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Morning Call about Exchange rate – Arif Habib Limited

Karachi: PKR/USD parity to face a further 1.5% depreciation in FY12

The PKR after witnessing a sharp drop in open market rebounded yesterday by 80paisa, as SBP intervened. However at the interbank market rupee remained relatively stable during the last tow trading day, touching a high at PKR 87.53, while closing at PKR 87.44/USD.

According To Arif Habib Limited, the rupee stability in official market is attributed to support from SBP. The rupee has so far depreciated by around 1.7% since the beginning of the current fiscal year, breaching the PKR 85/USD mark FYTD. Arif Habib Limited believes this deprecation is a more of a short-term volatility and should be overlooked, as long-term fundamentals point towards a fairly stable exchange rate, with a further devaluation space of ~1.5 %(FY12: PKR 88.7 average).

Monday Rupee fever
In response to this depreciating rupee trend the central bank warranted a direct intervention. Major reason cited for the need, was the ongoing lingering Pakistan and US relations, concerns over IMF meeting with Pakistani authorities along with falling gold prices, rendering high USD demand. This has brought the FY12TD rupee depreciation to 1.7% against USD. Arif Habib Limited also notes PKR is normally under stress during the first quarter (average devaluation of ~2%, 6-year) of the fiscal year, than the rest of the quarters (average depreciation of ~0.6%, 6-year). This Arif Habib Limited believes is usually driven on the back of higher USD demand owing to import payment (notably oil).

A medium-term concern lingers over debt repayment
In the medium term Arif Habib Limited expects rupee might come under stress, as domestic anxiety plays over the upcoming debt payment, staring from 2HFY12, while Arif Habib Limited opinions a stable PKR/USD parity to exist, during the remaining period of FY12. In Arif Habib Limited’s base case assumption, PKR will likely incur a further devaluation of ~1.5% (PKR ~88.7) on average, for the current fiscal year. Pakistan Rupee (PKR) has somewhat remained stable against US dollar (USD), depreciating by a mere ~2.4%YoY in FY11. Helped by a current account surplus USD +76mn, and stable foreign exchange reserves USD ~17bn.

While in long-term PKR/USD parity to depreciate by ~4% YoY in FY12
Arif Habib Limited’s long term view in FY12 is backed by a positive outlook on country’s total exports along with robust income from workers’ remittances which will render support to overall current account balance. Hence Arif Habib Limited does not see any medium to long term risks to country foreign exchange reserves. Currently, given the foreign exchange at USD ~18bn, the country’s can sustain an import cover of around 5 to 6 months. With oil (~38% of total imports, followed by food items) being the major imported good, Arif Habib Limited thinks the import cover is enough to cater the domestic demand. Even so if the foreign exchange reserves fall to USD 12bn and imports bill average around USD 3.5bn per month, which Arif Habib Limited thinks is very unlikely, it still provides a 3 months cushion. Hence the question of Pakistan exiting the SBA program shall not have dire consequences. As far as the IMF debt repayments are concerned, Arif Habib Limited thinks country liquid debt servicing ratio is currently at ~9.1, which Arif Habib Limited thinks is enough to accommodate a USD 1.98bn (or SDR1.2bn) repayment due from 2HFY12.

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