Karachi: After cumulative cuts of 200bpsFYTD, the SBP has kept the Discount Rate unchanged at 12% for Dec’11-Jan’12.
According to AKD Securities, while AKD Securities was expecting a 50bps cut, we had highlighted risks to monetary easing emanating from inflation outlook and the external side, in conjunction with persistent structural shortcomings. These are factors the SBP has alluded to in keeping the DR unchanged. While GDP growth lingers below the long-term, average and private sector credit off-take remains subdued, AKD Securities believes opportunities for further DR cuts going forward will be limited, particularly if inflation fails to come into single digits and Pakistan re-enters an IMF program. Nevertheless, AKD Securities does not see the KSE-100 Index taking pressure from yesterday’s decision (Index already at pre-easing levels) while Banks (down 15% in last 6 months) should also find reason to perform even as regulatory risks loom.
DR unchanged at 12%: In view of an uncertain operating environment, and risks to inflation and the external side, the SBP has decided to play it safe and keep the DR unchanged at 12% over the next two months. Specifically, the SBP has noted that 1) sequential inflation remains endemic (CPI up 1.3%MoM in Oct’11), 2) the current account deficit (at US$1.6bn in 4MFY12) is higher than the earlier projected deficit for full-year FY12, 3) reserve depletion will continue with repayments ahead (IMF & Paris Club) and 4) sizeable OMOs serve to neutralize low GoP borrowing from SBR.
Inflation outlook: While CPI has eased to 10.9%YoY in Oct’11 (from 13.3%YoY in Jun’11), inflation outlook is biased towards further increase. In this regard, wheat support price has been increased by PKR100/maund to PKR1,050/maund, electricity and gas tariffs are likely to continue rising while a weaker PKR (so far contained depreciation of 2%FYTD vs. the US$) pose risks for imported inflation particularly if oil prices remain upward sticky. While CPI should average 12%YoY in full-year FY12, the SBP is uncertain whether CPI will drop to single digits in 2013. AKD Securities does not rule out an uptick in interest rates over the medium-term, particularly if Pakistan enters into another formal IMF program.
The KSE & Banks: Considering that the KSE is presently at levels reached before resumption of monetary easing, AKD Securities does not see the Index taking pressure from yesterday’s decision. On the flipside, AKD Securities sees positives for Banks (MCB in particular) which have shed 15% since May’11, partly on margin compression concerns. Note that AKD Securities has modelled in avg. interbank rate of 11% for CY12F, where an increase in the same should raise AKD Securities’ earnings estimates for next year even if credit costs are adjusted upwards. That said, regulatory risk remains high – while the SBP has recently enhanced the FSV benefit, it has indicated the need for more competition in the banking sector (capital requirements to stay high) and better returns to depositors (potential follow-up on 5% floor on savings deposits).