The Pakistani rupee rebounded by 80 paisa yesterday after recording a sharp drop in the open market, prompting SBP intervention. However, at the interbank market, the rupee remained relatively stable during the last two trading days, touching a high at Rs87.53, while closing at Rs87.44/USD.
Rupee stability in the official market is attributed to support from the central bank. The rupee has so far depreciated by around 1.7 per cent since the beginning of the current fiscal year, breaching the Rs85/USD mark FYTD. We believe this deprecation is a more of a short-term volatility and should be overlooked, as long-term fundamentals point towards a fairly stable exchange rate, with a further devaluation space of 1.5 per cent, said Saad Khan at AHL.
Monday rupee fever
In response to this depreciating rupee trend, the central bank warranted direct intervention. Major reason cited for the need was worsening Pakistan-US relations, concerns over IMF meeting with Pakistani authorities along with falling gold prices, rendering high USD demand. This has brought the FY12TD rupee depreciation to 1.7 per cent against the greenback. We also note PKR is normally under stress during the first quarter (average devaluation of 2 per cent, 6-year) of the fiscal year, than the rest of the quarters (average depreciation of 0.6 per cent, 6-year), he said, adding this is usually driven on the back of higher USD demand owing to import payment (notably oil). With the first quater ending, the trend will be under increasing scrutiny.
4pc long-term depreciation
Our long term view in FY12 is backed by a positive outlook on country’s total exports along with robust income from workers’ remittances, which will render support to overall current account balance, he added. Hence we do not see any medium to long term risks to the foreign exchange reserves. Currently, given the foreign exchange at $18 billion, the country can sustain an import cover of around 5-6 months. With oil (38% of total imports, followed by food items) being the major imported good, we think the import cover is enough to cater to domestic demand. Even so, if foreign exchange reserves fall to $12 billion and import bill averages around $3.5 billion per month, which we think is very unlikely, it still provides a three months cushion. Hence the question of Pakistan exiting the SBA program shall not have dire consequences. As far as the IMF debt repayments are concerned, we think the liquid debt servicing ratio is currently at 9.1, which is enough to accommodate a $1.98b (or SDR1.2b) repayment due from 2HFY12, said Saad Khan.
Concern over debt repayment
The rupee is expected to come under increasing stress in comeing days as domestic anxiety over dept repayment plays out. In our base case assumption, PKR will likely incur a further devaluation of 1.5 per cent (PKR 88.7) on average for the current fiscal year, he added. Pakistan Rupee (PKR) has remained stable against US dollar (USD), depreciating by a mere 2.4 per cent YoY in FY11. The trend has been helped by a current account surplus of USD +76m and stable foreign exchange reserves ($17b).
