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Declining oil prices shall prove to be a good omen for Pakistan: Insight Securities

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November 23, 2018 (MLN): Amidst uncertainty and an aura of pessimism gripping the markets, Mr. Zeeshan Afzal, Research Analyst at Insight Securities, has drawn our attention towards the positive impact of globally falling energy prices, on Pakistan.

In the last two months, Arab Light crude oil price has fallen by 21%, while coal prices (Richard’s Bay) have fallen by 10%, highlights Zeeshan in his research report titled, “Falling oil prices: Much of a good thing for Cement, Banks and Textiles”.

In this report, Mr. Afzal points out that Pakistan is going to benefit majorly from falling energy prices (given that they sustain at these levels). He says that the positive impact will not be limited to balance of payments, as “energy prices have much deeper impacts on Pakistan’s economy, ranging from cost of utilities (Electricity & Gas), inflationary trends and fiscal balance (subsidies & tax collection) to the cost of manufacturing.”

Speaking to Mettis Link News, Mr. Afzal threw light on the Current Account Deficit (CAD) which has already been limited to $0.9 billion in the last three month, compared to $2 billion recorded for the three months prior to that.

He said that, “the positive impacts of the latest currency devaluation, imposition of regulatory duties and fiscal curb are set to kick in, in the upcoming months. In this scenario, the falling crude oil prices will act as a catalyst to further shrink the Current Account (and fiscal) Deficit.”

According to his estimates, the 21% decline in fuel prices has weighed down inflation by 0.8%, while it eased the annual petroleum import bill by $2 – 2.5 billion.

Cement: Narrowing down the impact on various sectors in Pakistan, the report tells that the cement sector is likely to be the “prime beneficiary of falling coal and fuel prices”, especially MLCF whose profitability is expected to improve by the largest margin of over 57%. .

Explaining the reason for this, Mr.Zeeshan said that, “While all cement companies use coal for production, MLCF uses coal for its power production as well, which is why declining coal prices will have a greater impact on MLCF’s profitability.”

Banking: In addition to this, the changing inflationary/interest rates will benefit the banking sector substantially as sharp increases in inflation/interest, multiplies the chances of non-performing loans.

Textile: The sector would benefit from lower power cost, helping in boosting exports.

Fertilizer: though domestic gas prices do not share a connection with global energy prices, FFBL would benefit (16% higher profits), as per the research report. Mr. Afzal further explains that since FFBL uses coal for power production, it is expected to gain an advantage.

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Posted on: 2018-11-23T17:28:00+05:00

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