Six-month KIBOR surges to 16-month high

KARACHI: The six-month Karachi interbank offered rate (KIBOR) surged to a 16-month high after the central bank, earlier this week, increased its policy rate by a marginal 25 basis points (bps) to 7.25 percent.

The six-month KIBOR, which is used for benchmarking short-term interest rates in Pakistan, rose 36 bps to 8.11 percent -- the level last seen on May 20, 2020 when the policy rate stood at 8 percent.

The secondary market treasury bond rates (PKRV) including 6-month T-Bill rate and 3-year Pakistan Investment Bonds (PIBs) also rose by 80 bps and 119 bps in 2021 to date to 7.98 percent and 9.46 percent, respectively. T-Bill yield is also up 36 bps since the monetary policy announcement.

Analyst Umair Naseer at Topline Securities said the recent surge in KIBOR and secondary market bond yields reflect heightened concerns over external account outlook and expectations of further increase in policy rate.

All tenors of KIBOR would rise as a result of any further increase in the interest rates and the T-bills yields. So, the bank borrowing would become more expensive for the private businesses.

“The impact will be somewhat mitigated by concessionary lending schemes like TERF [Temporary Economic Refinance Facility] and LTFF [Long-term Financing Facility],” Naseer said.

“However, it would still have an impact on companies' finance cost as a major portion of borrowing for these companies is still derived from KIBOR led lending.”

Analysts believe the impact of a surge in KIBOR and PKRV rates would be more profound on banks than generally believed by the market because the minimum profit rate on saving and term deposits is linked with policy rate which will be increased by 25bps compared to KIBOR and PKRV rates that have increased to a larger extent.

The minimum profit rate on saving and term deposits is 50 bps below the SBP repo rate.

Hence, minimum profit rate on saving and term deposits have increased by 25 bps to 5.75 percent as revised repo rate stands at 6.25 percent after the SBP’s policy tightening.

“We eye a 6 percent earnings impact on banks,” Naseer said.

The rise in lending rates will have a positive impact on banks whereas leverage companies and sectors like cements, steels, oil marketing companies could face negative impact due to higher finance costs, which is likely to be increased by 1.3 percent.

Cash rich sectors which include exploration and production, fertilizer and autos will likely benefit from the same with rise in PKRV rates but higher rates may affect the sales outlook of sectors like autos, consumers and others.

Analyst Syed Masroor Hussain Zaidi at Foundation Securities said increase in the policy rate was quite expected given the substantial increase in current account deficit and the recent run up in rupee against the green back despite SBP’s intervention.

This development is estimated to bode well for banks along with companies with the net cash positions.

“We expect inflation outlook to be a function of global commodity prices and along with the local energy tariffs. However, this token increase in the policy rate coupled with the regulatory measures to lower imports may keep demand in check,” Zaidi said.

“We see inflation to average 8.1 percent in FY22 in the absence of any IMF induced energy tariff hikes.

Furthermore, we do not expect any substantial slowdown in the private sector credit demand. However, we may observe regulatory tightening on consumer finance to keep it under desirable levels.”