AFTER having been shackled for a long time, the rupee has finally been left to find its true value against the US dollar in the market.

Economists and analysts have expressed their dismay over the artificial propping up of the rupee. But former finance minister Ishaq Dar feared inflation would kick in if the rupee was allowed to depreciate.

As the widening external deficits, dwindling reserves and uncompetitive exports started to hurt, the State Bank of Pakistan (SBP) loosened its hold on the managed-float operated rupee. Last week, most senior analysts at the country’s stock market thought that the currency had stabilised at Rs110 to a dollar.

“We have been projecting a five to seven per cent depreciation of the rupee during 2017-18,” says Hamad Aslam, research director at Elixir Securities. He affirmed that the current depreciation was within the range and should actually help ease Pakistan’s path back into an IMF programme during the second half of 2018.

Nauman Khan, the head of research at Foundation Securities, stated that the rupee had depreciated by around 5pc amid reduced SBP intervention.

“Among others, we see rupee depreciation as a good omen for the textile sector, Pakistan’s largest export contributor,” he said. “Moreover, the revised export package that was announced in October would make the impact of rupee depreciation more profound.”

Although specific stocks from various sectors should have shown a significant price change, the overall impact has been diluted

Although specific stocks from various sectors should have shown a significant price change (either way) from when the rupee first started to slide, the overall impact has been diluted by the market meltdown on political uncertainty in the country, which has eclipsed all other factors, including the depreciation.

Although stock prices are down 20pc from the start of 2017 — trading 27pc cheaper than their all-time high on May 25 this year — investors keep themselves away from taking long-term positions in stocks, lest prices continue to tumble.

Even foreign investors, whom everyone expected to swoop in to pick up stocks in the event of rupee depreciation, have continued to keep their sangfroid.

Against the entire year sale of equities worth $339 million in 2016, figures released by National Clearing Company of Pakistan Ltd (NCCPL) show a net outflow of $494m since January, with no major new buying after the recent depreciation.

Analysts at several major brokerage houses have been feverishly working to understand the sector-wise impact of the fall in the rupee’s value.

Commercial banks (neutral): According to Elixir, rupee depreciation is largely neutral for banks. Analysts put a caveat, saying that being a direct proxy to the economy, banks could be impacted indirectly in two ways: any further and more significant depreciation could slow down the economy and increase non-performing loans of banks going forward.

Secondly, any further and more significant rupee depreciation will increase inflation to double digits, causing bigger and earlier hikes in interest rates.

While that is thought to be a long-term positive for commercial banks (as their spreads would rise), the impact on profitability would come with a lag as they currently have very low advance-to-deposit ratio (under 50pc) and high investment-to-deposit ratio.

So, it’s the yield on Pakistan Investment Bonds that matters more, as banks would have a positive impact only after they start to aggressively increase their exposure in those bonds.

Oil and gas exploration (positive): Since oil and gas prices in Pakistan are benchmarked to global crude oil prices, the depreciation would lift the rupee-based oil prices and hence the revenues and profits for the companies.

Oil marketing companies (neutral to negative): The margins of oil marketing companies (Pakistan State Oil, Attock Petroleum, Hascol Petroleum and others) are fixed in absolute rupee terms for retail fuels (petrol, diesel, etc). With depreciation, retail-level oil prices would climb, but absolute margins would not. This will result in lower gross margins.

Depreciation would increase the build-up of circular debt in the system — so accounting income might be higher but it would not pass on to the cash flows. Oil marketing companies may also have to book one-time exchange losses due to depreciation on payables to foreign suppliers and foreign loans.

Gas marketing companies (neutral to negative): The rupee depreciation does not directly impact Sui companies. However, it would increase the wellhead gas prices while the government may defer increase in consumer/industrial (selling) gas prices due to upcoming elections.

As a result, Sui companies’ receivables from the government will rise and hence exacerbate its cash flow problem.

Power (positive): The returns for independent power producers are fixed in dollar internal rate of return. So, depreciation would have a positive impact on the companies’ profitability. However, it may be partially neutralised by a potential rise in circular debt (due to an increase in energy prices).

Cements (neutral to negative): The price of coal (particularly of imported coal), would increase. The impact would be partially neutralised by cement exports which are denominated in dollars.

Textiles and leather (positive): The sectors would be lead gainers as they are largely export-driven. The rupee depreciation would increase revenues, pricing power and profitability of companies.

FMCGs (positive): It would increase the prices of competing imported goods. Companies relying on domestic manufacturing, such as Nestle, Unilever, Bata and others would be better placed to increase their market share and margins as imported goods become more expensive.

Pharmaceutical (negative): Since these firms rely largely on imported raw materials, the rupee depreciation would increase costs, which may be difficult to pass on to consumers given the stringent regulations.

Autos (neutral for now; negative in the long term): The deprecation would increase the cost of imported parts for auto assemblers. Assemblers have the pricing power to pass on the cost to consumers by increasing selling prices. Over the long term, as new players KIA, Hyundai, Nissan, etc come in, the pricing power would reduce substantially.

Published in Dawn, The Business and Finance Weekly, December 18th, 2017