Currency stability in FY13 despite BoP concerns…
Despite the precarious Balance of Payments (BoP) position in FY13 - which
depleted foreign exchange (FX) reserves from US$15.29bn to US$11.02bn - Pak
Rupee (PKR) exchange rate held up considerably well last year. The PKR lost
4.8% of its value against the US Dollar (USD) in FY13, a reasonable enough
performance as compared to previous 30-year average annual Rupee devaluation
of 7.2%. The same was despite the fact that in FY13, State Bank of Pakistan (SBP)
reserves dropped from US$10.80bn (almost 3-months import cover) to US$6.00bn
(about 6-weeks import cover), which ignited concerns of a bull-blown BoP crisis.
…but YTD FY14 depicts sharp deterioration
FY14-to-date, has been a different story altogether. While the risk of a BoP crisis
has been averted by Pakistan's re-entry into the IMF program (September 2013);
Pak Rupee exchange rate has deteriorated considerably post July 2013. YTD
FY14, the Pak Rupee has shed ~7.4% of its value vs. the greenback (Jan 2013-todate
Pak Rupee is down 9.4% vs. the USD). The same can partly be dubbed a late
‘catch-up’ play vis-à-vis the rout in regional FX markets (see table adjacent). That
said, recent Pak Rupee slide also ties up to the IMF’s requirement that the SBP (1)
purchase US$125mn from the FX spot market (prior action completed 5-days
before IMF’s Board Meeting on Sep 04, 2013); (2) limit interventions in the market
to those consistent with the program; & (3) increase its net foreign reserves by
US$347mn by Dec-2013. With limited US Dollar liquidity, speculative activity also
picked pace with USD crossing an all time high of Rs108/US$ in the open market.
Outlook and KSE implications
Recall last week we raised our Pak Rupee exchange rate outlook for June 2014 to
Rs107.5/US$ (from Rs105.5/US$), where we flagged that currency pressure is
likely to subside post 1QFY14. We maintain this view but believe a weak/uncertain
currency outlook is likely to play on equity investor minds, given risk of (1) macro
slippages – inflation, fiscal account; (2) lowering KSE attraction for foreign
investors, where FY14-to-date deval has already pared Dollar returns at the KSE to
2.5% (9.9% Rupee denominated return) and (3) lower corporate earnings. On the
latter, we see a relatively timid impact on KSE earnings where heavyweight sectors
are either positively correlated to or immune to PKR exchange rate weakness.
http://www.jsglobalonline.com/researchReports/M25SEPT13.pdf