PakistanEconomicUpdate

RamadanFactorandTaxhikesvisibleinJul13inflation

5.9% 4.6% 7.8% USD10.5bn USD13.9bn USD(15.1)bn USD(2.3)bn 9.08% 11.78% 9.0%

TuesdayJuly 23,2013

SelectEconomicIndicators
CPIInflation SPIInflation NFNEInflation Reserves Remittances TradeBalance CurrentA/cdeficit 6MonthKIBOR (OfferRate) 10YearPIB DiscountRate Jun13YoY Jun13YoY Jun13YoY on12Jul13 FY13 FY13 FY13 22Jul13 22Jul13

The headline inflation for the month of July13 is expected to popup to ~7.6% (1.42%MoM)comparedto5.85%(0.72%MoM)seeninJun13 Though the tax increase has led price hikes across the CPI basket, the uptick in food inflationduetoaseasonalfactorisfarmorevisible The structural reforms in the first year of new government were expected but re entryintoIMFprogramhasmadethefactunavoidable Thisresultantlywillhaveanegativeimpactoninflation,whichaccordingtoourinitial estimation based on 1520% of power tariff pass on, will clock in around 9.29.3% in FY14 With slower uptick in inflation in 1HFY14 despite Ramadan factor and materialization oftaximpact,webelievetheheadlineCPIwouldremainat8.67% However,withaninflationexpectationof9.86%in2HFY14,the2HFY14wouldinitiate aroundof50100bpsincreaseinpolicyrates

InflationBreakup(YoY)
CPI 14 12 10 8 6 4 2 0 Jun12 Jul12 Aug12 Sep12 Oct12 Nov12 Dec12 Jan13 Feb13 Mar13 Apr13 May13 Jun13 WPI SPI NFNE

The headline inflation for the month of July13 is expected to popup to ~7.6% (1.42%MoM) compared to 5.85% (0.72%MoM) seen in Jun13 as the impact of tax hikes (1%increaseinGSTinBudgetFY14)andRamadanfactorplaysin.Thoughthetaxincrease has led price hikes across the CPI basket, the uptick in food inflation due to a seasonal factor is far more visible. Indicated by the recent SPI numbers, the jump will be visible in edibles(pulses,vegetablesandgrains)howeverdecliningfarmproducepriceswillprovide some support. Moreover, quarterly revision of House Rents will also lend its share in the highernumbers.

FY14:Inflationtopickup&DRtofollowsuit
Though the structural reforms in the first year of new government were largely expected, reentry into IMF program has made the fact unavoidable. The power policy initiated by thetemporaryconclusionofcirculardebtwillbefollowedbyreformsincludingpowerand gas tariff hikes and a complete overhaul of power system. This resultantly will have a negativeimpactoninflation,whichaccordingtoourinitialestimationbasedon1520%of powertariffpasson,willclockinaround9.29.3%inFY14.Thuswithminimalaveragereal rateofinterestexpectedtoprevailinthefiscalyearcoupledwithgovernmentsborrowing target of PKR975bn (major component to be borrowed from commercial banks) will lead thecentralbanktoinitiateamonetarytighteningpolicy,inDec13,webelieve. Slower uptick in inflation in 1HFY14 despite Ramadan factor and materialization of tax impactisexpectedtokeeptheheadlineCPIat8.67%intheperiod(realrateof33bpsover 9% DR) deferring the tightening stance may be for now, we believe. However, with an inflation expectation of 9.86% in 2HFY14, the 2HFY14 would initiate a round of 50100bps increaseinpolicyrates.

YieldCurveMovement
22Jul13 14% 13% 12% 11% 10% 9% 8% 15YR 30YR 1YR 3YR 5YR 7YR 9YR ON 1M 3M 6M 22Jul12

Thus, given our assumption of stable interest rates at least for the next two monetary policies (Aug13 and Oct13), we believe the yields in the secondary markets will remain in thesametrajectory.However,thecapitalgainsshouldbesettledonanyupsidewhilenew positionsshouldbemaintainedinshortterminstruments.

FurqanPunjani
furqan.punjani@bmacapital.com +92111262111Ext:2064
BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111 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 expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.11