Wednesday, July 6, 2022

Take conscious investment decision


Adil Ghaffar
Experienced Chief Executive Officer with a demonstrated history of working in the financial services' industry. Skilled in Negotiation, Business Planning, Microsoft Word, Accounting, and Team Building. Strong business development professional with an ACA focused in Accounting and Finance from institute of chartered accountants of Pakistan. Contact: [email protected]

World has changed after 9/11 and recently after COVID-19. Its impact seems to have grave implications. Calculate your risk to protect your assets.

Recent Developments

  1. IMF agreed to defer loan payments. Is it something to rejoice or raising concerns. At least temporarily relief on repayment of billions of $.
  2. IMF support fund of $ 1.38 billion. This is just a small number indicating clearly the adverse Impact of COVID 19 started on the economy in the shape of an adverse balance of payment.
  3. SBP revised its monetary policy rate thrice within a month and brought it down to 9% from 13.25%.
  4. Oil prices tumbled and hovering around $20 a barrel.

Impact on Rupee/US dollar parity

The US dollar starved reserves of SBP will have sigh of relief with the first two developments as the pressure on rupee parity due to principal repayment and debt servicing has been put on halt for the time being.

SBP revised its monetary policy rate

Within a month, from March 17, 2020, to April 16, 2020, SBP revised its monetary policy rate thrice and slashed it to 9% from 13.25% a downward revision of 32% to ease of liquidity issues.

This huge discount of 4.25% in interest rates will definitely reduce, substantially, the interest costs on loans obtained by corporates. This will correspond with couple of other measures that SBP took such as:

  1. Temporary economic refinance facility (TERF);
  2. Refinance facility for COVID 19 for hospitals;
  3. Refinance facility for payment of wages.

In the situation of complete lockdown where ports are closed and movements strictly restricted, it will only be a wishful desire that sales of a company will not be affected. Though, with reduction in policy rate, cost of carrying inventories has been reduced but not eliminated. Smart people, just do not only view one side of the story. They evaluate impact of reduction in interests costs alongwith impact of lockdown on sales. It will be exercise in futility if hypothetically we just incorporate reduction in interest rates to arrive at increase in Company’s earning per share without translating the impact of lockdown and closures on its sales.

With on ground worldwide lockdown situation, demand slashed leading to cancellation of orders. Situation further aggravated when stock markets collapsed worldwide and interest rates reduced to zero and even negative. The disposable income parked as savings eroded and apprehensions are that this recession could be bigger than what we experienced in 1929. Slowly and gradually, we will see demand of luxurious items will be drastically hit and it will take a long time before world will start again to attract customers towards luxuries.

SBP, being Apex Regulator of banking industry, being cognizant, took several steps to protect its regulated persons who otherwise would have been on the verge of collapse. All the following measures are implemented, as cosmetic surgery, to avoid huge Non-performing Loans and losses on investments.

  1. Implementation of IFRS 9;
  2. BASEL capital adequacy measures;
  3. Impairment in value of securities;
  4. Reducing margin requirements;
  5. Trade bills;
  6. Consumer financing;
  7. Rescheduling/Restructuring of loans;
  8. Relaxing credit requirements for exporters/importers; and
  9. Reduction in CARR requirements.

Oil Prices

Oil is the major import of Pakistan. Therefore, trade deficit and balance of payment has a direct relation with international oil prices. This turned out to be in favor of Pakistan when Oil, internationally took a reverse gear due to international conflict, trade war, and finally thanks to COVID 19 where international demand subsided. Oil, after touching its high of $145/ barrel (in 2008) and tried it’s base at $90/b till 2014 failed to maintain its momentum and rest itself to $55/b till 2019. In 2020, it is virtually down by approximately 70%.

Apprehensions are, that these prices will be further down as an aftermath of Covid 19. Demand is unlikely to increase due to impact of lockdown on disposable income. The road transportation, aviation industry, and marine bunkers consumes more than 60% of oil production.

Currently, reservoirs are full with no more capacity. Sluggish demand by ultimate consumers and rivalry competition between OPEC countries where huge cut in production is significant to the existence, make it unviable at even these levels.

The already huge reduction of 70% in oil prices, will translate in inventory losses for E&Ps and OMCs and eventually on earnings per share.

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