Pakistan’s May’24 inflation expected to be 14%

Inflation has plunged from ~29.7% in Dec’23 to ~17.3% in Apr’24

Overview

The consumer price index (CPI) for May 2024 in Pakistan is anticipated to settle around 14%, following a downward trend from previous months. This decline, projecting a 125 basis points month-on-month decrease, marks the second consecutive month of easing inflation after nearly three years. The reduction in inflation is largely attributed to a high base effect and a stable local currency, coupled with decreased food prices post-Ramadan.

Central Bank Policy

Despite a positive real interest rate, the State Bank of Pakistan (SBP) opted to maintain its policy rate due to uncertainties surrounding fiscal measures in the upcoming budget. Revenue collection targets set by the Federal Board of Revenue also add to economic complexities, as efforts are made to enhance tax compliance in untaxed sectors while adjusting indirect tax rates. Moreover, global inflation dynamics and cautious monetary policies of major central banks further prompt the SBP to adopt a watchful approach.

Potential Interest Rate Cut Implications

With notable declines in wheat prices impacting headline inflation, there is scope for the SBP to lower benchmark rates. However, the timing of such a move hinges on the FY25 budget announcement and details of the next IMF program, as these factors carry potential inflationary implications. Any adjustments to interest rates are expected to be gradual and moderate.

Focus on Leveraged Companies

Identified companies with a Debt-to-Asset ratio exceeding 35% are poised to benefit from anticipated interest rate cuts. Despite broader economic slowdown impacting cyclical sectors like cement, steel, and automobiles, leveraged companies with strong fundamentals stand to experience improved earnings due to lower borrowing costs and economic stabilization.

Potential Winners in a Rate Cut Scenario

Some listed companies identified as potential beneficiaries:

Company	Market Cap (PKR mn)	Total Debt (PKR mn)	Debt-to-Asset	Debt-to-Equity	Finance Cost (PKR mn)	FC as % of Sales	FC as % of Operating Profit	Cash & Cash Equivalent (PKR mn)	Net Debt (PKR mn)
NICL	12,276	18,253	59%	224%	3,601	8%	60%	188	18,065
SRVI	28,656	42,125	49%	192%	7,835	7%	52%	3,953	38,173
ILP	107,007	66,630	45%	125%	8,967	6%	28%	2,378	64,252
PTL	6,728	10,684	49%	155%	1,352	5%	49%	387	10,297
PCAL	6,782	13,390	48%	139%	1,544	6%	72%	263	13,126
SGF	12,332	7,117	43%	104%	997	6%	68%	823	6,294

Conclusion

Navigating Pakistan’s economic growth trajectory requires substantial reforms. In this environment, leveraged companies with strong fundamentals are likely to benefit from interest rate cuts, potentially experiencing improved earnings and growth.

Disclaimer:

The information in this article is based on research by Insight Research. All efforts have been made to ensure the data represented in this article is as per the research report. This report should not be considered investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.