Pakistan receives comfort on interest rate increase – AHL Research
By: Khurram Shehzad,
Arif Habib Limited
Letter of Intent with no initial rate increase endorsed!
After the IMF announced its fresh funding program for Pakistan, to the tune of USD6.64bn last Wednesday, with a very low front-load of ~USD545mn (rest subject to quarterly criteria deliverance, details given on the next page), the Ministry of Finance (MoF) also unveiled its Letter of Intent (LoI) that it submitted before the finalization of the new extended funding arrangement (36-month EFF with 4.5-10yrs repayment period at an estimated rate of 3%).
As per the LoI released by the MoF, Pakistan requested the lender for a waiver on some factors/targets for initial years where the IMF seemed to have agreed to no-rate increase request jointly put up by the MoF and the SBP. The text of the LoI says no interest rate increase at least in the first year of the program while the later years should see real interest rates in the positive. This means the gov’t authorities have now been accommodated with a full-year FY14 as far as monetary tightening is concerned while the central bank vows to keep price stability and reserves building efforts as priority. This flexibility, when weighed in against the last SBA facility, looks a better deal for Pakistan as there was no such liberty was accepted though other performance criteria largely remains the same.
Go-ahead on no-rate increase a fresh breather for capital market
As the LoI was released, KSE100 shot up by a massive 500pts yesterday while yields in the secondary market went largely down in the range of 4-11bps on various tenure papers. After the relative comfort on interest rates, we expect equities to sail through a better flow and sustain performance ahead, especially the leveraged sectors such as Textiles, Cement, Fertilizer and few smaller ones.
With a stable medium term outlook on interest rates, where central bank is expected to strife for keeping investment and growth supportive stance, we stick to our market outlook of a sustained performance by equities on the expectations of better Jul-Sep’13 quarter earnings, at least for the sector benefiting from the recent PKR depreciation (5% since Jul’13, 8% Jan’13 to date on closing basis), such as IPPs, Textiles, Telecom, E&Ps and Chemicals, in addition to the support provided through the recent cut in the policy rate by the central bank (50bps to 9% in its last MPS).
We believe, the new IMF deal though stands with a strict performance criteria on a quarterly basis, privatization news flow ahead (30 PSE’s to be announced before end Sep’13) and a status quo in the upcoming monetary policy should provide KSE reasons to sustain high returns. Any delay or the opposite in any of the mentioned developments would keep Pak equities in check. Currently, the KSE100 is trading at a 2013 estimated PE of 8.0x (48% discount from regional average) and an attractive DY of 6.0% (59% discount from regional average).