By Shahzada Ahsan Ashraf
The recent debacle involving Boeing shows why prioritizing cash flows over stability and safety is ill-advised. Pakistan has somewhat salvaged its cash flow crisis, courtesy of the IMF’s fresh tranche, but navigating around the election period will prove to be a challenge.
There have been many positives in the first few days of the new year, including robust remittances, prospects of a current account surplus, seriousness in privatization, and tax reforms, etc.
Markets are calmer, with price action in the bond markets reflecting a cut in interest rates, a rally in Eurobonds, and a stronger Rupee. However, what happens in the next couple of months is anyone’s guess, some of which can be reflected in Pakistan’s CDS, which though lower, is still among the most elevated in the world.
Currency Outlook:
As pointed out last week, the Rupee strengthened, flirting around the 280/$ figure. The main driver was exporters selling dollars forward in large volumes.
This was further accelerated by stronger reserves and the IMF’s Board of Directors’ approval. From the price action last week, analysts believe that the Central Bank is supporting the 280 level, and any time it trades below 280 may only be temporary. Even during the last period of Rupee consolidation, USDPKR stayed below 280 for only 12 days.
We expect the Rupee to be anchored around the 280 level until before the elections with temporary outruns on both sides.
Global Conflicts Escalate:
The world-renowned Richard Kelly in his book was able to build a relationship between the extent of global military conflict and a surge in commodity prices.
There is a definite escalation of conflict with the opening of the Yemen front, spiking the threat level to global shipping traffic. Apart from freight rates, supply chains, and trade flows, the real macro risk from the Yemen quagmire is panic buying in crude, despite its bearish fundamentals.
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If Brent spikes to above $100 as multiple wars in the Middle East escalate into a US, Israel, and Iran direct military confrontation, inflation risk will rise to at least 4% CPI, and the Fed will not cut interest rates anytime soon. That would be a catalyst for a spike in 10-year US bonds and a correction in overvalued stocks. It would also increase the complexity level for emerging markets and global trade.
US CPI:
US CPI clocked 3.4% against market expectations of 3.2%, resulting in higher volatility among currencies and precious metals. The market now worries that the Federal Reserve (Fed) won’t deliver a first-rate cut at the March monetary policy meeting.
(The writer is a Former Chairman and Managing Director PIA, Former Federal Minister of industries and production)
