towards a likely inflow of US$2-3 billion from two friendly countries, 2) PSX officials proposing rationalization of taxes on bonus shares, capital gains, and brokers’ regime as well as demanding altering the taxing mechanism of inter-corporate dividends, 3) current account deficit widening by 50%YoY to US$10.83 billion for 8MFY18, with both imports and exports registering double digit growths of 17.3%YoY and 12.2%YoY respectively, 4) the GoP hinting towards fixing FY19 tax collection target at Rs4.5 trillion, while stating that no new tax would be levied and 5) possible unveiling of a new amnesty scheme likely to result in bringing back US$5 billion to Pakistan.

Top gainers of the week were FFBL, MCB, EFOODS, UBL and HBL; while laggards included PSMC, INDU, PIOC, and ASTL. With concerns regarding eroding value or Rupee, being largely absolved and international oil prices once again hovering near their 2.5 year highs, fresh foreign flows can induce another short term rally in the market. Moreover, strong primary margins of the chemical sector can also garner investors’ attention. Further, interest rate hike expectations ahead of the monetary policy statement announcement by the end of next week can drive banking sector performance.

Lately, International Monetary Fund (IMF) has highlighted risks to Pakistan’s debt sustainability in medium-term and capacity to mobilize additional financing at favorable rates due to rising global interest rates. In this regard, the Fund has projected gross financing needs at US$24.5 billion for FY18, with external debt to reach US$93.3 billion by June 2018. This is primarily based on: 1) rising current account deficit to US$15.7 billion for the current financial years FY18 mainly driven by CPEC related outflows, 2) increasing external debt servicing at US$6.3 billion and 3) declining foreign exchange reserves held by the central bank despite borrowing from the international markets. The IMF estimates gross foreign exchange reserves around US$12 billion by end June 2018 against SBP’s target of US$12.5 billion. This highlights inability of the country to respond to adverse economic shocks. On the other hand however, the market implied risk-neutral sovereign probability of default stands quite low. Going forward, with declining foreign exchange reserves analysts believe the capacity to maintain exchange rate parity remains low.

 

Rupee value against greenback eroded by 4.4% in a single day during the week ended 22nd March 2018. This reflected continued pressures on the external front and declining foreign exchange reserves of the central bank’s to US$12.13billion (down US$1.98 billion beginning 2018). Current Account data for 8MFY18 surged to its highest level of US$10.83 billion as compared to US$7.22 billion for 8MFY17, up 50.3%YoY). Some experts believe that eroding value of Rupee is likely to ease off pressures on external account in the long run (restoring competitiveness of exporters and impeding import growth. Current account deficit at historic high level (end FY18 estimated at nearly US$16 billion) along with declining foreign exchange reserves held by the central bank can result in additional erosion of Rupee during CY18.

News flows of a mechanism for re-profiling debt arrears in the power chain have once again brought back circular debt issue into the limelight. The most disturbing points are: 1) power sector arrears climbing to Rs472.7billion, totally to Rs922billion if one adds Rs450 billion already parked in Government Power Holdings, 2) possible retirement of Rs514 billion with a mix of commercial financing (for GPHL and DISCOs) and TFC’s issued against payables to IPPs (similar to circular debt resolution plan entered into by PSO in July 2012 for Rs43.8 billion at coupon of 11.5%) and 3) continuation of previously imposed surcharges being enacted through NEPRA, resulting in additional annual collections of Rs59.05billion during FY18 with the majority of funds going towards rationalization surcharge to collect operational cost of DISCOs and tariff setting not covered in the tariff itself, varying across consumer categories and DISCOs.

Country’s total exports continue to post double digit growth, with February 2018 receipts rising to US$1.90 billion, up 16.4%YoY. Both food and textile exports were up 37.5%YoY and 7.1%YoY respectively.

In the textile group, value added segment that makes up 73% of total textile exports marginally grew by 3.6%YoY, with segment exports resting at US$767 million, while low value added exports strongly recovered to US$300 million, up 17.5%YoY. On a cumulative basis, 8MFY18 textile exports registered an increase of 7%YoY to US$8.79 billion as compared to US$8.22 billion for 8MFY17, value added exports were up 9%YoY to US$6.4 billion while low value added remain flat at US$2.6 billion. Going forward, analysts expect textile exports to continue their upward momentum due to the recent erosion in Rupee value. That said, any cut in export incentives following erosion in the value of Rupee remains a concern going forward.

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