Rupee expected to depreciate 12 percent by FY19-end

KARACHI: Rupee is expected to further depreciate around 12 percent by the end of the next fiscal year of 2019 as external financing requirements are projected to remain elevated in the medium-term on growing imports, a brokerage said on Wednesday.

“We expect a further depreciation of around 5 percent in rupee/dollar value by the second half of 2018 followed by approximately 5 to 7 percent devaluation during 2018/19,” Alfalah Securities said in an economic brief. “We expect further market-driven downward adjustment of the exchange rate in response to depletion of forex reserves, with the magnitude and duration of rupee weakness depending on when Pakistan signs up to a (International Monetary) Fund program – or manages to arrange foreign exchange reserves- bolstering hard currency from alternate sources.”

Rupee lost 10 percent of its value against dollar since December 2017.

The brokerage said the country’s external financing requirements would increase in the medium-term as large energy import requirements displace China-Pakistan Economic Corridor -related machinery imports, and as “a hump in debt repayments kick in”.

“The gross external financing requirement is on target to be around $25 billion for the full year,” it added. “The unfunded portion of the overall external gap is estimated to be around $12 billion for the current fiscal year, which could represent a drawdown of official reserves if it remains unfinanced.”

Alfalah Securities said the unsustainable external financing requirements on the horizon mean that the rupee would begin to experience volatility as well as pressure again within a few months.

“With dwindling foreign exchange reserves, SBP’s ability to intervene in the markets will also be constrained,” it added.

“The depletion of foreign exchange reserves continued with the country’s international liquidity having declined a cumulative $7.1 billion in the past 12 months or by 38 percent.”

The brokerage said the pressure on the balance of payments position has continued to mount despite a noticeable turnaround in the country’s exports since early 2017. “With large net external financing needs persisting over the next three years, the forex reserves loss is expected to continue, requiring an IMF (International Monetary Fund) loan arrangement (or an alternate financing source) by the summer.”

Current account deficit rises 50 percent to $10.8 billion for the July-February period of the current fiscal year.

Alfalah Securities said the dynamic of Pakistan-US relations could at some stage, depending on how much ‘pain’ the US administration wants to bring to bear, hamper the country’s access to multilateral financing, including from the IMF.

“At this stage, however, we regard this as a low-probability event – but a potential risk that needs to be monitored,” it added. “An additional exogenous risk is the possibility of a full-fledged global trade war sparked by the US administration’s tariff moves against major trading partners.”

The brokerage said the pause in monetary tightening is unwarranted and a sign of weakness that the central bank may rue in the months ahead as the pressure on the external account as well as inflationary pressure continue to intensify.

“We believe the policy response function warrants more aggressive measures – which the central bank will be forced to turn to from May onwards,” it added.