By: Saad Khan, Economist, Arif Habib Ltd.
The State of Pakistan (SBP) is due to announce the second monetary policy statement (MPS) for CY12 on April 13th, 2012. After keeping the rate unchanged in the last (Feb-12) MPS, we expect policymakers to keep the rate on a hold at 12%. This is pretty much in line with overall market expectations.
Better economic data
The volatile (food) prices we saw in 1HFY12have eased and there is a clear evidence of inflation falling below SBP target of 12%. The latest data released on Consumer Price index (CPI) reveals that inflation for Mar-12 stood at 10.8%YoY, much lower than market expectation of 11.03%YoY. However this month’s figure came more of a surprise, and it has been pointed out that it does not capture the effect of rising oil prices.
Descending inflation: Look for Food before Oil
If anything, inflation falling in recent months is due to descending food prices (9.8%YoY in Mar-12 compared to 17.9%YoY in Mar-11). We earlier estimated that a direct impact of oil price hike is pretty much limited due to its small weight in the overall price basket (Motor Fuel – 3.03%) in headline inflation. The rise in international oil (Arab light, Gulf) price during the month of Mar-12 was +~13%YoY, which is duly reflected by a comparable increase of +~28%YoY increase in domestic prices. We are of the view that the price effect of higher oil prices is likely to show up in core prices due to to its second-round effect. The core price (NFNE) notched up to 10.8%YoY during the month of Mar-12 and has stayed in double digits during 8MFY12. Similarly, non-food prices went up by 11.5%YoY during the month, however, Sensitivity Price Index (SPI) [used as a gauging index for food price sensitivity] has remained well-tamed at 6.6%YoY in Mar-12 compared to 15%YoY in Mar-11.
‘Bond fever’ diffuses
Earlier, anticipation of higher inflation in Mar-12 lifted the yields on the 3M and 6M T-bills by 5 and 4bps respectively. However following the recent release of inflation figures secondary market yields have remained unchanged, which puts extended confidence in the policy rate remaining unchanged.
Politically, this monetary policy will be of importance
Rest apart, we think upcoming monetary policy will be of some importance. We say this because the economy enters into the final leg of its fiscal year, and with toots of a popular budget in making, we think the pressure on policymakers to further depress interest rates would be quite defined.
Bottom line: Countdown to SBP’s show
Government borrowing has so far remained unabatedly high, which negates the SBP’s efforts to rejuvenate private investment, and in turn growth. We highlight widening current account deficits, lack of financial inflows and higher government borrowing as key risks to our call.
Monetary Policy Preview
By: Syed Saquib Ali, Global Securities Pakistan Ltd.
SBP is scheduled to announce its monetary policy for the next two months on Apr 13’12 and we expect the central bank will continue to maintain status quo. Our premise is largely based on lower than expected inflation during Mar12 and the SBP’s focus on stimulating growth. However, key risk to our expectation stems from recent indiscipline witnessed in government borrowing from the central bank. Secondary market expectations support our view as cut off yields in the last T-bill auction remained unchanged.
Inflation – FY12 target likely to be met
CPI inflation during 9mo FY12 has averaged at 10.82% which means that even if inflation averages between 11.5-15% during 4Q FY12, average for FY12 would range between 11-12%. However, inflationary pressures are expected to materialize during the ongoing month on the back of higher fuel prices while core inflation has maintained an upward, albeit subdued, trajectory.
Government borrowing & quarter end limit
Government borrowing from the central bank continues unabated touching its highest level since Dec 24’10. Total stock of borrowing from the central bank as of Mar 23’12 stood at PKR 1.45tr, up by 25% FY12TD (incremental borrowing of PKR 292bn). Given that the last T-bill auction held during 3Q FY12 (Mar 21’12) led to a net repayment of PKR 61.8bn, we believe that there is high probability that the government wouldn’t have been able to bring the level of borrowing down to the mutually agreed quarter end limit of PKR 1.15tr. This would be the second consecutive quarter where the limit has been breached as the stock of cash borrowing as of Dec 30’12 stood at PKR 1.30bn. The SBP has laid great stress on the quarter end limit and the same, along with expectation of declining inflation, was the key driver behind the 50bps cut enacted in Jul11.
We expect the upcoming policy announcement to be a non-event for the market while we believe that materialization of an expected uptick in inflation for Apr12 could dampen market sentiment. Key developments to follow include the ongoing parliamentary review of US-Pak relations where concessions, particularly regarding NATO supply routes, could lead to disbursement of CSF, potentially changing the shot term economic outlook. The next policy announcement would be post budget FY13 and we believe the government’s stance on fiscal reforms will have a significant influence on the central bank’s policy.