Uneasiness persists as IMF facility and bilateral assistance will keep market range bound
The week ended 21st December 2018 witnessed volatility coupled with muddled short term sentiments, despite inflow of US$ from ‘friendly countries’ and progress on negotiations with the IMF. The benchmark Index of Pakistan Stock Exchange (PSX) closed the week at 38,251 points, down 0.15%WoW. Increased clarity on points of contention between the IMF and Pakistan’s negotiations over an additional facility with FX support in the form of previously pledged US$ one billion from Saudi Arabia and financing facility worth US$3billion from the UAE failed to raise participation, average daily turnover for the week fell 13.4%WoW. Other news flows included: 1) a bit of a commotion was caused at the ‘withdrawal of public announcement of intention’ (PoI) to acquire 18,336 million shares or 66.40 percent stake in K-Electric by Shanghai Electric Power Company, where a fresh PoI is highly likely, 2) in a meeting of senior representatives of different Islamic banks on matters pertaining to the launch of Islamic Sukuk by the GoP’s power sector holding company, while the Economic Coordination Committee (ECC) of the Cabinet has reportedly directed Power Division and Finance Division to prepare a joint plan for raising Rs300billion Islamic financing by mortgaging Discos’ assets, and 3) the country’s liquid foreign exchange reserves increased by $831million WoW, mainly due to arrival of US$ one billion from Saudi Arabia.
Country’s total liquid forex reserves rose to $14.584billion as on 14th December 2018. UAE’s Abu Dhabi Development Fund reportedly pledged to keep US$3billion with State Bank of Pakistan (SBP).
Top gainers of the week were: MLCF, KEL, ABL and APL, while laggard included: PPL, POL, HBL and PSMC. Volume leaders of the week were: KEL, BOP, PAEL and EPCL. Upcoming judgement for landmark accountability cases before various judicial forums and news flow pertaining to granular details surrounding an IMF facility and bilateral assistance should keep markets range bound over the coming week. Recent slide in stock prices for defensive plays open opportunities for a buy on dips, with longer investment horizons increasingly built into investor attitudes.
The government and a consortium of Islamic banks have agreed to launch a bond of Rs200 billion to support the power sector entities facing cash constraints due to chronic circular debt. The two sides have already finalized the mechanism for the launch of the bond in consultation with the power, petroleum, finance and law divisions and the Securities and Exchange Commission of Pakistan. The consortium is led by the Meezan Islamic Bank and comprises of BankIslami Pakistan, Faysal Bank, MCB Islamic Bank, Dubai Islamic Bank and Al-Baraka Bank. The financing will be declared statutory liquidity ratio eligible by the government and the SBP. The funds will be used to service payables of the oil and gas sector that is beset with a circular debt of more than Rs1.3 trillion, including a fresh flow of about Rs700billion.
The government has already built up the Syndicated Term Finance Facilities of over Rs607 billion in the name of PHPL for funding repayment liabilities of the distribution companies (Discos). The conventional banks are not ready to commit more funds to the sector.
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Pakistan’s leading brokerage house, AKD Securities has explored the impact of lower crude oil prices on two fundamentals of the downstream oil sector, product pricing and demand. The immediate short term inventory loss risk from downward revisions are outweighed by the organic demand growth outlook. Looking at pricing and demand over a span of 15 years, incorporating monthly data sets for retail prices, Brent crude average and MS/HSD sales highlight the sticky down nature of MS and HSD prices (tendency to rise rather than fall), accompanied by marginal demand sensitivity (incremental demand in relation to price) as detriments to volumetric growth.
Ascertaining sensitivity to monthly retail prices for MS and HSD with average Brent prices, the brokerage house finds 15 year correlation of 0.49/0.46 having lessened over the past 5 years (0.38/0.34) and are generally more noticeable when Brent prices rise rather than fall. The analysis of marginal propensity of consumption for MS and HSD against shifts in Brent average prices reveals inverse relation between price and sales, underpinned by greater variation in MS sales, generally gaining traction during periods of Brent’s rise. The brokerage house believes POL prices are not heading lower anytime soon because of ongoing negotiations with the IMF and precarious fiscal situation and weakening organic demand.
The latest SBP data on external account shows current account deficit (CAD) for the month November 2018 marginally widening to US$1,255 million, up 3%MoM. Significant decline in remittances of 20%MoM and higher services trade deficit up 71%MoM were key driving factors, pushing monthly deficit higher. Encouragingly, primary trade deficit (goods) narrowed 11%MoM to US$2,381 million, due to a decline in imports by 9%MoM/8%YoY. However, soft commodity prices kept exports under pressure, which went down 8%MoM/13%YoY. Cumulatively, 5MFY19 deficit declined by 11%YoY to US$6,090 million as compared to US$6,811million in 5MFY18, where higher remittance receipts, up 13%YoY and falling services deficit down 35%YoY have extended crucial support against widening primary trade deficit.
Macro adjustments in the form rupee depreciation by 20.5%CYTD and policy rate hikes by 425bps have started yielding results, evident from the broad-based decline in non-oil imports, down by 7%FYTD. History also suggests non-oil imports greater sensitivity to major currency moves.
Also, recent commodity trends are encouraging, with major commodity benchmarks showing weakness. Analysts await crude prices to settle post recent OPEC production cuts before revising down CAD estimates. A $5/bbl fall in average crude prices reduces country’s oil import bill by $1.1billion. On Balance of Payment front, developments are positive so far, with gov’t officials repeatedly hinting towards assistance from friendly countries (China and UAE). Additionally, recent news flows suggest the GoP now embarking on a drive to adjust the fiscal imbalance, a path which would further bridge differences between the IMF and GoP on potential bailout program.