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May 14, 2019

Foreign investors eye rupee stability to capitalise on IMF-backed reforms


May 14, 2019

KARACHI: IMF deal is expected to enhance foreign investments into Pakistan, but investors are eyeing stability in battered rupee to capitalise on economic recovery aided by structural reforms, a renowned international economist said on Monday.

Renaissance Capital’s Global Chief Economist Charles Robertson said Pakistan is going to be more attractive to foreign investors as a result of a loan agreement with the International Monetary Fund (IMF).

“But, they are likely to be on pause until the rupee stabilises,” Robertson said on Twitter. “We think the rupee is slightly cheap to fair value and the best value south Asian currency.”

On Sunday, Pakistan and IMF announced an agreement on a six billion dollars bailout for the country, focusing higher tax revenue and seeking elimination of power sector’s subsidies.

“A market-determined exchange rate will help the functioning of the financial sector and contribute to a better resource allocation in the economy,” IMF said in a statement on a three-year extended fund facility program. “The State Bank of Pakistan will focus on reducing inflation, which disproportionately affects the poor, and safeguarding financial stability.”

Brokerage Alfalah CLSA Securities said pressure on rupee would draw negative reaction from the stock market in the short run. “This is despite the fact that for a sizable chunk of the scrips (exploration and production, power, banks) profitability has a positive correlation to rupee devaluation,” the brokerage said in a report. Rupee has lost 31 percent against the US dollar since 2017.

Spectrum Securities agreed that rupee devaluation is positive for exploration and production sector, independent power producers due to their return on equity indexation based on USD and export-oriented textile sector. “Similarly, it is also beneficial for chemical sector as its price is linked with imported chemicals and IT sector as its major revenue is generated in USD.”

But, rupee depreciation is negative for auto, pharmaceutical and cement sectors to some extent as it increases cost of imported raw materials that would impact the profit margins.

BIPL Securities sees a further five to 10 percent in rupee devaluation from the current level. “In hindsight, this will help Pakistan to contain its current account deficit which is expected to remain at 2.4 percent of GDP.”

Next Capital sees a further 10 to 15 percent rupee fall over the next fiscal year. “Our previous estimates suggest rupee/USD hovering around Rs145/USD by the end of the current fiscal year.”

Brokerage BIPL Securities said concern of higher interest rates and rupee devaluation would be likely setbacks for the capital market in the coming days and would halt any fresh investment from local and foreign financial institutions.

“We continue to remain skeptical on the market as we believe that market will foresee a barrage of new taxes being introduced. A potential 100 to 200 basis points hike in discount rate will make equities even more unattractive,” BIPL Securities said.

Spectrum Securities said the expectation of rise in interest rate would enhance financial costs of highly-leveraged sectors, including cement, textile, fertiliser, transport, sugar and technology and communication.

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