March 07, 2024 (MLN): The Pakistani Rupee (PKR) is nearly 20% undervalued on a 12-month horizon and offers about 26% nominal carry, according to Goldman Sachs’ GSDEER framework.
The Goldman Sachs Economic Research report suggests that positive real rates could be the catalyst needed for the Rupee's value increase, provided inflation rates begin to decline.
The report notes that inflationary pressures from oil, gas, and electricity price hikes continue to pose risks, potentially prompting the State Bank to maintain a cautious stance.
However, if Goldman Sachs' inflation forecasts are realised, ex post real rates would turn deeply positive, which would attract inflows that, in turn, would limit currently elevated external funding risks by increasing the likelihood of an extended program with the IMF after the current Stand-By Arrangement expires in April.
Such inflows could be further supported by the global backdrop if and when the Fed starts cutting rates later this year.
Although the macro situation will also depend on political stability, “we think the intersection of undervaluation, carry and the latest continued but slow disinflation motivates our constructive view on the PKR,” it noted.
