PKR to average weaker at 171.15 in 2021 due to higher structural inflation: Fitch Solutions

July 16, 2020 (MLN): Fitch Solutions broadly expects FX volatility to cool in H220 compared to H120 as the Covid-19 pandemic shock abates, the economic rebound gains momentum and risk sentiment generally improves.

According to a report issued by the international rating agency, Covid-19 continues to spread rapidly across the major emerging market (EMs) and second waves of infection are seen in major developed markets (DMs), which could further weaken economic fundamentals, delay the recovery, underscore looser monetary policies, impact sentiment and weigh on currencies.

The Asia Dollar Index (a basket of EM Asian currencies) fell as low as 4.5% on March 23 from its end-2019 level, as uncertainty grew over the economic impact of the Covid-19 pandemic. Since March 23, the US dollar has cooled from its highs, as global sentiment improved and broader risk appetite has grown towards growth-sensitive currencies such as the euro and the Australian dollar.

In addition, there has been a broad recovery across EM Asia assets as global uncertainty has abated, and several economies in the region have been successful implementing containment measures, such as Taiwan, Thailand, Vietnam, and Malaysia.

However, Covid-19 continues to progress rapidly in the largest countries in the region such as India, Indonesia, Pakistan, and the Philippines. The report further stated that the Pakistan rupee has underperformed given fears over its debt sustainability.

‘The Pakistani rupee has weakened around 7.1% in the y-t-d against the US dollar. We forecast the unit to continue to trade weaker, forecasting the rupee to average PKR163.00/USD in 2020. Soft demand for Pakistani assets by foreign investors will continue to cool demand for the rupee. Moreover, policymakers will likely allow for some depreciation, given lower oil prices should cap inflationary pressures’, the report said.

‘We do not expect a sharper depreciation in the rupee given our expectation for support from international partners, such as the Global-20 Countries, which will boost Pakistan’s FX reserve base and ease external financing pressures. Over the long term, we forecast the Pakistani rupee to average weaker at PKR171.15/USD in 2021 due to higher structural inflation vis-à-vis the US. We also see risks from Pakistan’s fiscal position and an overshooting of its fiscal deficit target in FY2020/21’, it added.

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