Macro Analysis / Global

Pakistan Economy: Outlook for petroleum prices

  • Large increase in local petrol/diesel prices due to international prices and will not lift GoP revenues significantly
  • CPI will rise by c.1ppt but would not re-enter the double-digits. This likely marks the end of monetary easing
  • OMCs can cheer but this will only curtail deep inventory losses from earlier months & volume growth will now be slower

Significant increase in July prices will be inflationary, with modest gains in tax collections

The government has increased retail prices of petrol and diesel (HSD) for July 2020 by a staggering 34% and 27% mom respectively to c.PKR101/liter (effective 26 June). The increase was largely led by international oil prices (which rose 45% mom on average basis in the prior-month while the PKR depreciated c.4%). As illustrated in the table below, the change in Petroleum levy and GST are negligible. While the latter will not accrue significantly more tax revenues for the government, in our view, the move will prove inflationary and can generate negative political noise.

We estimate that the CPI will rise by 1ppt as a result of the increase in petrol prices, all else the same. Having said that, the base assumption for July CPI was c.8.0%; hence, the increased prices will not immediately push inflation into the double digits again, in our view. Petrol directly comprise 2.5-3.0% of the CPI (rural-urban) while the total Transport index takes a c.6.0% share in the CPI basket.

Further monetary easing is now out of the picture, in our view. Recent cuts in the policy rate were partly premised on lower petroleum prices (albeit complemented by soft food inflation and weak aggregate demand taming core inflation). Future CPI readings hovering around 8-9% – with the policy rate recently being cut to 7.0% – will maintain negative real interest rates longer than expected earlier. Therefore, there is a possibility that, if the coronavirus pandemic situation is relatively under control by end-2020, the SBP could look to increase the policy rate, aimed at rebuilding positive real rates. 

On the fiscal side, we highlight that the increase in petrol and HSD prices, though large, will not lead to commensurate improvement in tax revenues from petroleum. Note that during June the Petroleum levy (PL) was already at the maximum level of PKR30/liter for both HSD and petrol, before this price increase. If we assume same level of volumes for FY21f as during FY20 and PL remains at PKR30/liter throughout the year, we estimate that total PL collection will be close to PKR500bn (from these two fuels) against the government’s budgeted target of PKR450bn (c.1.0% of GDP).

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Macro Analysis / Global

Egypt inflation picks up in April, interest rates to remain unchanged

  • Inflation for total Egypt rose to 5.9% YoY and 1.6% MoM as demand picks up during the month before Ramadan
  • Inflation was driven by its heaviest basket constituents: Food, Utilities and Health care
  • Projections: Inflation to stay within 6.5- 7% until November 2020; and CBE to hold interest rates constant
Sandy Eskaros @
Pharos Holding
11 May 2020

Pre-Ramadan demand takes Food prices up

Inflation for total Egypt accelerated to 5.9% YoY in April 2020, from 4.6% YoY in March. This acceleration is explained by the rise in demand for food items that usually occurs on the month preceding Ramadan. This demand surge was reflected on Food & Beverages and Tobacco categories MoM. 

Inflation was driven by its heaviest constituents: Food, Utilities and Healthcare

Both on an annual and monthly level, April inflation was driven by non-food items as a bulk, however when breaking down this group, Utilities and Healthcare are not a match for the effect that Food & Beverages category has on the overall inflation figure. For 4 months now inflation reading has been less and less impacted by food items, since the fruit and beverages volatility has been tamed relative to 2018 and 2019 fluctuations. 

Inflation to remain within 6.5-7% before picking up in November 2020

According to our forecasts, inflation should end FY2019/20 with an average of 5.4% YoY and end CY2020 at an average of 6.3% YoY remaining in the single digit zone, and within the CBE’s monetary policy target of 9% (+/-3%) all through 2020 and 1H2021. It is notable though that the restrictions on trade coupled with the rising pressures on the EGP during the prolonged Covid-19 lockdowns are likely to create inflationary pressures. 

Rates to be maintained on May 14th 

The CBE cut interest rates by 300 bps in an emergency meeting in early March, in an attempt to protect the economy from the Coronavirus global blowout. As the situation persists, we expect the CBE to maintain interest rates to assess the impact of the cut and the stimulus packages, before deciding whether more cuts are needed. 

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