Dollar touches new peak against Pak Rupee; third depreciation against dollar since December

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KARACHI: Dollar touches new peak against rupee after third devaluation in local unit since December 2017. The depreciation is due to debt repayment and trade deficit, experts said on Monday.
Analysts at Topline Research said that Pak Rupee devalued by 3 percent-4 percent in early hours of the interbank market today to Rs119-120. It reportedly went as high as Rs122 (4.6 percent) and then came back down to Rs119-120 as per sources. To recall, Friday’s close was Rs115.62.
This would be the third time that Pak Rupee has devalued during current fiscal year. The government had allowed devaluation in Pak Rupee by around 5 percent on Dec 8, 2017 to Rs110 and then again by around 4.5 percent to 115 on Mar 20, 2018. During the last 10 years, Pak Rupee has devalued annually by around 5 percent.
The analysts said that this is much needed as Pakistan’s external account continues to deteriorate as the external Current Account Deficit (CAD) remained higher than our expectations.
For the period July-April 2018, CAD increased to a whopping $14 billion (4.4 percent of GDP) compared to $9.3 billion (3 percent of GDP) last year.
For FY18, they expect CAD to be in the range of US$17-18 billion (5.4 percent-5.8 percent of GDP) compared to earlier estimates of around $16 billion (5.1 percent of GDP).
As a result, Pakistan foreign exchange reserves (reserves with SBP) also declined from $16.1 billion in Jul 2017 to $10.0 billion as of Jun 1, 2018, which is equivalent to 2 months of import cover.
Other than higher than expected deterioration in external account, recent currency movement of Pakistan’s trading partners have been contrary to expectations. Major currencies of our trading partners have weakened against the USD by higher than expectations.
They said the Real Effective Exchange Rate (REER) index is now estimated to be in the range of 113-114 (before this round of devaluation) as compared to earlier estimate of 110. This has not fallen below 90 during the last 10 years. Prior to the Dec 8, 2017 devaluation, the REER index was 125.
Based on upward estimation of REER index, they revised exchange rate assumption for FY19. They expect the Pak Rupee to devalue to Rs131 by Jun 2019 as against earlier expectation of Rs127.
Given that devaluation would result in inflation, we expect State Bank of Pakistan (SBP) to increase its Policy Rate from current 6.5 percent to 8.25 percent (up by 175 basis points) by June 2019. This would be positive for local banking sector. Every 1ppt increase in interest rates leads to 6 percent rise in banks’ earnings.
A weaker Pak Rupee will be largely positive for listed sectors including Oil & Gas Exploration, Power (IPP’s) and Textiles due to dollar denominated revenues. On the other hand, Auto Assemblers and Cements could be negatively affected as it could lead to lower margins for Autos and higher coal prices, which could affect Cement company margins. Furthermore, we do not expect any major impact on Insurance, Fertilizer and Steel Sectors.