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Morning Call about Monetary Policy Preview – Arif Habib Limited

Karachi: Policy rate to remain unchanged or in for a surprise yet again

According to Arif Habib Limited, as per the news the State Bank of Pakistan (SBP) is due to release the monetary policy statement for the period Dec’11 to Jan’12 on 30th of Nov’11. Arif Habib suspects that the monetary policy committee is likely to extend the easing posture despite, what the fundamentals advocates. Arif Habib’s understandings mainly follows the earlier meeting held at the SBP monetary discussion forum. While Arif Habib considers the risk on external side still lingers on as the current account deficit for the period plunges to a deficit.

So the moot point is…
While although Arif Habib remains convinced that SBP will likely adhere to current monetary policy status keeping the rate unchanged at 12%, but following a judgmental call on it, the surprise element again this time cannot be ruled. If so, Arif Habib thinks the SBP discount window may well be lowered by another 50bps.

Price pressure, No big deal…
In the discussion Arif Habib sensed that SBP is more or less, likely to continue monetary easing policy. As far as the current headline inflation remain favourable even for the minimal period up until Nov’11 (Arif Habib’s estimates suggests), though Arif Habib’s concerns pointed towards downward sticky core inflation with NFNE still at 10.6% YoY and Trimmed, 11.7% YoY for the period of Oct’11 (second round effects). The prior MP decision in Sept’11 contained a more ‘Surprise’ element, allowing a 150bps rate cut. Arif Habib thinks the SBP is not done with the rate easing cycle as yet, so long as economic growth remain resilient and secondary to that, headline inflation provides just enough room to squeeze another 50- 100bps cut.

…or is SBP too quick, too easy to act
In Arif Habib’s Consumer Price Index (CPI) projection, inflation is likely to dot at 10.7% YoY for the month of Nov’11, allowing for real rates at ~+0.8% (at 11.5% DR). While, eventually picking up later as the low base effect dissipates, to peak during summer (Jun’11 ~11% YoY). If Arif Habib’s suspicions are indeed correct, that SBP is likely to ignore northward inflation trajectory then this rate easing cycle will not sustain for any time long (in Arif Habib’s opinion no more than beyond Feb’11, RR est. -~1.7%). This is something Arif Habib has previously argued over SBP short-sighted approach.

Clearly, the MPC is not going to factor in inflation trajectory alone, but over the period despite some pessimism there has been few developments which may have an upper hand in the policy decision making this time.

Fiscal side seems to be on a mend…
Consider the incoming tax collections figure, which as of latest (Nov’11) stands at PKR ~534bn (P), a +~25.7% YoY higher than the last year, the fiscal situation seems to be on a mend. While on the expenditure side government might have over-optimistic projections for FY12 (down by -20% (R), PKR 2,315tn), Arif Habib thinks given this tight fiscal space SBP is likely to ensure a right policy mix, fiscal contraction and monetary expansion would not be too much of a harm to the economy.

…and so much with hype over SBP borrowing
Although Arif Habib thinks there is no room for complacency as yet. As with the recent meeting held in Dubai with the IMF officials, government achieving deficit targets of 5.5% seems inadequate. With IMF authorities claiming a 6.0% fiscal deficit as percentage GDP seems more adequate given the time and space. So, although the government budgetary borrowing from SBP has remained under the control during much of the 1QFY12; PKR 1,121bn (~-17.4% YoY). But has now been diverged to schedules banks. With increase financing need in picture the government would require additional borrowing; as such the total borrowing posted a ~29% YoY rise to stand at PKR 1,200bn. The rising share (+~74.5% YoY growth) of schedule bank borrowing can pretty much hint towards the low private sector credit off-take (~4% YoY).

External sector pastes a gloomy picture…
Perhaps the most worrying development over the follow up of previous MPS (when a 150bps rate cut) is the widening current account deficit and the pace of it. The 4MFY12, CAB registered a USD ~1.6bn deficit (~187% YoY), owing to higher energy import bill of USD ~5.6bn, ~+57 %YoY along with domestic demand led deteriorations. After all, this should not be considered as a major threat, as such these denotes investment cycle reversal with monetary easing starting to materialise. However, the pace of this widening deficit is thus alarming, with exports (international commodities prices) gradually starting to slow down with growth registering ~+14% YoY (USD ~8.1bn). Keeping in mind further rate cuts by SBP, will act as a catalyst towards the pace of current account deficit as these measures takes time to materialise.

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