Inflation and Interest Rates: Projections lifted for 2022/23
We update our inflation and interest rate expectations after the SBP increased the Policy Rate by 250bps to 12.25% earlier this month in an emergency meeting. National CPI has averaged 12.6% CYTD and is likely to be north of 15% over the next few months if the subsidies on fuel and electricity are withdrawn. The SBP expects CPI to average 11% in FY22, before moderating in FY23. While we think there are upside risks to the SBP’s projections, we agree with the central bank’s assessment that interest rates have peaked for now, especially if near term distortions to CPI are ignored. The SBP’s decision to alter the calendar of MPC meeting and cancel the scheduled meeting for April backs this view. We expect the Policy Rate to persist at 12.25% across the rest of 2022 and expect monetary easing again in 1Q 2023. While our 2022/23 inflation and interest rate projections are now higher, estimates remain unchanged over the medium-term. Risks of tighter monetary policy settings emanates from talks with the IMF, which may push for further tightening.
Risk-Free Rate: Slight increase to 11.5%
Over the last c 15yrs - during which Pakistan has gone several expansionary and contractionary phases - the 10yr PIB has averaged 11.2%. We think this is an appropriate benchmark for the risk-free rate to employ in valuing domestic assets. That said, we prudently lift our risk-free rate by 50bps to 11.50%.
Textile sector earnings to falter amid change in Export Refinance Scheme
The Textile sector earnings will witness a double-whammy as a result of the recently announced Monetary Policy, in our view, due to the rise in both the policy rate and Export Refinance rate. We highlight that the change in the Export Refinance Scheme from 3.0% to 5.5% jolts earnings more than the change in Kibor, as the majority of short-term borrowings are through this scheme. Hence, our IMS Textile Universe earnings are likely to decline by 7% in FY23.