Macro: Near term boost in reserves likely; favours DR cut
Based on FY15 budgetary estimates for external loans and repayments, and KASB Securities Limited's current account deficit estimate of US$2.1bn, KASB Securities Limited believes FX reserves are likely to increase further to ~US$17bn by Jun-15 from estimated US$14bn at Jun-14.
Reserves are expected to increase in near term (from current US$13.4bn to US$14bn by end of Jun-2014) on the back of (1) successful UBL privatization (~US$311mn from foreign participation) and (2) IMF's fourth tranche (US$550mn) expected in Jun-14.
As a result, SBP's reserves should improve to US$9.0-9.5bn by Jun-14 which provides 2.4-2.5 months of import cover. A gradual increase in import cover to 3 months, while positive for investor sentiments, could also lead to discount rate cut by the central bank (in Sep or Nov), in KASB Securities Limited's view.
On the exchange rate front, KASB Securities Limited maintains KASB Securities Limited's view of relative stability in FY15E; with 2% depreciation only (vs 10%/4% in FY12/13).
External loans to help boost reserves to US$17bn by Jun-15
Finance Minister Ishaq Dar recently commented that foreign exchange (FX) reserves are likely to cross US$14bn by end of June 2014. Latest position of FX reserves stands at US$13.4bn (as of 6 June), where reserves held by SBP and banks are at US$8.6bn and US$4.8bn respectively.
Based on govt's projections for external loans, grants and repayment, and KASB Securities Limited's current account deficit estimate of US$2.1bn in FY15E, KASB Securities Limited believes FX reserves are likely to reach US$17bn by Jun-15, assuming reserves position at end of Jun-14 at US$14bn.
Looking ahead, KASB Securities Limited believes increase in import cover is likely to lead to SBP becoming more inclined to cut discount rate. At the same time, it reinforces KASB Securities Limited's view of relative stable exchange rate outlook for FY15E/16E (2% depreciation per year).
Near term increase in reserves should bode well for DR outlook
While SBP's FX reserves currently stand at US$8.6bn (import cover of 2.3-months), KASB Securities Limited sees uptick in Jun-14 to US$9.0-9.5bn (2.4-2.5 months of cover) on the back of (1) recent UBL secondary public offering which could provisionally lead to foreign investment worth US$311mn (as per media reports) and (2) US$550mn as fourth tranche post-IMF Board's approval in late June.
A gradual increase in import cover to 3 months (at level of US$11.2bn SBP reserves), while positive for investor sentiments, could also lead to discount rate cut by the central bank. This reinforces KASB Securities Limited's view that discount rate would be cut in latter half of 2014 (Sep or Nov) where import cover should be a key variable to track.
External stability to strengthen, even assuming KASB Securities Limited's conservative base case
The government has projected loans worth US$6.3bn including US$1.8bn/US$2.0bn in project/program loans. Program loans have only recently been resumed by ADB/WB after Pakistan entered IMF program and remain contingent on strict adherence to IMF targets. In addition, this includes plans to launch another Eurobond (US$500mn) and Sukuk bond (US$500mn) in FY15E.
Given successful Eurobonds launch in FY14 (worth US$2bn) and currently trading at a significant premium, this target appears achievable and another issue can be launched at a lower yield.
On the other hand, targets that may fall short of expectations are (1) privatization proceeds (US$2bn) and (2) others including China SAFE deposits of US$1bn which were also projected for outgoing year. In KASB Securities Limited's base case, KASB Securities Limited assumes privatization proceeds of US$1bn and no inflow under the "others" head.
Â€¦but maintain stable exchange rate outlook
Despite ambitious projections on external front by the govt, KASB Securities Limited believes realization of project/program loans as well as successful Eurobond and Sukuk bonds could boost FX reserves. Consequently, KASB Securities Limited maintains KASB Securities Limited's view of relatively stable exchange rate in FY15E; with expected 2% depreciation only (vs 10%/4% in FY12/13).