There are many real-life ‘odds-defying’ moments. One revealing in real-time is the Pakistani Rupee. In the last one month, Rupee strengthened by more than Rs.3/$ to close at 282.50 against all odds. A key reason is that SBP is carrying out a zero (current account deficit (CAD) policy, prompting Banks to strictly match outflows with inflows.
Due to this, the current account for last month was mildly positive. Reserves have taken a dent due to debt serving and repayments but largely remained stable, hovering around $12bn, and slightly down from its peak of $12.9bn in July, despite $1.16bn CAD for the current 5 months.
This policy of maintaining zero CAD stays at a huge cost, which is zero GDP growth. However, the current setup is prioritizing stability over growth whilst trying to cool down inflation.
Forex Obligations
Forex obligations of $24bn are worrisome, of which approximately $6bn is a funding gap (factoring in repayments, rollovers, and known bilateral & multi-lateral commitments) for the next 7 months. With getting funds being tremendously tough from foreign markets, this will continue to bring a severe challenge.
SWAP Premiums
SBP has managed to support swap premiums & is presumably doing sell/buy swaps in the markets at the behest of the IMF. This can be seen in SBP’s liquidity profile, in which the net short positions have shrunk from $4.5bn (June) to $2.9bn (Oct).
Currency Ideas
Moreover, with payment values getting strong, some exporters are reserving proceeds till Jan-end because the position for USD-PKR is stable. Not surprisingly, they are avoiding the election months and the presumable change in governments & consequently policies thereafter.
USDPKR seems to be hovering around the 282 mark for another month or so. This cautiously optimistic outlook is contingent on IMF approval, containing inflation & therefore, REER, and political stability.
Pakistan Stock Exchange (PSX)
The KSE100 is currently having a nosebleed, losing about 5k points in the last 7 sessions. Interest rate reduction is like steroids for the stock market, and as soon as market investors understand that exorbitant interest rates would prevail for a longer than expected duration, sentiment might change. Investors have realigned their rate cut expectations from the current month to at least the end of April – a huge setback to leveraged positions that haven’t seen any fresh liquidity coming in.
Analysts have cited other reasons for the sharp correction, ranging from profit-taking, hitting stop losses & margin calls, and political instability over the upcoming corrections. Some even argue that this whole rally & anti rally was a case of pump & dump manipulation.
Fed Rate Cuts
However, markets are turning increasingly assertive that the Federal Reserve will begin reducing interest rates in 2024. The first decline is predicted at the March 20 monetary policy session. While the market is projecting around 6 rate cuts in the year 2024, and shrewd market players are factoring in nominally 3 rate cuts.
