Pakistan's tough decisions on economy to pay dividends: Fitch

[Rinnegan Sasuke]

KARACHI: Fitch Solutions, a US-based global research house, expects stability to return in Pakistan’s economy after the government making two tough decisions in the past week.

The two steps taken by the government include the aggressive key interest rate hike by 1.5 percentage points to 91-month (eight years) high at 12.25% on Monday and the 7.5% depreciation in rupee in the past few days to Rs151.95 against the US dollar in the interbank market on Wednesday.

“The aggressive pre-emptive hike will help to cool inflationary pressures over the coming months,” the research house said in a commentary.
“The 150 basis points interest rate hike will likely support a stabilisation in inflation over the coming months,” it noted.

The inflation will remain in single digit at 7% in the ongoing fiscal year and tough decisions will help offset the impact of higher international oil prices in the domestic economy.

The research house foresaw no further rate hikes during the remaining seven months of the current year. “Given our expectation for inflation to stabilise, we at Fitch Solutions forecast the SBP to maintain its benchmark interest rate at 12.25% throughout 2019,” it said.

The rate hike followed Pakistan’s agreement with the International Monetary Fund (IMF) on a bailout package (worth $6 billion) on May 12.

According to the SBP’s monetary policy statement, the rate-hike decision was driven by underlying inflationary pressures from higher recent month-on-month headline and core inflation, the recent exchange rate depreciation, an elevated fiscal deficit and its increased monetization and potential adjustments in utility tariffs.

Rupee stability

Fitch Solutions also anticipated a return of stability in the rupee-dollar exchange rate following the real interest rate strengthening to 3.5%.

“The interest rate hike has brought the real interest rate firmly into a positive territory of around 3.5%, which should help to stabilise the rupee and hence the prices of imported goods.”

Fitch Solutions had predicted rupee deprecating to Rs148 against the greenback last Friday (May 17) in its commentary.

Negative fallouts

On the flip side, the rate hike and rupee depreciation decisions will discourage new investment in the country and there will be further economic slowdown, according to Fitch Solutions.

The research house said it was considering revising down Pakistan’s rate of gross domestic product (GDP) to factor-in possible impact of the recent two decisions soon.

“Given the aggressive hike in interest rates, we believe that Pakistan’s GDP growth is set to slow over the near term. In addition to the likely fiscal consolidation measures agreed as part of the IMF Extended Fund Facility deal, the 150bps interest rate hike will discourage investment as well as consumer spending,” it noted.

“We forecasted the real GDP growth to slow from 5.4% in the fiscal year 2017-18 to 4.4% in the fiscal year 2018-19, but will be revising down our forecast within the coming weeks.”

The combination of rising interest rates and slowing economic growth will also discourage private sector borrowing which should also help in curbing inflationary pressures.

Commercial banks

The research house observed that with a weaker demand for credit from the private sector, commercial banks could be more willing to lend to the government at the new higher interest rate, thereby potentially improving the transmission mechanism of monetary policy.

Given the higher costs of borrowing and the likely reduction of public spending following the finalisation of the IMF deal, credit growth to the government (which rose by 14.5% year-on-year in April from 11.8% year-on-year in April) is likely to slow down.

Moreover, there is a chance that the interest rate hike could improve the interest rate transmission mechanism in the economy. According to the SBP, the government’s heavy reliance on the SBP for funding was because of the reluctance of the commercial banks to lend to the government, which had “diluted the impact of previous monetary tightening”.

https://tribune.com.pk/story/1978504/2-pakistans-tough-decisions-economy-pay-dividends-fitch/

 

[Adijazz1706]

Hopefully the awaam can understand all this

 

[Bewal Express]

Hopefully the awaam can understand all this

Do you really think the Noora and PPP created education system will ever give the people the tools to understand how they have systemically destroyed the PK economy for their own benefit?

 

[CricVet]

Do you really think the Noora and PPP created education system will ever give the people the tools to understand how they have systemically destroyed the PK economy for their own benefit?

I am sorry, the gift of ignorance is from the feudal of Pakistan given at its creation. How else would they have those great slaves? Bhutto + Zia assured its status while the rest of the brigade has taken it to a level with the lack of Population control to a point where only a strong economy and an honest leader like Imran can turn this around. Imran to me is the last hope of Pak.

 

[sshakir411]

It was always going to get worse before it got better but thanks to the dumb Pakistani awaam there’s been tons of misinformation that has hindered swifter progress.

 

[Savak]

Expecting journalists like Najam Sethi to say that this US thinktank is on the PTI and Establishment payroll.

Funny how he never made these accusations against the PML N and PPP when they were in power

 

[Angrez Pakistani]

A lot of word salad here by the IMF which is understandable. They don't want to give a simplified version to the ppl because the jig will be up. By hiking the interest rates, our national earning will take a huge hit in the long run, especially when it comes to the compound interest rates. A lot more people will default on their loans while their purchasing power will also be reduced. Without new investment, we'll again be going back to IMF within the next 10 years, if not sooner. Behold and weep for the future of Pakistan. There will be market crashes, with people investing in the housing sector, which will create the housing bubble and the day it bursts, the $hitt will hit the fan so hard that the government won't be able to withstand the consequences. Prices of commodities will increase. Median wage will decrease. Infant mortality will rise and life expectancy will reduce drastically. We'll either see the resurgence of traditional political parties and corrupt political parties with high and mighty promises or we'll see a total collapse of the democracy. I've lost all hope.

 

[cric_man]

A lot of word salad here by the IMF which is understandable. They don't want to give a simplified version to the ppl because the jig will be up. By hiking the interest rates, our national earning will take a huge hit in the long run, especially when it comes to the compound interest rates. A lot more people will default on their loans while their purchasing power will also be reduced. Without new investment, we'll again be going back to IMF within the next 10 years, if not sooner. Behold and weep for the future of Pakistan. There will be market crashes, with people investing in the housing sector, which will create the housing bubble and the day it bursts, the $hitt will hit the fan so hard that the government won't be able to withstand the consequences. Prices of commodities will increase. Median wage will decrease. Infant mortality will rise and life expectancy will reduce drastically. We'll either see the resurgence of traditional political parties and corrupt political parties with high and mighty promises or we'll see a total collapse of the democracy. I've lost all hope.

So what is your solution?

 

[Pete Rose]

Growth will return in year 3 or 4. till then it will be tough. PTI re-election prospects will take a lot of damage in the interim.

 

[MenInG]

Fitch Ratings said on Wednesday that it believes Pakistan’s recent policy adjustments measures would aid in curtailing rising external risks.

Fitch Ratings Inc, an American credit rating agency and one of the 'Big Three' along with Moody's and Standard & Poor's, added that ongoing reforms, if sustained, could create positive momentum for the sovereign’s ‘B-’ rating, which it affirmed in May 2021 with a 'Stable Outlook'.

“Fitch Ratings believes Pakistan’s recent policy adjustments and demonstrated access to external financing, as well as its commitment to a market-determined exchange rate, offset rising external risks from a widening current-account deficit,” the agency said in a report titled, 'Reforms and Financial Support Ease Pakistan Sovereign Risks' published on Wednesday.

The report comes just days after the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) decided to raise the policy rate by 150 basis points to 8.75%. The MPC was of the view that risks related to inflation and the balance of payments have increased while the outlook for growth has continued to improve.

We think external liquidity pressures should be manageable in the near term, despite the wider current-account deficit, given Pakistan’s adequate foreign-exchange reserves and success in accessing financing: Fitch

Meanwhile, Fitch said that the ongoing reforms, if sustained, could create positive momentum for the sovereign’s ‘B-’ rating, "which we affirmed in May 2021 with a Stable Outlook".

Fitch forecasts that Pakistan’s current-account deficit in the ongoing fiscal year is set to be wider than their previous forecast of 2.2% of GDP, owing to increases in global energy prices and a strong domestic recovery which “have put additional strains on Pakistan’s external position”.

“We think external liquidity pressures should be manageable in the near term, despite the wider current-account deficit, given Pakistan’s adequate foreign-exchange reserves and success in accessing financing,” said Fitch.

Speaking on the recently concluded staff-level agreement reached between the International Monetary Fund (IMF) and the government authorities, Fitch said that it expects the IMF to release a further $1 billion in funding, provided certain prior actions are met.

“We believe these include amending the SBP Act to formalise the central bank’s institutional independence and removing some tax exemptions. The authorities’ sustained reform efforts and commitment to the IMF programme should support access to external financing, even with global financing conditions potentially becoming more challenging for emerging markets in 2022 as global monetary policy settings grow less accommodative.”

The agency was of the view that if the government continues its commitment to a market-driven exchange rate, “we believe this would be a useful shock absorber to help contain external risks in the longer term”.

Fitch said that an exchange rate that supports the price competitiveness of Pakistan’s exports could over time help to reduce the country’s reliance on debt financing to balance its external accounts.

“In addition, fiscal consolidation under the Extended Fund Facility (EFF) could help reduce external imbalances by dampening imports, while also reducing the drag of weak public finances on Pakistan’s rating,” it said.

Political pressures could test the government’s commitment to reform, particularly if inflation accelerates from its already high levels: Fitch

“At our rating review in May we noted that continued implementation of policies sufficient to facilitate a rebuilding of foreign-exchange reserves and easing external financing risks could lead to positive rating action.

“We also argued that positive rating momentum could emerge from improvements in the business environment or fiscal consolidation, if sustained over time. Continued adherence to the EFF reform agenda would increase the likelihood of achieving these outcomes, in our view.”

However, political pressures could test the government’s commitment to reform, particularly if inflation accelerates from its already high levels.

In an earlier report, Fitch Ratings revised down its forecasts for the Pakistani rupee for both this year and next due to a variety of factors including an increased flow of US dollars into neighbouring Afghanistan.

Fitch's forecast for the rupee's average rate this year was 164 to the US dollar compared with 158 previously. For 2022, Fitch now expects an average rate of 180 versus a previous forecast of 165.

"Our expectation for the currency to weaken further is based on Pakistan's worsening terms of trade, tighter US monetary policy, alongside the flow of US dollars out of Pakistan and into Afghanistan," it said earlier.

https://www.brecorder.com/news/4013...asures-to-curtail-rising-external-risks-fitch