REP-300

Pakistan Economy
MPS Preview (Oct’23)- Status quo likely
20-Oct-2023

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MPS Preview
Status quo likely
▪ The MPC is set to commence its next meeting on October 30th, 2023 and we expect the SBP Exhibit: CPI and Policy Rate
to hold the policy rate at 22% in this meeting.
CPI SBP Policy Rate RiR (RHS)
▪ To recall, in the last scheduled meeting of Sep’23, SBP maintained the policy rate unchanged
45% 10%
at 22% citing that the decision took into consideration the latest inflation trends, which
indicated a sustained decline in inflation rates, dropping from its peak of 38% in May to 40%
5%
27.4% in Aug’23. Despite recent increases in global oil prices, the committee anticipated that 35% 31.4%
inflation will continue its downward trajectory, particularly in the latter half of the year.
▪ We also expect the headline inflation to continue its downward trajectory in the upcoming 30% 0%
months with the average MoM rate projected to be 1.03% until Jun’24. This projection is 25%
expected to result in an annual average of ~24% for headline inflation during the FY24. These -5%
20%
expectations are based on several factors, including reduced demand-side pressures, the 16.37%
stabilization of global commodity prices, and the influence of a high base effect. This stands 15% -10%
in contrast to the FY23, where the average headline inflation rate was higher at 29.2%.
10%
▪ Moreover, the recent data published by PBS indicates an uptick in the output LSMI for -15%
Aug’23, showing a 2.5% increase on a YoY basis. After a 14-month period, LSM finally saw 5%
positive YoY growth in Aug’23. In addition, LSM’s MoM growth reached its highest point in 9- 0% -20%

Apr-23
Mar-23

May-23

Feb-24E
Aug-23

Apr-24E
May-24E
Jan-23

Jun-23

Dec-23E
Feb-23

Jan-24E

Mar-24E
Jul-23

Sep-23
Oct-23E

Jun-24E
Nov-23E
months (Dec’22), up 8.4%. With this, during 2MFY24, LSM achieved a positive growth of
0.5% YoY. We believe that the relaxation of import restrictions has been a pivotal factor in
driving growth of the LSMI. Therefore, we believe, choosing not to raise interest rates
further and instead opting for a monetary policy that promotes easing is likely to strengthen Source (s): SBP, PBS, AHL Research
the growth prospects of the LSMI and overall economy.
▪ On the external front, recent Balance of Payment data demonstrates a significant
turnaround. In 1QFY24, the CAD declined by 58% YoY to USD 947mn, in contrast to a deficit
of ~USD 2bn recorded during the same period in the previous year. This positive change was
primarily attributable to a 34% YoY reduction in the trade deficit. As a result of a contained
CAD, disbursements from IMF/friendly countries and crack down measures, the PKR made a
remarkable recovery, particularly in Sep’23, showing a 6.2% gain against the USD.

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MPS Preview
Status quo likely
Exhibit: PKR against USD Exhibit: Current Account Balance

Trade Deficit
USD/PKR PKR Depreciation (USD bn) Current Account Deficit (RHS) (USD bn)

305.5
325 15.0%
5.3 3.0

287.7
286.6
286.0
285.5
283.8
300 283.8 10.0% 4.5 2.3
267.9
261.5

275 5.0% 3.8

1.5
250 0.0% 3.0
228.5

226.4
223.9
220.9
218.8

0.8
225 -5.0% 2.3
-
200 -10.0% 1.5

0.8 (0.8)
175 -15.0%

- (1.5)
150 -20.0%

Mar-22

Mar-23
May-22

May-23
Nov-21
Jan-22

Nov-22

Jan-23

Jul-23
Jul-21
Sep-21

Jul-22
Sep-22

Sep-23
Dec-22

Aug-23
Oct-22

Apr-23
May-23
Aug-22

Jun-23
Nov-22

Jan-23

Mar-23
Sep-22

Feb-23

Jul-23

Sep-23

Source (s): SBP, AHL Research Source (s): SBP, AHL Research

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 MPS Preview
Money Market yields
▪ In anticipation of a 2-3% interest rate hike in the last monetary policy of Sep'23, banks meticulously positioned themselves for what they believed would be a
further tightening in the monetary policy stance.
▪ However, the outcome of the Sep 14th, 2023 monetary policy announcement by the SBP took everyone by surprise. Contrary to market expectations, the SBP
decided to keep the policy rate unchanged at 22%.
▪ This unexpected announcement prompted a correction in money market yields, which had seen a substantial increase in anticipation of a rate hike.
▪ In the primary market, there has been a significant reduction of ~40-59bps in T-Bill cutoff rates since last monetary policy. Notably, the 3-month T-Bill has
experienced the most substantial decrease, with a cut of 59bps, followed by the 12-month T-Bill with a 50bps decrease.
▪ Even in the secondary market, T-Bill yields have reduced by ~70-106bps as of Oct 19, 2023. Moreover, in the secondary market, PIB (Fixed) yields have also
reduced significantly by ~87-182bps since the last MPS, with the major decline seen in the 3-year PIB.
▪ Furthermore, the yield curve remains inverted, with long-term bond yields consistently falling below those of shorter-term bonds.
Exhibit: Yield Curve Exhibit: Primary market yields (latest vs. previous)

19-Oct-23 15-Sep-23 Policy Rate 19-Oct-23 15-Sep-23 Policy Rate

24.0% 24.0% 22.9% 23.0%

22.6%
21.9% 21.9% 21.9%
22.5% 22.0%
19.6%
21.0% 20.0%
17.8%
19.5% 18.0% 17.3%
16.2%
15.7%
18.0% 16.0% 15.4%

16.5% 14.0%

15.0% 12.0%

13.5% 10.0%
3M 6M 12M 3Y 5Y 10Y 3M 6M 12M 3Y 5Y 10Y

Source (s): SBP, AHL Research Source (s): SBP, AHL Research

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MPS Preview
AHL Survey
▪ In order to find out what the market is expecting in the upcoming monetary policy scheduled
on Oct 30th, 2023, we conducted a survey (poll) taking feedback from various sectors. Our
respondents belong to sectors such as:
▪ Financial services: Banks, AMCs, Insurance, and DFIs
▪ Non-Financial Services/Manufacturing: E&Ps, Cement, Fertilizers, Steel, Textiles, and
Pharmaceuticals.
▪ Following are the results of the survey (poll):
▪ A majority of the total respondents, comprising 80.6%, believe that the SBP will keep the
policy rate unchanged.
▪ On the other hand, 12.9% of the total respondents hold the view that the policy rate will
increase from its current level of 22%. Out of this, 9.7% see a 100bps hike while remaining
3.2% expect a hike of 150bps.
▪ Around 6.5% of the respondents expect a cut of less than 100bps in the upcoming policy.
Exhibit: AHL Survey Poll Results

100.0%
80.6%
80.0%

60.0%

40.0%

20.0% 9.7%
6.5% 3.2%
0.0%
Below 100bps Cut 100 bps Hike 150 bps Hike Unchanged
Source (s): AHL Research

5
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Analyst Certification and Disclaimer – Neutral
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Equity Research Ratings

Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as Jun 2024 for Target Price. In addition, return excludes all type of taxes. For
more details, kindly refer the following table;
Rating Description
BUY Upside of subject security(ies) is more than +15% from last closing of market price(s)
HOLD Upside of subject security(ies) is between -15% and +15% from last closing of market price(s)
SELL Upside of subject security(ies) is less than -15% from last closing of market price(s)

Equity Valuation Methodology

AHL Research uses the following valuation technique(s) to arrive at the period end target prices;
▪ Discounted Cash Flow (DCF)
▪ Dividend Discount Model (DDM)
▪ Sum of the Parts (SoTP)
▪ Justified Price to Book (JPTB)
▪ Reserved Base Valuation (RBV)

Risks: The following risks may potentially impact our valuations of subject security (ies);
▪ Market risk
▪ Interest Rate Risk
▪ Exchange Rate (Currency) Risk

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