PKR likely to weaken in near term due to dividend backlogs: JPMorgan

July 26, 2024 (MLN): Despite Pakistan’s Balance of Payment (BoP) account being in a healthy position, there is anticipation of a weaker PKR in the near term due to the final clearance of dividend backlogs, JPMorgan's analysts wrote in a latest research report.

In line with the above projection, analysts highlighted that they await more attractive FX entry points.

"In our estimates, we do not view PKR as being overly expensive," the report added.

That said, although the International Monetary Fund (IMF) states that all FX restrictions have been removed, the agency assesses that there may still be a few informal restrictions relating to the repatriation of dividends.

Assuming these are fully eliminated at the start of the Extended Fund Arrangement (EFF), then it could result in USD/PKR moving moderately higher over the coming months.

However, the analysts cited their expectation that such a move would be shortlived due to the favorable BoP dynamics.

Additionally, this is seen as a good entry point for bullish T-bill/bond trades, especially ahead of a large State Bank of Pakistan (SBP) cutting cycle.

Since the start of the year, the PKR NEER has appreciated, in line with improving BOP dynamics, namely stronger export gains, resilient remittance inflows, and the gradual return of financial inflows.

Some concerns lingering foreign currency restrictions have artificially suppressed FX volatility, but according to IMF’s latest Pakistan report in May, authorities have eliminated the last vestiges of FX controls (e.g., multiple currency practice or MCP, limitations for advanced payments for imports) effective end-January.

Since then, the PKR has stayed stable, evident in the lack of premium in the informal/parallel market.

The import bill has also only risen gradually, suggesting limited pent-up import demand.

While the REER is showing some signs of overvaluation, it is far from the extremes reached in previous years and should normalize lower as inflation moderates, analysts write further.

As such, absent a significant deterioration in the current account, JPMorgan thinks that any negative FX adjustment will be minor.

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