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Flash Note: Pakistan Economy: Rupee devalues in interbank market

• As per channel checks and news reports, Pak Rupee devalued by around 4% in early hours of the interbank market today to Rs126. This would be the 4th time that Pak Rupee has devalued since December 2017 and is now down a cumulative 20%. Govt. had devalued Pak Rupee by 5% on December 8, 2017 to Rs110, 4.5% to Rs115 on March 20, 2018 and 5% to Rs121. During the last 10 years, Pak Rupee has devalued annually by around 5%.
• We believe this is much needed as Pakistan’s external account continues to deteriorate with the external Current Account Deficit (CAD) down during FY18 by higher than expectations. CAD is now expected to increase to a whopping US$18.0bn (5.8% of GDP) in FY18 compared to US$12.6bn (4.1% of GDP) previous year. This is not sustainable given current low level of reserves of US$9.5bn (less than 2 months imports) as of July 6, 2018, we believe.
• A weaker Pak Rupee will be largely positive for listed sectors including Oil & Gas Exploration, Power (IPP’s), Textiles and Information Technology (IT) due to dollar denominated revenues. On the other hand, Auto Assemblers, Cements and Steel could be negatively affected as it could lead to lower margins for Autos (devaluation may not be fully passed on) and Cements (higher imported coal prices). Steel sector’s demand could be negatively impacted due to higher steel product prices. Furthermore, we do not expect any major impact on Insurance and Fertilizer Sectors. 
• We believe that this devaluation is a positive signal on the economic front to investors that the much required steps are being taken to address the burgeoning external account. We currently expect Pak Rupee to further devalue to Rs131 by Jun’19.