Karachi, July 27, 2021 (PPI-OT): Pakistan Economy: MPS – Balancing external vulnerabilities with need for growth

MPC meeting of the Central Bank is due today where we expect the committee to maintain Status Quo citing risks from COVID’s fourth wave. However, an increase of 25bps cannot be completely ruled out given pressure on exchange rate (exacerbated by uncertainty around IMF program) and inflationary risks being skewed to upside.

Inflation for FY22 is expected to be recorded at 8.1% where in our base case we have assumed Govt. to collect ~58% of the targeted petroleum levy of PkR600bn at an avg. oil price of US$65/bbl, while given limited visibility on IMF mandated utility adjustments, 5% hike in electricity prices is incorporated in Aug’21 and Sep’21 each.

For Jul’21, inflation is expected to recorded at 8.9%YoY vs. 9.7%YoY in Jun’21 owing to high base effect. On a monthly basis, inflation is likely to be +1.7%MoM – the largest single increase since Oct’20.

An increase, if any, is unlikely to materially alter Pakistan’s growth fundamentals, we continue to like thematic plays such as Cements, Steel, and Construction-Allied. The recent round of devaluation should also bring Textiles into play while expectation of rate hike could bring interest in Commercial Banks.