The latest round of 'Chinese largesse' has given Islamabad confidence to snub the International Monetary Fund's (IMF's) more stringent requirements for obtaining funds, says Fitch Solutions. Fitch Solutions in its latest report "Industry Trend Analysis - Dark Clouds Still on the Horizon for Pakistani Banks" stated the administration continues to have little appetite for austerity and painful and necessary economic reforms, which would prolong the current up cycle.
It further states that Pakistani banking sector appears to be on a sound footing for now, but the outlook of the broader economy and the industry will deteriorate over the coming quarters.
It further stated that Finance Minister Asad Umar announced on January 13 that Pakistan will not approach the IMF for a new bailout package and is considering alternative options to tide over its economic crisis. Umar made the remarks during a meeting with businessmen at the Karachi Chamber of Commerce and Industry.
"In our view at Fitch Solutions, this suggests that the administration continues to have little appetite for austerity and painful and necessary economic reforms, which would prolong the current up cycle," stated the report, adding that the worst case scenario of a balance of payment crisis appears likely to be avoided in the near term with foreign bilateral assistance.
Islamabad has secured $3 billion in foreign loans from the UAE, and is eyeing further assistance in the form of deferred oil payments. The government has also reportedly secured an additional $2 billion from Beijing. While the details of the agreement remain murky, the deal appears to be part of the larger CPEC (China-Pakistan Economic Corridor) framework. It seems likely that the latest round of "Chinese largesse" has given Islamabad the confidence to snub the IMF's more stringent requirements for obtaining funds. "However, if Pakistan experiences acute signs of a currency crisis over the coming months, we would not be surprised to see talks between Pakistan and the IMF resume."
The Imran Khan-administration continues to seek unconventional sources of funding to prevent a balance of payments crisis, which would typically require a sharp contraction in imports and accompanied by a slowdown in economic activity. "However, that is just kicking the can down the road in our view, which would create larger economic distortions and greater pain in the future."
"The report further states that headline metrics across Pakistan's banking sector continue to look solid, and we are pushing back our expectations for a decline in profitability and asset quality."
Regardless, the rapid pace of credit growth looks set to slow over the coming months as the impact of significant tightening by the central bank in 2018 begins to feed through, informing our loan growth forecast of 13.0% in 2019, down from an estimated 15.0% in 2018. Together with higher oil prices, this could create a downward cycle of lower loan growth, weaker asset quality, and reduced profitability and capitalization.
It further states that the banking sector appears to be in a sweet spot for now; loan growth to the private sector continued to accelerate in November, hitting a fresh multi-year high of 21.4% year-on-year. Meanwhile, the non-performing loans (NPLs) ratio remained low in Q3-18, coming in at 8.0% of total loans, only up marginally from the previous quarter's print of 7.9%.
"Loans to the private sector have continued to increase as a share of total credit, coming in at 41% in November, the highest level since 2013. With profitability on loans to the private sector much higher than loans to the government, the banking sector's profitability looks likely to rebound over the coming quarters after seeing a slump in Q1-18. Taken together with the added tailwind of lower oil prices (since Q418) helping to boost consumer purchasing power and corporate margins, we expect asset quality and capitalisation to remain healthy in the near-term.
"We see the cumulative 400bps interest rate hikes by the State Bank of Pakistan over the course of 2018 leading to a slowdown in loan growth in the coming months.
"With tighter monetary conditions, we expect refinancing risks to rise and negatively impact asset quality of banks. Real benchmark interest rates have increased to around 380bps as of end-December, which will make loan affordability increasingly difficult in the low margin manufacturing sector that has been the main recipient of the recent surge in credit. Moreover, we expect oil prices to rebound over the coming quarters, which will pose headwinds to the economy - our Oil and Gas team forecasts the price of Brent crude oil to average USD75.00/bbl in 2019, up from the spot price of around USD 60.70/bbl.
"Pakistan's external woes are not yet over. Financial assistance in some form or another should help prevent a destabilising currency collapse and an outright recession in the near-term, which would potentially lead to a surge in NPLs as corporate profitability tanks, particularly in the import dependent sectors. However, this is not solving the root cause of the problem, which is the country is spending beyond its means. The continued rise in government bond yields, which hit 10.1% on January 14, partly reflects the rising credit risk."
Comments
Comments are closed.