As has been expected for quite some time now, the Pak rupee witnessed a third round of depreciation yesterday, and is now trading at 120.25 on the inter-bank market, an increase of about Rs. 4.63 compared to yesterday’s close at 115.62. This translates to a percentage change of about 4%. During the day, PKR/USD opened at 120 and hit a high of 121, falling subsequently during the latter part of the day to the current rate of 120.25.
This is the third time the Pak rupee has depreciated during the current fiscal year, the previous two times being December 2017, and March 2018 when the rupee was devalued by about 4.7% and 4.4% respectively. Since December 2017, the rupee has depreciated by about 13.2% against the dollar. Prospects of further devaluation had already been anticipated by analysts in response to the deteriorating external accounts situation made up of rising current account deficits alongside mounting trade deficits. While the devaluation had been anticipated, the timing came off as a surprise to many analysts who expected the devaluation to occur at a much later date in the year.
According to research by Arif Habib Limited, the impact of PKR devaluation would be positive on the Textile sector as cheaper rupee against the US dollar is going to boost export revenues for this sector. Similarly, Oil and Gas Exploration and production companies are going to witness a positive impact as revenues derived from the oil prices are denominated in the relatively more expensive US dollar. Other sectors to witness a positive impact from this devaluation include the Chemicals sector and Power Generation companies. Banks are also likely to see a positive impact as the change in exchange rate parity could lead to an early interest rate hike, allowing the banks to increase their spreads. However, the impact may even be neutral if interest rate hikes do not come about. Similarly, Fertilizer companies could also see a positive or neutral net impact.
Oil Refineries and marketing companies will have a negative impact due to the devaluation as it may result in foreign exchange losses due to increased costs of fuel import and foreign exchange borrowings. Impact on the cement sector could be neutral or negative given the fact that PKR devaluation would increase input costs for this sector as coal imports are going to be more expensive. However, since the cement sector also exports its output, rupee based margins are going to increase and ultimately the net impact on this sector could be either negative or neutral. Similarly, anticipated affect on the Auto sector and Steel sector could also be either negative due to higher input cost of raw materials from imports or neutral as this affect could be passed on to consumers.
On the macroeconomic side, research by Nauman Khan from Foundation Securities suggests that this third round of currency devaluation could finally fuel inflation in the economy. While headline inflation has remained relatively stable in response to the first two valuations, the abrupt rise in ‘Core Inflation’ to 7% YoY in April 2018 is indicative of an inflationary trend likely to ensue in the near term. The research suggests that this episode of devaluation may push up Fiscal Year 2019’s average inflation to 7.0-7.5%, above government’s target rate of 6%. This would lead to a much stronger case for a further rise in the interest rates. In his view, Mr. Khan believes the market is likely to initially experience a consolidation phase as it adjusts to the new macroeconomic reality.
