Pakistan Economy - BMA Capital Management

 Pakistan Economy Inflation Preview: Apr’15 inflation to clock in at 1.8%YoY
Wednesday April 29, 2015 Select Economic Indicators CPI Inflation Mar‐15 YoY 2.5%
SPI Inflation 23‐Apr‐15 YoY NFNE Inflation Mar‐15 YoY Reserves 17‐Apr‐15 USD17.5bn
Remittances 9MFY15 USD13.3bn
Trade Balance 9MFY15 USD(12.7)bn
Current A/c deficit 9MFY15 USD(1.4)bn ‐1.1%
5.9%
6 Month KIBOR (Offer Rate) 28‐Apr‐15 7.2%
10 Year PIB 23‐Apr‐15 9.3%
Discount Rate 8.0%
Source: SBP, BMA Research Average Inflation (YoY) 25%
21.0%
Continuing on its downward trajectory, we believe inflation for Apr’15 is likely to post a new low of 1.8%YoY (lowest reading since Jul’03) as against 2.5%YoY registered in Mar’15. Despite MoM increase of ~1%, headline inflation is expected to remain benign due to high base in Arp’14 where inflation clocked in at 9.2%YoY. The MoM increase in CPI basket can be attributed to increase in fuel index (up 0.5%), upward revision in HRI (up 1.0%) and higher food inflation (~1.5%). Going forward, we believe MoM inflation will continue following upward momentum owing to seasonal impact of summer amidst pre‐Ramadan euphoria in Jun’15. That said, we reckon 4QFY15 average inflation to clock in at 2.6%, bringing average inflation in FY15 to 4.5%, lowest since FY04. Given low inflationary outlook in 4QFY15, which translates into a massive positive real interest rate of 5.4%, we believe SBP will continue monetary easing theme however, quantum of DR cut will potentially be on the lower side to 50bps due to SBP’s historic conservative approach. From market’s perspective, continuation of quant easing and materialization of projects under China‐Pakistan Economic Corridor will revitalize investor sentiments. In an event of DR cut, we recommend investors to build position in levered plays particularly cements (FCCL, MLCF) and Fertilizers (Efert, Engro, FFBL). Furthermore, another reduction of DR will pave the way for further surplus on revaluation on fixed income securities, realization of which have already augmented bank’s earnings 1QCY15. Against the traditional practice, banking sector may potentially come in further limelight in such an event. 20%
13.7%
15%
11.9%
9.3%
10%
5%
10.1%
11.0%
8.6%
7.4%
7.9%
7.8%
4.5%
4.6%
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
0%
Source: PBS, BMA Research FY16 Inflation expectation 12%
+0.6%MoM
+0.8%MoM
+0.7%MoM
10%
CPI: 5.5%
8%
CPI: 6.2%
CPI: 6.9%
6%
4%
2%
Jun‐12
Oct‐12
Feb‐13
Jun‐13
Oct‐13
Feb‐14
Jun‐14
Oct‐14
Feb‐15
Jun‐15
Oct‐15
Feb‐16
Jun‐16
0%
Source: PBS, BMA Research Iqbal Dinani iqbal.dinani@bmacapital.com April’15 Inflation to clock in at 1.8%YoY: Pakistan is all set to see one of the lowest inflation readings in decade in Apr’15 primarily due to favorable base effect and sustained lower crude oil prices. Following a cumulative jump of 0.2% in Sensitive Price Index (SPI) in past four weeks, we expect the headline inflation (CPI) in Apr’15 to clock in at 1.8%YoY, bringing average inflation to 4.8% in 10MFY15, significantly lower than 8.7% in 10MFY14. That said, on a sequential basis, Consumer Price Index (CPI) is likely to jump by 1.0% (highest MoM jump since Jul’14) primarily due to i) upward adjustment in the domestic petroleum prices (up 5%YoY), Diesel (4%YoY) & Kerosene (1%YoY); thus directly increasing fuel segment (CPI weight: 3.03%), ii) scheduled quarterly revision House Rent Index (CPI weight: 21.8%) and iii) tamed food inflation. During the outgoing month, the prices of food staples portrayed a mix trend with declining prices of wheat & allied products offsetting the price increase in farm products. Inflation Outlook: On a monthly basis, headline inflation towards the tail‐end of FY15 is likely to rebound sharply particularly because of food inflation due to seasonal uptick coupled with pre‐Ramadan euphoria in Jun’15. That said, favorable base impact is likely to keep overall average inflation on the lower side ~2.6% in 4QFY15, bringing average inflation to 4.5%; lowest average inflation since FY04. For FY16, future course of monthly inflation will remain contingent to the trickle down impact of i) upward revision in gas prices (scheduled to revise in Jul’15), ii) fiscal consolidation measures which would be the heart of FY16 Federal Budget, iii) trend in global crude oil prices and iv) domestic demand/supply situation of food commodities. Investment Perspective: From market’s perspective, 50bps cut in MPS and timely materialization of projects under CPEC will revive investor sentiments. Thus we recommend investors to build position in levered plays particularly cements (FCCL, MLCF) and Fertilizers (Efert, Engro, FFBL) in order to tap into the benefits of DR cut. +92 111 262 111 Ext: 2059 BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.11
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