PakistanMoneyMarketStrategy

AnEyeonGovernmentInvestmentBonds
SelectEconomicIndicators
CPIInflation

Jun13YoY

5.9%

SPIInflation

Jun13YoY

4.6%

NFNEInflation

Jun13YoY

7.8%

Reserves

on5Jul13

USD10.5bn

Remittances

11MFY13

USD12.7bn

TradeBalance

11MFY13

USD(13.8)bn

CurrentA/cdeficit

11MFY13

6MonthKIBOR
(OfferRate)

17Jul13

9.07%

10YearPIB

17Jul13

11.41%

USD(2.0)bn

DiscountRate

Persistent wellbehaved inflation and a further slowdown by the end of fiscal year
(4QFY13average5.6%comparedto8.1%inpreceding9MFY13)ledtheStateBankof
Pakistantocutthepolicyratesby50bpsto9%

Withthecutbeingconsideredastheconclusionofmonetaryeasingcycleontheback
of upcoming uptick in inflation (factors mentioned below), the failure of
materializationofahighercutledthelongtermgovernmentbondstoretreatfrom
theirearliergains

ThedebatecenterednotonIfbutonwhenandbyhowmuch,themoneymarket
hasmoreorlessacceptedthatFY14willbringwithitthemonetarytighteningcycle

AnotablespreadbetweenDRandinflationwhichwouldtakeitsduecoursetofillup
despite seasonal impact, we believe the discount rates would remain in the same
rangetillDec13

However 2HFY14 will start with a 50100bps increase in DR jacking up the discount
rateto9.510%

Inourassumptionwheninterestratesareexpectedtoremainsameatleastinnext
two monetary policies (Aug13 and Nov13), we believe the yields in the secondary
marketswillremainthesametrajectory

However we believe, the capital gains should be settled on any upside while new
positionsshouldbemaintainedinshortterminstruments

9.0%

InflationBreakup(YoY)
CPI

WPI

SPI

NFNE

14
12
10
8

Thursday July18,2013

TheBackground

4
2
Jun13

Apr13

May13

Mar13

Jan13

Feb13

Dec12

Oct12

Nov12

Sep12

Jul12

Aug12

Jun12

YieldCurveMovement

Sincetheinitiationofmonetaryeasingcycle,theyieldshaveunsurprisinglycomedown.A
cumulativecutof450bpsinlast2yearshaveloweredtheyieldsoflongtermgovernment
bondsby300460bpsoftenurerangingfrom210years.Thesuccessivecutsinpolicyrates
despitebeingintheIMFprogramwereinducedbytheslowdownininflationespeciallyin
FY13(averaged7.4%comparedto11%inFY12;realinterestrates:1.6%)primarilyledby:
1) ChangeinindexbasingfromFY01toFY08

17Jul13

2) Wellbehavedfood,fuelandhouserentinflationand

17Jul12

3) BaseaffectespeciallyaftermassiveFY09inflationlevels(averagedat20.8%)

14%

Though the cuts were intended to spur an uptick in private lending, law and order
situationandpowershortageskeptthelendingrestrictedtoworkingcapitalrequirements
only. Having said that, the biggest borrower in the economy i.e. the Government of
Pakistan (GoP) stood as the biggest beneficiary as their lending cost was reduced
massively. Had the interest rates been at 14% (the case in FY11), the governments
borrowinginFY13wouldhavebeenhigherby~PKR372bninFY13.

13%
12%
11%
10%
9%
30YR

15YR

9YR

7YR

5YR

3YR

1YR

6M

3M

1M

ON

8%

Ontheotherhand,theinitiationoftheeasingcyclebenefittedcommercialbanks,funds
and corporate entities by affording hefty capital gains on their long term government
bonds.

Thecurrentscenario
FurqanPunjani
furqan.punjani@bmacapital.com
+92111262111Ext:2064

Persistent wellbehaved inflation and a further slowdown by the end of fiscal year
(4QFY13 average 5.6% compared to 8.1% in preceding 9MFY13) led the State Bank of
BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262111

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.11

Pakistantocutthepolicyratesby50bpsto9%.However,themoneymarketparticipants
wereexpectingthecentralbanktoconcludethefiscalyearwithadeepercutamid:
1) Asteepspreadof160bpsbetweenpolicyratesandaverageFY13CPIinflation,
2) Aperceptionalchangeininvestmentenvironmentafterchangeinthegovernment
3) UnlockingofexternalinflowsfrommiddleeastasPMLNenjoysabetterrelationship
withthesecountriesand
4) PMLNsprobusinesspoliciesmaycompelthemtomanagefundsinsuchamanner
thatpolicyratesmayremainlower
Moreover, with the cut being considered as the conclusion of monetary easing cycle on
the back of upcoming uptick in inflation (factors mentioned below), the failure of
materializationledthelongtermgovernmentbondstoretreatfromtheirearliergains.To
mention, the yields have come up by 4066bps (510 yrs) since the monetary policy
announcement.
RecallthatweforecastedthesameretreatinthePIByieldsandadvisingtheparticipants
to book some capital gains in our report titled Secondary Market Ignoring Rare view
datedJune04,2013onthebackof:
1) Reversalininflationcycleamidinitiationofpowertariffincrease
2) Reentry into IMF program compelling the central bank to follow the changing
inflationarytrendsandreductioninOMO
3) Mopping up of cash from secondary markets by the Government to fund energy
sectorinjection(thoughthisfailedtomaterializeasgovernmentpreferredtoborrow
fromcentralbank).
YieldCurveComparisonBeforeandAfterDRAnnouncement
17Jul

4Jun

3Apr

13
12
11

30years

20years

15years

10years

9years

8years

7years

6years

7
5years

4years

8
3years

2years

1year

6Months

10

3Months

1Month

Source:BMAResearch

Whatsahead?
WiththedebatecenterednotonIfbutonwhenandbyhowmuch,themoneymarket
hasmoreorlessacceptedthatFY14willbringwithitthemonetarytighteningcycle.And
to have a clear understanding of this, we would here highlight factors that will play the
decisiveroleforthepolicyratesoutlook.
BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262111

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.22

Thefactorsthatcryforfurthereasing,thoughweakly,are:
1) Driedupprivatelendingrestrictingtherealeconomicgrowth
2) CertaintyonnontaxreceiptsincludingUSD800mnfromEstisalat,USD1.2bnfrom3G
AuctionsandUSD500mnfromexchangeablebonds
3) InflowofsupportfundsfromUS(USD1.2bnforCSF)andADB(USD600mnbyDec13
end)
4) ReentryintoIMFtoeasesignificantpressureoffexternalaccount
5) Bettertaxcollectionafterintroductionofindirecttaxmeasures
Andnowourfavoriterearview(whichactuallyhasnowbecomethefrontview)iethe
factorsadvocatingaDRhike:
1) UptickininflationduringFY14Eonthebackofnewlyintroducedrevenuemeasures,
powerandgastariffincrease,PKRdepreciationandlowbaseaffect.Webelievethe
headline inflation to clock at 9.26% in FY14E (1HFY14 average 8.67% and 2HFY14
average9.86%).Thiswouldslidetherealinteresttonegative26bpsintheeconomy.
2) Reentry into IMF program (in 1QFY14) would compel the government to conclude
theoutstandingOMOamount(approx.PKR~250bn)
3) Reentry would also compel the central bank to devotedly eye rising inflation levels
anddecisiveactionslikerebuildingUSDreserves&refrainingfrominjectingUSDinto
thesecondarymarket,leadingtoasteeperPKRdeprecationinthenextfewweeksof
theprogram
4) Tax and power sector reforms would take their due implementation time before
impacting the liquidity situation of the government and hence power subsidy may
remain at ~PKR300bn for FY14E, compared to ~PKR450bn in FY13. To mention, the
IMFrequiresthegovernmenttoendsubsidiesinthenext3years.
Much of the DR movement is dependent upon two factors i.e. inflation and IMF EFF
program (details to emerge later, IMF review report in next couple of weeks will also
provide more understanding); these will be become visible post Ramadan. The uptick in
inflationduringFY14(tobeinitiatedbyRamadanfactorfollowedbypowertariffpasson)
would make it difficult for the policy makers to continue with status quo for long, we
beleive.
Havingsaidthat,withanotablespreadbetweenDRandinflationwhichwouldtakeitsdue
coursetofillup,thediscountratesshouldremaininthesamerangetillDec13.However
2HFY14willstartwitha50100bpsincreasejackingupthediscountrateto9.510%.
Inourassumptionwheninterestratesareexpectedtoremainsameatleastinnexttwo
monetarypolicies(Aug13andNov13),webelievetheyieldsinthesecondarymarketswill
remaininthesametrajectory.However,webelievethecapitalgainsshouldbesettledon
anyupsidewhilenewpositionsshouldbemaintainedinshortterminstruments.

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262111

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.33