Brief Note

REP-300 July 9, 2019

State Bank of Pakistan

Analyst Briefing Notes
SBP held its analyst briefing today on July 9, 2019 to improve its communication with different stakeholders along with
clarification on IMF staff document released yesterday. This dialogue will be a regular event going forward. The briefing was
led by Dr. Raza Baqer, Governor of the SBP.
Brief Takeaways
 Economy was growing on the back of rising consumption, whereby savings were declining, resulting in higher Current
Account Deficit (CAD) reflecting higher saving investment gap. REER had been continuously appreciating and under the
fixed exchange rate regime, a monthly CAD of upto USD 2bn was being incurred.
 On the fiscal side, the revenue-expenditure gap fueled a rise in public debt.
 SBP took proactive measures to resolve these challenges such as depreciation of exchange rate was allowed that reduced
monthly CAD and interest rates were increased in advance to control inflationary pressure.
 Non-oil CAD has come down close to zero from approximately USD 1bn monthly. Saudi Oil facility will further help finance
the oil related CAD.
 The governor stated that a sustainable CAD does not mean a CAD of zero. A sustainable CAD is the one which can be
financed through financial and capital inflows. Zero CAD is not the target level. Similarly, REER is showing the level from
base year, and therefore does not show complete picture. A lot of adjustment has taken place in terms of REER.
 Deteriorating CAD was the primary reason behind increasing swaps and foreign exchange liabilities that led to decline in
Net International Reserves (NIR). Reduction in CAD is expected to resolve these problems.
 Timing of the IMF program is right because the trend shows that CAD is on a lower trajectory. Overall CAD has almost
halved from USD 2bn monthly. Sources of compression of imports include reduction in import of services (including
traveling), food, vehicles and machinery. Foreign traveling is a luxury, and is affected tremendously. Imports reduced
aggressively, while increase in exports is a gradual process due to time taken for expansion and other structural issues.
 Monetary policy decisions are made by MPC, which is an independent body. Updated Information is provided to MPC by
the SBP. Inflation projections are being made which are kept under consideration. Forward Real interest rates are also
kept under consideration, not past real interest rates. Technical data is provided by SBP and there is no representation of
Ministry of Finance on the MPC. However, regular meetings of ECC take place where SBP has representation. Responding
to a question regarding defending the level of the currency the SBP said it cannot disclose information regarding amount
used for intervention.
 Fiscal measures for primary deficit reduction are a better measure of discretionary spending, caused by deficit reduction
measures including higher collection from sales tax, income tax, FED, customs duty etc primarily by increasing the base.
Expenditure reduction is undertaken via freezing defense expenditure.
 Other fiscal measures include zero borrowing from SBP, re-profiling of government debt and rebuilding the yield curve.
Open market operations were allowed which supported the government’s efforts to refinance its debt at longer maturities.
 Liability management operations undertaken to improve debt profile while coordinated efforts are being made to bring in
liquidity in the long term debt.
 While giving a clarification on the exchange rate regime, the SBP commented that keeping a fixed exchange rate was not
in our best interests, and there is no agreement on any level of exchange rate. IMF does not want a fixed exchange rate,
therefore, it would not want to target any level of exchange rate. Free float is also not desirable where no intervention is
allowed in the currency markets. Sometimes sentiments take precedence from fundamentals, whereby authorities will
bring back the market to fundamentals. SBP would allow demand and supply factors to determine the exchange rate while
it will also retain the right and ability to intervene if it senses disorderly market conditions.
 Regarding volatility in exchange rate the governor stated that it is not unique to Pakistan. There are more than 50 or more
emerging markets which are managing currency this way. Initially there is expected to be more volatility which is expected
to tame down gradually. Intraday volatility is expected to come down.
 The economic outlook after taking these policy actions has improved considerably – CAD has halved and continues to fall
 CAD is lesser than countries facing balance of payment stress.
 There has also been a qualitative improvement in outlook for inflation.
 Output gap is also kept under consideration to determine whether the economy is over heated.
  Pakistan should also be open for investment in rupee denominated fixed income instruments and SBP is looking at taxation
issues for further clarity. Pakistan would like to attract foreign currency flows into its rupee debt in treasury bills. The country
has had flows in treasury bills previously but the size was very small.
 SBP is confident on the sources of foreign currency listed in the financing plan. IMF itself being the lender of last resort,
ensures that the financing plan is viable and practical. No lender of last resort would have given money to Pakistan if the
financing plan was not feasible.
 Regarding choosing core or headline inflation to determine interest rates, SBP looks at core inflation and headline inflation
both.
 FATF slippage could lead to suspension of the program. A lot of communication has been with the government regarding
this. There is a team of people working on the substance of this issue. Pakistan wants to increase documentation and
avoid abuse of the financial system. Political capital to be used to take support from member countries.
 Talking about the comparison between Egypt and Pakistan, the governor stated that both are very different cases. Egypt
had kept the exchange rate flat for a long time which meant that the pressure on exchange rate was much higher than
Pakistan. Pakistan is entering the program with a declining CAD, unlike Egypt. Egypt does not have Euroclear either
despite the fact that they attracted large investment.
 Treasury Single Account will be implemented in a gradual and phased manner and the transition will be orderly.
 We are not part of Jpembi (JP Morgan Emerging Bond Index) which has some requirements

Analyst:
Samiullah Tariq
sami.tariq@arifhabibltd.com Contact: +92-21-32462742

www.jamapunji.pk
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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 December 2019 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 +10% from last closing of market price(s)
HOLD Upside* of subject security(ies) is between -10% and +10% from last closing of market price(s)
SELL Upside* of subject security(ies) is less than -10% from last closing of market price(s)
* Upside for Power Generation Companies (Ex. KEL) is upside plus dividend yield.

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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