Seasonal flows leading credit offtake
Following a 6%YoY contraction in the stock of private sector loans in 9MCY09, latest SBP data indicates that the banking sector has extended loans of PkR181bn to the private sector in 4QCY09. Within the manufacturing sector, fresh credit disbursement has mainly occurred in textiles (particularly spinners). Credit has also been concentrated towards utility companies, exporters and retailers. On the flipside, consumer financing (particularly auto loans) has continued to be a laggard. Improving credit flows towards the private sector, albeit largely seasonal, indicate growing confidence on the part of lenders, in our view. At current levels, our top banking sector picks are NBP, MCB and ABL. We prefer NML in the textile sector while INDU (product mix less dependent on financing) is our top auto sector pick.
AKD Research
January 26 2010
External deficits, exchange rate & the impact of oil
Despite improvements on the external side, the PkR exchange rate has experienced rising distress in the previous months, slipping by 0.8% against the US$ in Dec’09, higher than average (preceding 6 months) depreciation of 0.5% per month. While the upcoming payment of US$600mn on maturing Euro bonds and imminent reserve erosion has added to exchange rate volatility, Finance Minister Mr. Shaukat Tarin reportedly announced yesterday that the US will release overdue Coalition Support Funds of US$350mn in Jan’10. If these funds materialize in this month, it should partially alleviate concerns regarding the stability of PkR exchange rate. However, the sustained decline in remittances in the past three months clearly signifies that inward remittances have already peaked. This reduces the economy’s deficit financing capacity in a scenario where import demand will likely rise in tandem with a pickup in economic activity. In this report we assess the monthly core debt financing gap and quantitatively assess the impact of oil prices on the trade deficit.
AKD Research
January 21 2010
Is Pakistan heading into another debt trap?
The recent projections given by the IMF of Pakistan’s external debt burden shooting up to US$72.6bn by FY16 from current level of US$55bn has raised concerns regarding debt sustainability going forward. The following graph shows that the yearly increase in external debt primary mirrors the schedule of loan inflows & payments to the IMF. In our view, as Pakistan retires the US$11.3bn debt under the stand-by facility, the country’s external debt will start stabilizing.
We are cognizant that the increase in external debt burden will make the country more vulnerable to both endogenous & exogenous shocks. However, if Pakistan’s debt servicing capacity, as measured by growth in GDP and increase in export earnings, improves then the debt burden should remain manageable despite the “nominal” hike in debt. Considering that Pakistan’s debt to GDP ratio is comparable to its international competitors and significantly lower than the economies in Eastern Europe, we think that the possibility of Pakistan falling into a debt trap has an outside chance in our view.
AKD Research
January 13, 2010
2009 – a year of redemption
KSE-100 rounds off 2009 with 60% YoY gain
KSE rounded off the decade with ~2% MoM return in Dec, bringing CY09 gains to 60% which were short of regional peers and left KSE trading at ~45% discount to peers. 2009 saw KSE driven in spurts by diverse variables - 'distressed valuation' rally (4 x forward PE) and reinstatement of judges in 1Q, Swat operation in 2Q and booming FPI (US$235mn) in 3Q. Dec-09 was politics' turn as Supreme Court declared NRO void. This combined with preference of institutions to preserve YTD gains saw 2nd & 3rd tier stocks dominate activity. KSE-30 share of market volume touched year low of 50% in Dec, resulting in 22% MoM decline in avg vols.
Macro stabilization was one of the comforting factors
Key highlight of 2009 was macro stabilization as most data points improved YoY (CPI down to 10% from 25% leading the way), providing SBP comfort to cut the discount rate 250bp during CY09 to 12.5% vs a 500bp hike in CY08. Progress was also appreciated internationally as IMF augmented its credit line by US$3.7bn to US$11.3bn, CDS receded to ~8% level from a high of 50% last year and credit rating was upgraded in 2009 to B- with stable outlook.
Variables that should shape 2010
On the macro front, we believe two driving factors would shape key indicators (inflation, currency and interest rate outlook) i.e. 1) commodity prices, as Pakistan remains a net importer and 2) sovereign flows from US, IFIs and FoDP.
On sentiments, we highlight 1) interplay of judiciary and politics (NRO follow through impact), 2) war on terror and related law and order situation in main cities and 3) media which has demonstrated throughout 2009 its power in molding sentiments (restoration of judges and war on terror are cases in point). Potential upgrade to MSCI EM and reintroduction of leverage should also be tracked.
On corporate profitability, while improvement in macro will have a positive impact on demand and hence pricing power + margins, sector wise, we eye 1) positive news on oil and gas production, 2) developments on power capacity/ tariffs/ intercorporate debt, 3) slowdown in NPL provisions, 4) developments on cement pricing agreement and 5) judicial activism (courts' recent involvement in oil pricing and written off loans) as key swing factors.
Performers 2009 vs 2010
Study of BofAML-KASB Pakistan universe reveals that gains in 2009 were broad based with 17/19 stocks outperforming KSE-100 where NML (+239%), FFC (+236%) and FFBL (+194%) led the way. Looking ahead, our sector picks in 2010 include PPL within E&Ps, PSO amongst OMCs, Hubco amongst IPPs, Engro within fertilizers, while PTCL remains the sole investable telco. While we await further clarity on banks and cement, we prefer Lucky and MCB to sector peers.
KASB Securities & Economics Research
Inflation in Dec 09: blip now a trend…
Breaking the thirteen month long persistent downward trend, CPI inflation rose to 10.5%YoY in Nov’09. We highlighted that the impact of Ramadan and cost pressures arising from the 7% hike in power tariffs in Sep’09 were the primary reasons for the inflationary spike and hence initially anticipated the trend to reverse in Dec’09. Our view held for the first three weeks of the months where the weekly Sensitivity Price Index – a leading inflationary indicator – fell till the 17th of Dec’09 (Please see the graph below). However, the SPI rose in the last two weeks ending 31st Dec’09, a rise which corresponds with the start of the Islamic month of Moharram when demand for primary food commodities usually goes up.
The average SPI inflation for Dec’09 should clock in at 12.9%YoY up from 10.7%YoY in Nov’09. Based on this increase we forecast CPI inflation to rise to 11.2%YoY in Dec’09. Now that gas & power tariffs have been raised substantially in Jan’10, we expect cost push inflationary pressures to persist over the next three months. Therefore, we reiterate our expectation of no cut in the discount rate in the upcoming monetary policy to be announced by end-Jan’10.
AKD Research
January 7th 2010
