LAHORE - Declining interest rates and improving macros are likely to push credit growth in double digits in 2015, said experts following the State Bank announced monetary policy statement on Jan 24, 2014, slashing discount rate by 100bps to 11 year low of 8.5%. This has provided yet another reason for the market to rejoice as market participants generally anticipated a 50bps decline in interest rates. Pakistan last saw such low level of interest rates in Nov 2002 when interest rates were lowered to 7.5% from 9.0%.
According to experts, decline in interest rates will be slightly negative for banks as they may witness some pressure on the spreads. However, banks will get some cushion form heavy investment in Pakistan Investment Bonds (PIBs), made during 2014. Moreover, banks are now less exposed to interest rates risk as they were previously because rates on saving deposits are also linked with policy rate, which will be revised down following rate cut. According to financial experts, the negative impact of rate cut will somewhat be negated by higher credit growth, gains on PIBs and higher non-interest income in 2015. However, assuming all other things constant a 100bps decrease in interest rates will affect earnings of the banks by 5%.
Lahore Chamber of Commerce & Industry President Ijaz A. Mumtaz said that it was longstanding demand of the Lahore Chamber of Commerce & Industry that markup rate should be at the lowest to provide some breathing space to the industrial.
Ijaz A Mumtaz, however, called for measures to make interest rate cut meaningful and result oriented as if the other economic factor were not taken, they would continue to create problems for the economy in general and for the private sector in particular.
He said that perhaps the Lahore Chamber of Commerce and Industry (LCCI) is the only chamber of commerce in the country that had termed a considerable cut in policy rate a panacea to low investment phenomenon. He said that the cut will help ensure availability of cheaper money to cash starved private sector besides encouraging the potential foreign investors for investment in Pakistan. He, however, hoped that in the upcoming monetary policy, the interest rates would further be lowered to 7 per cent.
Umair Naseer of Topline Securities, observed in a report that companies with high debt levels on their balance sheet are expected to gain significantly from interest rate decline. After this he expects benchmark 6-month kibor rate will fall to 8.5% from 9.1%. Textile, cement, fertilizer sector and telecom sector companies are likely to benefit from rate cut, he added.
SBP, in its policy statement, also remains optimistic on the growth outlook of the country hinting growth rate of 4-5% in FY15. According to SBP, the recent floods had minimal impact on main crops of the country except rice production. Production of wheat, cotton and other major crops is expected to surpass last year’s production whereas sugarcane is also expected to remain close to last year’s level. The growth outlook of industrial sector has also improved due to availability of cheap raw material and increased construction activity. Expected improvement in electricity supply, stable exchange rate and lower commodity prices is also anticipated to further support the growth. Services sector is also anticipated to perform in line with the commodity producing sector.
External account outlook has also improved due to a significant fall in oil prices, increasing inflows and successful completion of IMF reviews. Inflows from Sukkuk, privatization proceeds and IMF payments led to an increase in foreign exchange reserves from $14.3b in Jun 2014 to $15.2b despite a current account deficit of $2.3b during 1HFY15.