Tresmark: With the current government paralysed into inaction, it took the Deputy Assistant Secretary of the US Treasury to fly down and advise the government that there is no other way but to follow the IMF-prescribed reforms. Following this, we saw a flurry of measures, including the ongoing currency devaluation and preparing a mini-budget to steady the ship.
Has the devaluation been done?
Most analysts believe Rupee will weaken to 275 and then consolidate towards the 270 level as IMF approves the program. They cite several reasons for these levels, one being a recent precedent – Egypt, which just reentered the IMF program, and its currency was devalued by 20%. After two days of devaluation, USDPKR jumped from 229.50 to 262.60 (+33/$), trading at 264.
What we can tell from Friday’s trading session
While there was no intervention in the forex market on Friday, the USDPKR struggled to go up beyond 264, and after staying at that level, it receded somewhat to close at 262.60. Indeed, there was interest from exporters are these levels.
More export proceeds will follow
If we look at ERF figures, exporters have drawn more loans (25% higher) despite the low export activity. This suggests that exporters borrowed in the local currency (at high rates) but did not bring in their export proceeds. Analysts estimate this figure to be around $2.5bn. Now having a windfall (+33/$), they may not wait for PKR to depreciate further in a race to 1) pay back their high-interest money and 2) quickly procure raw materials before the prices jump up.
Against this change in equilibrium, banks started to call clients (mainly exporters) to settle their backlog of imports partially. Market estimates of back records go beyond $3bn with at least $1.7bn in crucial or immediate imports.
While the last quote on Friday evening was 278/280, it was of much smaller amounts. Market sources said that most high-volume deals were done on Thursday at the 270 to 272 levels.
Post devaluation, the swap market eased, showing signs of some liquidity infusion. One-week and one-month swaps climbed from -20 & -10 to 10 & 20 levels. It is expected that next week there will be more consolidation.
Inflow of funds
Despite the interest rate hike and the devaluation round, there are still differences between Pakistan and the Fund. If things fall into place, we may see IMF inflows as early as mid-February. And an IMF staff-level agreement will likely pave the way for more substantial inflows from friendly countries and multilateral agencies. But it seems like Pakistan’s position has changed from resisting to negotiating.
The market does seem to factor in that the IMF deal will materialise, as can also be witnessed from PSX, which recorded the highest weekly gain since last April of more than 2,000 points.
Keeping the above in mind, the market will struggle to go above 270 in the short term, correcting to 265 levels if there is no negative news on the IMF or the political front. But traders will keep a close watch on depleting reserves which went below $10bn for the first time in years (last week’s change was negative $902mn).
Is devaluation necessary
There seems to be a misunderstanding when leading economists talk about a market-based exchange rate. It doesn’t mean devaluation, as even after devaluing, the State is holding on to a new level. It means there has to be a marketplace, which can not happen unless the forex market is deregulated, and has more market makers and modern products. But deregulating the market is long drawn process, but something that needs to be done.
The dollar index is at its lowest level in months, trading just above 101, as traders expect the Fed to abandon its stringent quantitative tightening to a more dovish stance. Most major currencies and some Asian currencies (including China & India) have strengthened against the dollar.
US Debt Ceiling
The US debt ceiling will be in the news in the next few weeks as the US is fast approaching its debt limit. Expect some fireworks