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Economy and capital markets update by ABL asset management company April 2013.

All eyes on elections for future economic direction.

Not much change was witnessed in Pakistan's economic landscape over April, 2013 with all eyes now on the General Elections scheduled for May 11, 2013. Monetary authorities, as per expectations, kept the policy rate unchanged at 9.5% for the next 2 months. Soaring fiscal deficit and declining FX reserves were highlighted as key concerns for Pakistan's economy in the April MPS; however, lower than expected CPI figures soothed SBP concerns for the time being. Overall economic indicators showed little signs of improvement over the last month as Current Account deficit was recorded at USD513 mn for March 2013 (9MFY13 deficit at USD1,028 mn) while 9MFY13 fiscal deficit was reported at 5% of GDP. Burgeoning electricity subsidies coupled with below target tax collection (Tax Collection 10MFY13 PKR1, 508 bn vs. Annual Target PKR2,050 bn) implies that fiscal deficit is expected to miss the initial target of 4.7% by a significant margin. IMF repayments and weak current account situation resulted in SBP FX reserves dropping to USD6.640 bn at month end (Total FX reserves at USD11.938 bn on April 26, 2013). CPI figures, however, remained immune to the frail economic conditions with inflation clocking in at 5.8% for April 2013 (lowest since Mar-2004). Low inflation emanated from high base effect and stagnant food prices. As we move ahead, the newly elected political set up and the IMF (re-entry appears imminent) are expected to chalk out a plan on economic policies which will provide some direction to Pakistan's future fiscal and monetary policies.

Constricted liquidity

A major shift was witnessed in the money market where bank borrowing via weekly Open Market Operations (DMO) declined from a month high of PKR500 bn to a low of PKR379 bn. As SBP's OMO rate increased, money injection amounts gradually reduced. However, SBP's discount window saw frequent visitors during the month as banks struggled to maintain their liquidity balances. Thus minimal participation was witnessed in T-bill auctions where against a monthly target of PKR575 bn, only PKR347 bn was accepted despite cut offs being stretched to extreme levels. As liquidity conditions worsened, interbank rates and PKRV yields even surpassed the discount rate of 9.50%. A PIB auction having a pre-defined target of PKR25 bn was conducted during the month where investor bias for the 3 year issue was witnessed. As a result, the targeted amount was not achieved owing to minimal participation (only PKR14.9 bn was accepted in 3 years). Towards month end, PKRV rates declined as liquidity situation improved due to T-bill maturities and market players built up expectations of a low inflation figure for the month. Status quo on interest rates in the MPS announcement in the earlier part of the month had minimal impact on market yields as investors had already incorporated a no change scenario. Preference towards short dated instruments thus remained strong.

Extended rally at KSE

Equities witnessed an extended rally over April 2013, with the benchmark KSE-100 index breaching the 19,000 points level for the first time and eventually closing the month at 18,982 points, +5.2% MoM. Pre-election euphoria, buoyant March 2013 results season, expected liquidity from the delisting of Unilever shares and strong foreign flows boosted investor sentiment. Contrary to expectations, banks reported only a minor drop in profitability, while other sectors such as fertilizers, power and cement posted significant earnings growth. Foreign flows also remained strong, clocking in at +USD28 mn for April 2013 (USD256 mn for 10MFY13). Looking ahead, election results will shape up investor sentiment and determine market's direction for the medium term. The market is expected to cheer any change in the current political set up as it is expected to result in improved investment climate for Pakistan. Overall valuations of the market remain attractive with KSE-100 trading at 2013E P/E of 7.5x and offers dividend yield of 6.6%.
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Comment:Economy and capital markets update by ABL asset management company April 2013.(ECONOMIC DATA AND ANALYSIS)
Publication:Economic Review
Article Type:Statistical data
Geographic Code:9PAKI
Date:Jun 1, 2013
Previous Article:Economic data and analysis.

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