Some pressure on the exchange rate and interest rate pricing is eased, a week before the budget. Crude oil coming down is a sign of relief for economic managers in an otherwise tough economic and political scenario.
The currency appreciated by 2.7 percent or Rs4.02 against USD in the last week. This surely shows that a market based exchange rate mechanism is in place under the leadership of new Governor and stewardship of IMF. Now the movement of exchange rate either way would be a norm and small (1-2%) fluctuation should not become headlines.
Last week, the Eid effect resulted in higher inflows of remittances while the external payments were not that high, and that brought the price down. The expat money inflow may slowdown in a week or two after Eid, and the currency may come under pressure again. As long as it moves in the band of Rs145-155/USD, it should not raise any hope or worry.
On the interest rates, interestingly, the yield curve has inverted after last week’s PIB auction where 10Y paper cut off came lower than the 3Y. The SBP and MoF decided to pick amount not less than the auction target and attempted to participate in all tenure. The aim was to signal that long term inflation is not high and that is why rate for 10Y is kept lowest and in the 5Y paper, rate went high.
The last time inverted yield curve was in May 2009 where average 10Y PKRV was 60 bps lower than 3M PKRV rate. That might happen now, if interest rates go further up in July MPS. On 30 May 2019, the 10Y PKRV is down by 48 bps to 13.48 percent and is just 79 bps higher than 3M PKRV of 12.69 percent - In April 2019 the average difference was 220 bps . Another 100 bps hike and the yield curve between (3M-10Y) would be inverted.
The implication of recession is rather lagging. In FY09, GDP grew by 0.36 percent, lowest growth since FY51, and in FY10 the growth went up to 2.58 percent. GDP was already at the lowest ebb in FY09 and it went up thereafter. A similar implication for FY20 is plausible where GDP growth could be higher than FY19.
Today, May19 CPI numbers would be announced and the headline number is expected to be around 9.6-10.0 percent versus 8.8 percent in April. The inflation may go further up in Jun-Sep period owing to new taxes/end of exemption in upcoming budget along with upward revision in electricity and gas prices.
The good omen is recent dip in oil prices as Brent was down by 5.1 percent in the last week, and if this fall continues, it will ease the pressure on inflation and current account deficit. Apart from that it will give room for government to have higher PL (not part of divisible pool) without changing domestic fuel prices to have some additional revenues which are much needed to bring primary fiscal deficit close to FY20 target of 0.6 percent of GDP.