AKD Quotidian about — Inflation Preview and MPS Outlook

Karachi, July 27, 2012 (PPI-OT): Inflation numbers for the first month of FY13 are scheduled to be released shortly.

According to AKD Securities, while SPI data suggests a hefty 2.5%MoM decrease in Jul’12, AKD Securities expects CPI to clock in at 10.6%YoY, implying a 0.7%MoM increase vs. the average historical pre-Ramadan spike of 1.6%MoM. AKD Securities attributes this to a decline in petroleum and gas prices even as the Food group is expected to register a sizeable increase (seasonal effect and increasing global food price due to US drought). Based on AKD Securities’ projected Jul’12 CPI, real interest rates stand at +1.4%, which pushes the case for monetary easing particularly if the US releases CSF funds of US$1.2 billion. The money market possibly appears to anticipate monetary easing – with latest T-bill bids skewed towards the 6m and 12m maturities. That said, considering risks remain in the shape of 1) potential high deficit monetization and 2) weakness on the external side, AKD Securities believes the SBP will err on the side of caution and keep policy rate unchanged. On a related note, considering rates are unlikely to rise in the near-term, AKD Securities believes Investors may choose to book profits in banking sector stocks with margins unlikely to expand, particularly as the AKD Banking Universe is already up 46%CYTD.

Positive real interest rates: Recent data indicates a sharp 25%MoM decline in SPI which AKD Securities attributes to lower fuel and selected food items (from a global vantage, the TRJ Commodity Index is up 8%MoM and down 14.21%YoY). As a result, although history suggests an average 16%MoM increase in CPI ahead of Ramadan, AKD Securities expects Jul’12 CPI to clock in at 10.6%YoY/0.7%MoM. Beyond the immediate term, CPI could depict an interim pickup due to Ramadan and a rising NDA/NFA ratio but real interest rates should still remain positive in AKD Securities’ view.

Monetary easing? Positive real interest rates and flagging private sector credit offtake push the case for near-term monetary easing. Recall that the 200bps cut in the DR in FY12 was prompted by declining inflation together with a need to support private sector credit offtake. That said, risks emanate from 1) potential high deficit monetization ahead of general elections and 2) weakness on the external side. Regarding the latter, although the US has reportedly agreed to release CSF amounting to US$1.2 billion (not received as yet), AKD Securities still sees gradual fx reserve depletion going forward. In this regard, AKD Securities understands that the movement of Nato supplies into Afghanistan has yet to achieve full traction due to lack of consensus on detention fee for previously and currently stranded trucks/containers, port demurrage charges, procedural delays and emergent security concerns. Regarding procedural delays, a fresh Customs Clearance Request (CCR) will be required incase shipments go missing or cargo/containers are compromised, pilfered/lost inside Pakistan leading to Pakistan demands for custom duties and taxes. As a result, while the SBP does appear to have room to cut the DR by at least 50bps in the upcoming MPS, it could potentially choose to err on the side of caution. Note that an IMF mission is shortly expected to visit Pakistan where AKD Securities flags post-visit comments from the Fund as a key checkpoint to firm up views on monetary policy trajectory.