PSX relieved after change of guard at political front

The change of guard on the political front led to an initial relief rally at the Pakistan Stock Exchange (PSX) (up 3.7 per cent for the month at one point), as this was expected to bring back the much-needed attention and ownership of macro policies, which had been missing in the last few weeks, amid the political noise.

However, the initial relief rally faced hiccups, as the political noise failed to die down, while macro policies also remained unclear, resulting in the KSE-100 closing +0.7 per cent on a month-on-month basis in April 2022, taking the four months of CY22 performance to +1.5 per cent. However, April witnessed better participation with higher average volumes in earlier sessions, taking the average trading to 40 per cent MoM.

With the Pakistan Muslim League (PML-N) now taking the charge of the lower house, the present government needs to show resolve and provide the market clarity on critical policy matters.

Just before the government changed hands, the State Bank of Pakistan (SBP) raised the key policy rate to 12.25 per cent (+250 bps) from 9.75 per cent and had termed it ‘decisive’ to curb expectations of further hikes. The policy impasse meant that the secondary market yields have continued to rise with the Kibor approaching 15 per cent level in the last days of April 2022.

The key fiscal challenge is rolling back subsidy on retail fuel prices announced by the outgoing government. While the new government has stressed the need to remove these subsidies in a targeted manner, political compulsion and festive season constrained them from making a move as yet, resulting in a subsidy of Rs30/litre on petrol versus an earlier commitment to the International Monetary Fund (IMF) to collect Rs30/litre levy on the same.

Swift action on the fiscal side is needed to keep the rates under control and also unlock respite on the external front.

Last month’s balance of payments position took a huge toll on the SBP’s forex reserves, reducing by $4 billion to a two-year low of $12 billion over the current account deficit of $1 billion and a delay in the debt rollover from China.

The depletion continued in April 2022, as the foreign exchange reserves of the central bank reach $10.6 billion, taking a toll on the rupee movement against the dollar, declining to its all-time low of Rs188.

More pressure can be exerted in the coming months with the recent Indonesian ban on palm oil exports and reported $4 billion additional scheduled payments by the SBP. The resumption of negotiations with the IMF on their next visit to Pakistan in May 2022 has been welcomed with the prospective extension of the programme to June 2023 and enhancing it from $6 billion to $8 billion.

In addition, friendly countries like Saudi Arabia and the UAE could also respond positively to the IMF programme coming back on track. Sorting out the fiscal situation appears to be the first milestone to that end.

The results season for March 2022 quarter kicked off with improvement in the banking sector and oil marketing companies, albeit flat and declining margin in the cement and steel sectors.

The sectors continue to feel the brunt of inflation and higher commodity prices, as the announcements of price rise were witnessed in the steel, fertiliser and auto sectors. To recall, price increases in these sectors were also reported in March 2022, in addition to cement price hike.