Despite the positive news-flow regarding the IMF staff level agreement, the benchmark index of Pakistan Stock Exchange (PSX) trimmed the last week’s gains on account of unexpected hike of 150bps in policy rate by SBP. In addition to this, the Current Account Deficit (CAD) widened by US$1.66 billion in October 2021 and rose to 4.7% of the GDP from 4.1%, beyond the target of 2-3% for the entire financial year.
With negative news-flows engulfing the investors, the confidence remained jittery. At the same time, PKR remained on downward trajectory against US$, hitting a low of PKR176.5/US$. As a result, the benchmark index lost its value during the week by 5.1%WoW to close at 44,114 points as against 46,489 points last week. The average traded volume rose by 8.2%WoW to 264.38 million shares.
Other major events during the week included: 1) weekly inflation hitting 7-month high of 18.34%YoY, 2) petrol pump dealers calling nationwide strikes, 3) one-year KIBOR rising to 11%, 4) Ayub Afridi resigning from senate, a clear indication that PM’s Finance Advisor Shaukat Tarin is to be elevated in the upper house of Parliament, 5) cabinet approving PKR134 billion payment to IPPs as second installment, 6) SBP keeping the inflation outlook unchanged at 7-9% in medium term, 7) Bank deposits rising 13% CYTD to PKR19.34 trillion, 8) Fertilizer offtakes surging 45%YoY and 9) SBP reserves taking the biggest drop of US$691 million in FY22 so far owing to dual pressure of debt repayments and rising CAD. Stock wise, major performers were: GATI, HMM, ATLH, EFUG and HGFA, while laggards included ANL, SEARL, TRG, DGKC and PIOC.
As expected, the market remained under pressure after SBP increased the benchmark interest rates by 150bps against the general consensus of 100bps. Also, CAD rising to US$1.66 billion created further volatility in the market. For upcoming week, analysts expect the market to change the momentum to positive side owing to the meltdown in Crude Oil where Brent Crude (ICE) declined 5.73%, thereby giving a sigh of relief on the commodities front. On the flipside, the birth of a new Covid—19 variant has risen the panic across the globe.
In a move that surprised the market, SBP raised the benchmark interest rates by 150bps. The move marks a structural shift in central bank’s policy from stimulating growth to now targeting stabilization amid rising risks emanating on the external account. The rate hike brings real interest rates closer to ZERO, having stayed well below minus 2% mark during the pandemic as SBP strived to protect economy from the negative impact of the COVID-19. With rate hike, Pakistan has broadly met all the requirements of the IMF paving way for the revival of assistance program. To this end, the news of country reaching staff level agreement finally broke this morning, notwithstanding any last minute hiccups; country is expected to receive US$1.1 billion and unlocking further funding from other bilateral partners. A hike of 150bps was higher than market expectation of 100bps and may set ground for further rate hikes in the coming months as focus shifts back to stabilization amid mounting risks to external account and as SBP may look to target mildly positive real interest rates. Money market yields had already peaked at 9% before the hike in interest rate and ordinarily the equity markets may witnessed a heavy correction as the news of higher than anticipated rate hike was further compounded by soaring CAD. However, the staff level agreement with IMF is likely to be positively received by the market and may keep downside in check.