Forex, Rupee value may slide down

After a period of relative stability due to strong current account position in the fiscal year , the Pak Rupee has come under strain against the dollar from the onset of fiscal year 2011-12, depreciating by 1.9%. Major reason being the

i) weakness in the CA (-$189mn in 2million fiscal year 2010-11),

ii) restoration of forward cover facility in March, 2011

iii) IMF’s SBA repayment of US$1.2bn due in 2 half of fiscal year 2011-12 with government potentially not seeking new loan.

In our base-case with forex reserve easing down to $15bn by June, 2012 (import cover of approx. 5-months), we estimate Pak Rupee to depreciate by 4-5% in Pak Rupee .5-90.4 versus the dollar. This is inline with last 10-yrs (fiscal year 2002-11) average depreciation of 4.1%, while far better than last 4-yrs (fiscal year 08-11) and 20-ys (fiscal year 1992-11) average depreciation of 10.1% and 7.2%, respectively.

Even in this scenario, we estimate forex reserves to ease down to $15bn by June, 2012, thus providing an import cover of 5-months as against a mere 6-weeks back in FY09, while current account is forecasted to be 1-1.5% of the GDP in FY12 with adverse commodity price shock a major risk to our projections. Furthermore, abrupt weakening of PKR could caution central bank for further monetary easing in the upcoming MPS (08 Oct). However, below than anticipated inflation (Aug-11 CPI at 11.56%) and further reduction in CPI on cards due to high base effect make a strong plea for the continuation of monetary easying.

With USD dominated product pricing, we expect E&P sector to benefit from the prevailing phenomen. Similarly, IPPs’ ROE component is indexed to PKR/US$ partiy. With rising PKR/US$ parity, Pakistan ’s textile exports would yield better returns in absolute terms benefiting export oriented cos.

Within chemicals, LOTPTA would enjoy higher primary margins and custom duty in absolute term. This would more than off set the exchange losses in imports of PX, thus bodes positive for the company.

For OMCs, cash flow impact would be neutral in case of deregulated products like furnace oil since OMCs pass on the impact to end consumers. In case of regulated products on which margins are fixed, the impact is negative. Hence neutral-negative for OMCs.

After continuous rise in Japanese yen, recent Pak rupee deprecation would further augment the import bill for the Auto assemblers as partial import cost is locked in US$. This would reduce the gross margins as passing on cost pressure would remain under question in regulatory risk environment.

The recent depreciation of Pak rupee against USD would have a negative impact on cement sector as coal, major component, is an imported factor. However, this impact would nullified for the companies like Lucky, having higher export share in the revenue mix.

For fertilizer sector, the Pak rupee devaluation will have no major impact on local urea manufacturers since urea prices are already 50% discount to international prices. However, for DAP producers (like FFBL), the Pak rupee devaluation bodes slightly positive given the fact that higher cost on imported phosacid will be more than compensated by the gain on DAP prices.