Market Guru, Floods may dampen agricultural output

Pakistan’s yield curve, which was upward sloping till October 2021, turned flattish by April 2022, moving towards an inversion since then. The spread is not only reflecting a higher near-term inflation trend, which is expected to normalise in the long-term, but has widened the most, in at least, two decades.

A similar case is also reflected in Pakistan’s international bond yields where earlier maturing bonds (2022/24) are trading at yields close to 45 per cent, while the bonds maturing by 2027 and 2031 trade at yields of 20 per cent — 23 per cent.

While inverted yield curves are relatively short-lived, the last time Pakistan witnessed the same lasted for nine months, in 2019/20. This was also when other countries had last witnessed yield-curve inversion, albeit, for varying time intervals.

This is not a different phenomenon, compared with other countries, owing to the global inflation pressures and recession fears. At present, more than 15 countries have an inverted yield curve, of which most are ‘A’ or higher rated countries by S&P. A similar assumption plays in the global inflation readings, pumped up by higher commodity prices, at present, and expected to recede after a couple of quarters.

To address the higher near-term inflation Pakistan has so far raised the policy rates by 800bps, raising it to 15 per cent in a year. This has also been accompanied by 30 per cent rupee depreciation, which still continues; we observe a similar pattern in regional currencies, as well over strengthening dollar index and macro headwinds over pressure on external account of net importing countries.

For Pakistan, the sharp monetary tightening has begun to reflect in cooling off the overheated economy, reducing the demand in various segments across-the-board.

With a decline in auto, the petroleum oil lubricants (POL) products, cement and fertiliser sales so far, we do not rule out the large-scale manufacturing (LSM) growth limiting to a single-digit in the coming months. This also coincides with an inverted yield curve also signalling depressed economic demand.

This fix can also be prolonged for some more months, owing to the aftermath of the floods on various segment productions. While land soaked in water is expected to delay goods distribution to many parts of the country, lower availability of land and damage from floods is also expected to dampen the agricultural output this year.

We present a brief scenario analysis on the impact of lower LSM and agricultural growth on GDP growth for FY23, where our expected GDP growth falls from 4.2 per cent to 3.2 per cent.