By Moonis Ali, WEEKLY PULSE MAGAZINE, September 23, 2013
All industrial and export oriented sectors have opposed the upward revision in the policy rate by 50 basis points (bps) by State Bank of Pakistan (SBP).
It would spell disaster for the grappling economy and damage the shabby investment climate while it would only benefit the lenders.
Representatives from different trade bodies opined 50 bps increase in rate would create liquidity problem to the whole industry, which was already braving losses on high cost of energy and other crisis in the country.
The SBP revised the key policy rate upward by 50 bps to 9.50 percent for another two months.
Such an unprecedented increase would mount the cost of production besides we have comparatively low productivity comparing with India, Bangladesh and Sri Lanka. The mechanism to control inflation through this measure would not work as government the major borrower of the banks borrowed huge money, said Pakistan Tanners Association Chairman Agha Saiddain.
Availability of surplus liquidity in the market is always essential as its absence is the prime reason behind lack of investment in the industry, he added.
A member of FPCCI said private sector borrowing remains still very low as banks prefer lending to the government and a hike in the key policy rate would amount to punish the masses, as well as the private sector as they would have to pay more interest on borrowings.
Increasing interest rates in past has not helped government reduce imports of oil, food, raw material and essentials while it has reduced growth and savings, triggered unemployment and made imports costly, he added.
Moreover it has hit investors’ confidence and eroded the ability of the government and private sector to spend on development, which has stalled national progress. The increase in the policy rate is negative for stock valuations and earnings of leveraged companies and for the overall economic revival that was expected after the induction of business PML-N government.
KCCI expressed deep concern over hike. The different segments of the society were already facing hike in power tariffs of 56 percent for industrial, 33 percent for commercial and 15 percent for residential consumers.
The industrial and trading activities would be hit hard and this decision would increase the cost of doing business. This increase in rate from 9 to 9.50 bps would benefit little to the government.
APMMPIEA Chairman Sanaullah Khan said the upward policy rate would definitely hurt the developing export-oriented industrial sectors including marble, surgical and sports, as they were in need of funds on reasonable rates.
The increase in policy rate would definitely hurt the industrial sector, as it would face difficulty in returning the banks’ loan, which would increase the ratio of non-performing loans (NPLs).
SBP should continue to monitor developments in the fiscal sector and those pertaining to foreign financial inflows to gauge risks for macroeconomic stability. It would have been better if the rate could be brought down to around 8 percent, which was the need of the day, he added.
Analysts term discount rate hike a bad move.
Unexpected 50 basis points (bps) increase in discount rate by SBP will bode negative for the equity markets, especially for highly leveraged companies, analysts said.
JS Research analysts Farrah Marwat and Bilal Qamar reacting on the monetary policy statement said that the equity markets, except commercial banks are likely to react negatively to the news when it opens on next week with leveraged companies such as Engro, Fatima, Fauji Cement Company Limited and Maple Leaf Cement in the firing line.
They further said that while uncertainty was widespread pre-monetary policy statement, the rate hike should register as ‘largely unexpected’ for the Karachi Stock Exchange (KSE), where rate hikes were broadly anticipated later in the year. Recall that in the details shared by the Ministry of Finance on Pakistan’s latest $6.7 billion International Monetary Fund (IMF) agreement, the fund’s tone on monetary policy came across as relatively dovish, which took the edge off market expectations as 76 percent of market respondents were eyeing no change in the policy rate.
For the banking sector, earlier than expected rate hike should register as positive where the sector has been facing depressed core earnings over the last 12 months, they added.
Similarly, Invest Capital’s Abdul Azeem said that SBP’s decision to increase the discount rate will not bode well for the equity markets, especially for the highly leveraged companies. He predicted the cement sector to be the worst affected by this move; similarly the textile sector and Engro from the fertilizer sector will have a negative impact on their valuations largely due to increase in cost of borrowing eroding the bottomline.
Azeem said that however, banks are expected to be the main beneficiary due to improved spreads after increase in discount rate, also he maintained his positive stance on the exploration and production and power sector consequent to the rising oil prices and negligible debt exposure. The SBP also expects inflation for the FY 2013-14 between 11 percent to 12 percent.
The SBP governor announcing the MPS said that likely inflationary impact of unwinding subsidies built into administered prices, potential oil price instability and continued government reliance on the banking system to finance its fiscal deficit will be the key risks to higher inflationary expectations and Consumer Price Index going forward.