Monthly Archives: February 2024

“Don’t try to hit me and hit me.” Anyone who watched the movie Matrix will remember Morpheus’ line during Neo’s training. It underlines the difference between “Wish” & “Intent”. While every government wishes to have a strong currency & low-interest rates, this government is pursuing its intent to make it look real.

So while the odds are heavily against Rupee appreciation, that is what is happening. This is exactly what Tresmark’s previous weekly forecasted that the Rupee would appreciate once IMF goes back post-approval.

As soon as the staff-level agreement was announced with the IMF, the top machinery, including the PM, FM & Gov SBP came out with guns blazing & speaking all positives to reinforce the sentiment. The verbal intervention was accompanied by market tactics to bring down USDPKR. Allegedly, import payments were postponed, new LC issuance was restricted and oversight in market trading was intense.

This resulted in PKR reversing its 17-day losing streak and gaining from 288 to 286.50/$. This reversal has reintroduced exporters to sell forwards, even though forward premiums were down by 30% (1 & 3 months ended the week at 190 & 430 paisa). The market now estimates that the Rupee will strengthen to around 282/$, whereupon SBP will restart its dollar buying. Positive news flows like lending from multi-laterals & IMF BoD approvals will keep Rupee buoyant. Some of the positives announced are:

Highlights of announcements
– CAD for Oct projected to shrink to $100mn
– Consolidation for Forex reserves from $8.5bn in Feb ‘23 to $12.5bn (current)
– Inflows from WB, ADB, and AIIB of approximately $1.2bn before year-end
– Hopeful of more inflows from Saudi & UAE
– Uptick in RDA inflows
– Higher exports & remittances
– Further cut of 50 bps in TBills, as per the latest auction
– Inflation to sharp contract from Jan onwards due to tight monetary policy and base effect; interest rates are positive on a forward-looking basis
– Easing of Brent Oil from $97 to $80 (17%) in the last 20 days.

Global risks are immense

It’s too early to claim success. The geopolitical risks in the region are substantial, the US fiscal crisis is a global threat, highly likely chances of recession in Europe, the UK, China and swathes of emerging markets where sovereign debt trades at distressed levels, the Ukraine/Russia conflict and China’s epic property/debt crises will keep markets on their toes.

Domestic reforms are still slow

The real disappointment is still the slow progress of reforms within the country, which includes low productivity, low tax to GDP, fiscal mismanagement, energy reforms, privatisation of loss-making SOEs, etc. No amount of verbal intervention and optics management will improve the country’s financial health. With less than 3 months to the next elections, we can hear investors say, “Welcome to the real world.” (Morpheus – Matrix)

Read More: Fuel offer controversy deepens amid Gaza hospital crisis

The recent Boeing debacle illustrates why prioritizing stability and safety over cash flows is crucial. Pakistan has partially alleviated its cash flow crisis, thanks to the IMF’s recent tranche, but navigating the upcoming election period will pose a challenge.

The first few days of the new year have seen numerous positives, such as robust remittances, prospects of a current account surplus, a commitment to privatization, and progress in tax reforms.

Market conditions have stabilized, with bond market price actions reflecting a reduction in interest rates, a rally in Eurobonds, and a stronger Rupee.

The upcoming developments in the next couple of months are uncertain, and this uncertainty may be reflected in Pakistan’s Credit Default Swaps (CDS), which, despite a decrease, remains among the highest globally.

Currency Outlook

As pointed out last week, the Rupee has strengthened, flirting around the 280/$ mark. This shift is primarily attributed to exporters engaging in significant forward selling of dollars.

This was further accelerated by stronger reserves and IMF’s BoD approval. From the price action last week, analysts are of the view that the Central Bank is supporting the 280 level and any time it trades below 280 may only be temporary.

Even during the last period of Rupee consolidation, USDPKR stayed below 280 for only 12 days. We expect Rupee to be anchored around the 280 level till before the elections with temporary outruns on both sides.

Global Conflicts Escalate

Richard Kelly, a world-renowned author, has successfully established a connection in his book between the extent of global military conflict and a surge in commodity prices.

There is a definite escalation of conflict with the opening of the Yemen front, spiking the threat level to global shipping traffic.

Apart from freight rates, supply chains and trade flows, the real macro risk from the Yemen quagmire is panic buying in crude, despite its bearish fundamentals.

If Brent spikes to above $100 as multiple wars in the Middle East escalate into a US, Israel and Iran direct military confrontation, inflation risk will rise to at least 4% CPI and the Fed will not cut interest rates any time soon.

Such an inflationary surprise could act as a catalyst for a spike in 10-year US bonds, prompting a correction in overvalued stocks. Additionally, it may elevate the complexity for emerging markets and global trade dynamics.

US CPI

The US Consumer Price Index (CPI) recorded 3.4%, surpassing market expectations of 3.2%. This led to increased volatility in currencies and precious metals.

Concerns are rising in the market that the Federal Reserve (Fed) may not implement a substantial rate cut during the upcoming March monetary policy meeting.

When the famous psychologist Erik Erikson informally said “Everything before the ‘but’ is horseshit,” a century ago, no one really paid heed. Today, the word ‘but,’ suggests that what follows may be more aligned with the speaker’s true thoughts or intentions, potentially casting doubt on the preceding statements. Some spoken statements last week:

– The economy is growing, but structural reforms …
– Inflation will come down, but …
– Rupee is strengthening, but…
– The election dates have been announced, but …

… & so the uncertainty goes on, with the fact that the Pakistan economy is still very fragile.

Interest rate outlook

One of the biggest uncertain segments is the interest rate. When CPI (Consumer Price Index) clocked in around 26% for Oct, the market went on a bond-buying spree predicting rates to come down. Subsequently, the increase in gas prices and the 2 consecutive SPI number of over 40% has cast solid doubts. Yields have consequently ticked up last week, and everyone is now looking for another round of data to project future inflation rates.

While most analysts don’t think of an increase in interest rates, they insist a no change will be akin to a hike, because the market has strongly factored in a cut. But a cut looks tricky if CPI comes above 30% (as is the market consensus), especially amidst a hawkish Fed and a unique interest rate trajectory in Turkey – in which they increased rates by another 5% yesterday to take it to 40%.

Rupee outlook

The rupee lost a few paisa in the last 2 trading sessions. The key triggers were declining reserves which deteriorated by $232mn & higher REER (Real Effective Exchange Rate), which weakened from 91.7 to 98. 6. However, most analysts think the lion’s share of the rupee weakness came as SBP (State Bank of Pakistan) bought swaps to prop forward premiums and subsequently started buying dollars from the market to boost reserves. In spite of profitable premiums, exporters were not active in selling forwards.

In the coming week, we see the Rupee to be range-bounded & vulnerable to news flows. Importers & exporters should just wait and see, which comes earlier – positive or negative news flows.

Fed determined to “Proceed Carefully”

The FOMC (Federal Open Market Committee) minutes were arguably slightly on the dovish side, with the committee now seemingly of the view that no further hikes will be needed, with the language instead focusing on the need to proceed carefully.

Yesterday, the PMIs (Purchasing Managers’ Index) came in stronger than expected in the UK and the eurozone but weaker in the US. Despite the notion that eurozone growth pessimism may have peaked, rate differentials still point to a weaker EUR/USD & EUR/GBP.

Read More: CM Mohsin Naqvi & UAE Ambassador discuss bilateral cooperation

The present Pakistan Army is running a number of institutions under the umbrella of the Army Foundation, and Army Welfare Trust. All these institutions are profit-making institutions.

It would be in the fitness of things, if PIA and the Steel Mills, both are the burden on national exchequer. If said loss-making units were taken over by the Pakistan Army, I am sure these loss-making units would soon turn into profit-making units. Selling of national assets to foreign buyers at a throwaway price is beyond comprehension. Moreover, the Federal government should support local manufacturing industries to generate domestic and foreign revenues. By way of selling quality products at a competitive rate, drastic cutting of considerable import bills, and increasing sizeable exports to international markets to earn precious foreign exchange to ensure timely payments to foreign creditors, and improve in GDP and per Capita income. Thus providing expected relief to the common man by the Federal and provincial governments.

One more thing I would like to bring to your kind notice is that due to the suspension of flight operations by the national career, the other airlines making hey while the sun shines. The unbridled fares of these airlines should be checked and caped to arrest the unhealthy practice of minting money and to save the passengers from paying forced fares at the sweet will of airlines.

Read More: The 5 C’s of credit & PIA’s financial responsibility

The Great Throwdini (Frank Cullen) held millions of people captivated by his precision knife throwing, narrowly avoiding human bodyline. It is no surprise no one wanted to be that human target. The current new year has enacted the role of the Great Throwdini with Pakistan being the unwilling accomplice.

The regional conflict, escalation on its borders, deepening political turmoil, an indifferent ally in China, unyielding inflation and an increasingly challenging debt burden are all unblunted knives that can cause deep injuries. And we are not talking about Cricket yet.

Till now, Pakistan has bravely faced what ever is thrown at it. The sense of stability has been created much due to improved economic optics. And the way forward will also be to strengthen the economy.

Currency outlook

The Iran Pakistan conflict abruptly ended the slow & steady forward sale of dollars by Exporters. Even though the conflict is on the trajectory of reconciliation, it seems unlikely that there will be any resumption any time soon. Having said this, USDPKR seems to maintain its anchor at the 280 level, at least till there is a new elected government.

Analysts are also keenly watching the calculated escalation of hostilities against the Houthis in Yemen, and are hoping it is not intended to expand geographically.

KIBOR and interest rates

KIBOR has decreased by about 125bps during the last one month. This would typically prelude a rate cut, but with inflation refusing to subside, an interest rate cut in the upcoming MPC seems premature. With IMF’s review coming up next month, the best bet for a rate cut is in March 24.

USD Index looks firm

Despite the calmer conditions, the selling pressure on risk assets, and therefore the EUR/USD, may likely resume without a fundamental change in the current macro backdrop. Right now, the big concern is that the major central banks like the Fed, ECB, and BoE will not reduce interest rates as soon and as much as the markets have been expecting.

While in the case of the US, it is partly because of a relatively stronger economy, elsewhere – especially in the UK and Eurozone – it is mainly because of concerns about inflation remaining sticky, with wage pressures continuing to remain elevated.

Euro expected to trend lower

• The EUR/USD pair is slightly stronger, but the US dollar’s resurgence keeps it under pressure, requiring more price action to attract bullish interest.
• Short-term trend remains downside-oriented, and despite the current calm, selling pressure may resume.
  
  https://khabarwalay.com/eng/pakistan-grapples-with-falling-knives/

Room rates have quadrupled and rent-a-cars are unavailable. COP28 comes in a big way to Dubai, where the world’s leaders, ministers, movers & shakers are taking centre stage. You would also find the Sequoias, Khosla’s, and Bezos – all there ready to invest. COP28 (Conference of Parties) presents a crucial opportunity to put the world on a more sustainable path.

It is therefore no surprise that the IMF has insisted that Pakistan’s next budget must adapt to climate change demands. And it is not long before the majority of Pakistani production buyers will require compliance with an extensive checklist of SDGs (Sustainable Development Goals), which stakeholders will need to adopt on a fast-track basis. If they want to compete, this should start now.

US investors betting interest rates have peaked

In the US, Investors are betting higher that the Fed will soon start cutting interest rates – a bet that went into overdrive last week and ignited the strongest rally in bonds in 40 years, taking yields to just below the 4% mark. The Dollar Index also retreated marginally.

This rally is ignited by PCE (personal consumption expenditures price index) clocking in at 3% in October from a year ago, according to data released on Thursday, falling from 3.4% the previous month. This index is widely seen as the Federal Reserve’s preferred gauge of inflation, and although the reading was still above the Fed’s 2% target, the trajectory is lower.

Interest rate expectations in Pakistan

Two of the developments have put the brakes on a much-anticipated policy rate cut:
1. Rising SPI & CPI, primarily due to revisions in gas tariffs
2. A pushback by bond traders wanting higher yields.
Inflation is widely expected to fall in the Jan-Mar quarter but it’s too early to say where the policy rate will land in the next MPC. But surely a dovish stance by the Fed will help in justifying a rate cut here.

Currency outlook

Last week, we opined that FX will be range-bound but subject to news flow. Thus, Rupee marginally strengthened, even though the two factors cited for its strength were quite immaterial, which are:
1. Reserves rose by US$90mn
2. The trade deficit shrunk by 33% on a YoY basis. In the trade deficit area, the lion’s share was the reduction in imports & not the increase in exports, which is quite disappointing.

Continuing the news flow trend, the market widely expects the IMF BoD to approve the 2nd tranche on Thursday. Though the amount is a mere $700mn, it could drive USDPKR to the 280-282 level, at which level, the Central Bank will resume dollar buying to bolster its reserves.

As with the Climate change initiative, there is a lot the stakeholders (GoP, Regulators, Businesses) need to do on reforms and, in general, increase the nation’s productivity levels, if it were to grow at reasonable levels.

Read More: UAE Celebrates Global Achievements on 52nd Founding Day

That one time when you reach into your old coat and are surprised to find a stack of money in one of the pockets is exactly how analysts reacted to the +$787mn rise in forex reserves. The mystery inflow, with no mention from the authorities of the source, got everyone talking.

Sentiment gets better as this increase and the expected IMF tranche including the other multilateral flows would typically bode well for Pakistan. If multilateral flows keep coming in, Pakistan’s external funding gap will be a non-event.

Lessons learned from 2023

The year 2023 for Pakistan, was perilously close to bankruptcy, and by borrowing more money, it may have stabilised the ship but has not addressed the root causes. Some traction can be seen in terms of tax filers, efforts for privatisation, encouraging FDI etc, but with the fresh elections which are 5 weeks ahead, everybody is holding their breath over their continuity.

Post mortem

Looking back, the only significant action taken by the caretaker government was to contain the currency crises, and as Rupee redeemed from 310s to 280s, the panic subsided. It wasn’t by letting the Rupee find its true market rate. While the same is true for high-interest rates, it is not practical to cut rates when inflation is a raging problem. SBP is confident that inflation will fall back to 25% next month due to the rebasing effect, but it would seem improbable without strict implementation of writ of law.

Currency outlook

If all goes well politically, we will see the Rupee range bound for January. For later, it will rely significantly on how the elections transpire. But there is a realisation now that any abnormal devaluation of the currency snowballs into a full-blown avalanche, which should keep Rupee under the lid.

Strong performance by KSE100

KSE100 was one of the strongest performing markets with a 55% gain, though 2023 was a dream year for most stock markets the world over, with S&P, Nasdaq, Argentina & India growing by 24%, 54%, 70% & 17%.

Fed rates and emerging markets

The prevailing market consensus points toward lower interest rates in developed countries next year, with both the Fed and the ECB anticipated to make rate cuts. This bodes well for emerging markets as more capital will flow there. With the right amount of incentives, Pakistan may also benefit from this trend.

Due to this, two key trends are anticipated. First, the stock markets will continue their sizzle. Second, the dollar index will drop to below par.

Other key forecasts

Some of the relevant forecasts for 2024, sourced from around the world, are:

• Gold will surge to $2,400 before consolidating just below $2,000
• Property markets, led by China, will continue its lacklustre run
• Modi/BJP and Putin will win their respective elections
• Brazil with its huge investment in offshore drilling will become a major oil-producing country

By : Shahzada Ahsan Ashraf
Former Federal Minister of industries and production
Former chairman and Managing Director of PIA

Read More: Shahzada Ahsan Ashraf analyzes Pakistan’s economic uncertainties

https://khabarwalay.com/eng/forex-reserves-surprise-on-the-upside/