Inflationary pressures seem to have gained strength in May-11

Trends beyond headline inflation warrant attention: While focus remained largely on the budget during first fortnight of Jun-11, some important trends in May-11 inflation figures seems to have gone unnoticed. While headline CPI inflation rose marginally from 13.04% in April-11 to 13.23% in May-11, core inflation measures witnessed a sharp spike.

All core inflation measures rose sharply in May-11: NFNE rose from 9.4% in April-11 to 10.2% in May-11 while 20% trimmed core inflation rose from 11.6% in April-11 to 12.1% in May-11. Exclusion of HRI from NFNE indicates an even sharper rise in prices, from 12.8% in April-11 to 14.5% in May-11.

Inflationary pressures, upward revision in FY11 fiscal deficit could force another DR hike: Rising inflationary pressure is a cause of concern, especially in a scenario where FY11E fiscal deficit faces risk of upward revision on likely underperformance on revenue targets. Measures undertaken to instill fiscal discipline in FY12 budget would likely fail to convince SBP while GoP borrowing from the central bank as of Jun 4, have increased by PKR83bn over Sep-10 agreed ceiling. While it is premature to form an expectation for now, we believe the risk of hike in DR have increased at least from the last MPS announcement of May-11.

Trends beyond headline inflation warrant attention

While focus remained largely on the budget during first fortnight of Jun-11, some important trends in May-11 inflation figures seem to have gone unnoticed. Headline inflation indicators showed a somewhat mixed trend during May-11, with CPI inflation rising from 13.04% in April-11 to 13.23% in May-11, while WPI inflation fell sharply from 25.9% in April-11 to 22.9% in May-11. SPI pointed towards easing inflationary pressures with SPI for combined group falling from 16.1% in April-11 to 15.4% in May-11. Interestingly, key contributor to muted trend in headline inflation was falling food prices which trimmed 1.1% MoM with YoY food inflation falling from 17.23% in April-11 to 15.88% in May-11. Worryingly, all the remaining components of the CPI witnessed sharp increase in YoY inflation in May-11.

All core inflation measures rose sharply in May-11

All core inflation measures witnessed a sharp spike in May-11.  NFNE rose from 9.4% in April-11 to 10.2% in May-11 while 20% trimmed core inflation rose from 11.6% in April-11 to 12.1% in May-11. Interestingly, while HRI is on its uptrend, it is still much below core inflation levels, rising by 7.5% in May-11. HRI thus continues to pull down core inflation. Exclusion of HRI from NFNE indicates an even sharper rise in prices, from 12.8% in April-11 to 14.5% in May-11.

House Rent Index (HRI) inflation has started rising sharply, where YoY HRI rose from 6.63% in Mar-11 to 7.01% in April-11, further rising to 7.5% in May-11. Likely continuation of this rising trend would lead HRI to average ~12% in FY12, as opposed to 7.23% in 11MFY11. HRI has a 23.43% weight in CPI.

Inflationary pressures, slippage in FY11E fiscal deficit could force another DR hike

Rising inflationary pressure is a cause of concern, especially in a scenario where FY11E fiscal deficit faces risk of upward revision on likely underperformance on revenue targets. Meeting FY11E fiscal deficit target of 5.7% mentioned in the budget would require FBR to collect PKR278bn in Jun-11 alone, a tall task in itself, while FY11 revised PL collection target of PKR90bn also seems to be higher by PKR30bn.  A PKR100bn slippage in Jun-11 revenues, coupled with PKR30bn shortfall in PL collection could lead to FY11E fiscal deficit rising by 60bps to 6.3%. GoP’s borrowing from the central bank for budgetary support, as of Jun 4th, had increased to PKR1373bn, PKR83bn above the Sep-10 agreed limit of PKR1290bn with the SBP. While it is premature to form an expectation for now, we believe the risk of hike in DR have increased at least from the last MPS announcement of May-11.

Economic & Political News

4 IPPs invoke sovereign guarantee

As per news reports, four major Independent Power Producers (IPPs), Nishat Chunian, Nishat Power, Liberty and Atlas Power, have invoked sovereign guarantees for recovery of overdue payments from Pepco. These IPPs issued a one month notification on May 13, demanding payment of overdue amounts from the NTDC. However, their receivables continued to rise during the notice period as payments from NTDC were lower than the value of incremental electricity sales to NTDC by these IPPs during the period.
Analyst Certification:
The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Disclaimer

The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

Contributed By