MorningShout

PakistanDailyNotes

Macro:SBPlikelytoleaveDRunchangeddespitesoftCPI

LatestCPIdataindicatesinflationhasdroppedtoa14monthlowof6.99%YoYin
Aug14vs7.88%YoYlastmonth,ledbybenignfoodinflation(4.7%YoY).
Against our earlier conviction call of 50bp cut in DR in Sep14, we now think
chancesofSBPkeepingDRunchangedhaveincreased.
In the backdrop of current political turmoil, we now believe (1) delay in IMFs
fourth review conclusion and (2) increased risk of delays in economic reforms
warrantacautiousstance.
Our earlier stance assumed (1) within target (8%) CPI and expectation of over
300bprealinterestratetodriveDRcut,(2)materializationofgovtsFY15plans
toraiseFXreservesandmobilizefiscalresources,and(3)IMFprogramontrack.

CPIinflationclocksinat7%inlinewithexpectation
AsperlatestdataofPakistanBureauofStatistics(PBS),CPIinflationdroppedto6.99%inAugvs
7.88%inJul14,onthebackofendofseasonalpressureonfoodpricesduringtheholymonth
ofRamadanandunchangedhouserentindex(whichisrevisedonlyonquarterlybasis).Ona
MoM basis, CPI increased by only 0.33% led by benign food inflation (0.6% MoM), where
perishable food prices saw 1.8% MoM decline. Apart from food, core nonfood nonenergy
inflation increased nominally by 0.2% MoM, recording7.9% YoY inAug14compared to8.3%
YoY in Jul14 contributed by benign inflation in textile, housing and transport groups. We
maintainourinflationestimateof8.5%forFY15.

Cautionwarrantedgivenpotentialdelayineconomicreforms
We will not be surprised if SBP adopts a waitandsee stance in the upcoming bimonthly
monetarypolicyreview(dueinmidSeptember)againstourearlierconvictioncallof50bpcutin
discountratecurrentlyat10%.Ourearlierstanceassumed(1)withintarget(8%)inflationand
expectations of 300bp real interest rate to drive DR cut;(2) materialization ofgovtsplans to
raiseFXreservesandfiscalresourcesinFY15,keepingexchangeraterelativelystable;and(3)
IMFprogramontrack.

2September2014

SarahMazher
Sarah.kamran@kasb.com
KASBSecuritiesLimited
+9221111222000

BothCPIandCoreinflationsawdecline
inAug14
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%

Jul13
Aug13
Sep13
Oct13
Nov13
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14

CPI

CoreNFNE

Source:PBS

Realinterestratenowat300bp;butrisktoexchangeratehaveemerged
WithlatestdipinCPIrealinterestratenowstandat300bp.Recallthatinprevioustwopolicy
decisionsonDRcuts(Dec12andJun13),realinterestrateswerejustabove300bp.Alsokeyto
noteisthatinthelastMPS,thedecisiontoleaveDRunchangedwasnotunanimouswithsome
members favoring cut in DR to support economic growth. However, in contrast to earlier
comfortableexchangerateposition,PKR/USDhaslatelyseensharpmovement(down3.6%in
Aug14vsstablein2Q14)onaccountofpoliticalcrisis.Hencereducingrealinterestrateatthis
pointmaynotfindmuchsupport,asitcouldhavenegativeimpactonexchangerate.

Risingconcernsregardingeconomicagendaandsecurity
Near term reforms face risk of delays, in our view, due to current political situation. These
include (1) increasing power tariff by 45% and (2) government privatization schedule. Hence
webelievemajorityoftheSBPsboardmemberswilllikelynotviewacutinDRasusefultospur
growth, while other structural factors remain unfavorable including (1) hurdles in timely
implementation of reforms and (2) increased risk of widespread lawlessness associated with
ongoingpoliticalevents.

IMFfourthreviewstillawaitsconclusion
IMF,initsrecentpressconference,continuestoadvocatethattheprogramprogressisintact.
Howeverdelayincompletionofthefourthreviewcouldpotentiallyleadtodelayinapprovalof
thefifthtranche(earlierexpectedbymidSeptember),whichislikelytoaffectSBPsdecision,in
ourview.
Refertoimportantdisclosuresonpage3

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morningshout
WorldMarketsandCommodityPrices
InternationalEquityMarkets

AsianMarkets(ClosingRates)
Price
AllOrdinaries
ShanghaiComposite
HangSeng
BSE30
JakartaComposite
KLSEComposite
Nikkei225
NZSE50
StraitsTimes
SeoulComposite
TaiwanWeighted
KSE100Index

EuropeanMarkets(LastTradingSessionsRates)
Price Abs.Chg.
%Chg.

Abs.Chg.

5,629.27
2,235.51
24,752.09
26,867.55
5,177.62
1,866.11
15,476.60
5,215.40
3,314.13
2,067.86
9,513.06
28,493.74

4.7
18.3
10.0
229.4
40.8
0.0
52.0
7.9
13.0
0.7
76.8
74.0

0.1
0.8
0.0
0.9
0.8
0.0
0.3
0.2
0.4
0.0
0.8
0.3

ATX
BEL20
CAC40
DAX
AEXGeneral
SwissMarket
FTSE100

%Chg.

2,297.42
3,180.69
4,379.73
9,479.03
414.23
8,746.97
6,825.31

4.1
12.0
1.3
8.9
1.1
88.0
5.6

0.2
0.4
0.0
0.1
0.3
1.0
0.1

17,098.45
4,580.27
4,082.56
2,003.37

18.9
22.6
9.4
6.6

0.1
0.5
0.2
0.3

AmericanMarkets(Aug29th)
DowJonesInd.Average
NASDAQComposite
NASDAQ100
S&P500Index,RTH

Source:Bloomberg

ForeignPortfolioInvestmentinEquities
Country
Day(US$mn)
Pakistan
India
Indonesia
Japan
Philippines
SouthKorea
SriLanka
Taiwan
Thailand
Vietnam
AbuDhabi
Qatar

WTD(US$mn)

(0.6)
(83.2)
10.9
N.A
(8.6)
47.2
0.3
278.6
47.1
42.5
(4.5)
1.6

MTD(US$mn)

(0.6)
139.2
10.9
1,679.7
(8.6)
101.6
0.3
278.6
47.1
43.9
(4.5)
(21.0)

YTD(US$mn) 12M(US$mn)

(0.6)
1,054.5
10.9
(2,270.8)
(8.6)
101.6
0.3
278.6
47.1
(14.3)
33.0
1.6

360.7
12,910.4
4,853.8
(11,545.5)
1,303.1
8,735.6
60.2
13,263.9
(697.9)
262.7
972.4
2,320.8

436.5
21,472.9
3,893.7
48,100.2
785.7
18,510.2
94.3
20,944.2
(3,092.6)
410.1
1,249.2
2,540.7

Date
0109
2808
0109
2208
0109
0109
0109
0109
0109
2908
3108
0109

Source:Bloomberg,NCCPL

ForexandMoneyMarketsnapshot
6MonthKIBOR(Offer)
12MTBill(Average)
10yearPIB(Average)
PkR/US$
Source:KASBMoneyMarket

Current

Previous

Chg.

10.18
10.04
13.35
102.52

10.18
10.04
13.35
101.76

0.00
0.00
0.00
0.76

CommodityPrices
Price
WTI(CrudeOil)*
Gold
CRBIndex*
Source:Bloomberg
*Aug29th2014

95.96
1,287.01
292.75

Abs.Chg.

%Chg.

1.4
2.0
1.4

1.5
0.2
0.5

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