KARACHI: The State Bank of Pakistan (SBP) has projected deterioration in bank earnings, inter-bank borrowing, foreign currency market and external sector vulnerabilities in 2018.

This carries a potential risk to dent financial stability of the country in the current calendar year.

The central bank has, however, raised hope that commercial banks would meet almost all the financing demand as they maintain ample liquidity under their management. Whereas, the money and capital markets are expected to become stable with relatively steady inflation in the country, it added.

“At the aggregate level, macroeconomic vulnerabilities are identified as the greatest risks to financial stability at present; whereas financial market risks are perceived to be critical for the next six months,” SBP said in its Financial Stability Review (FSR) for the calendar year 2017.

Among all the risks, the highest cited, at present, are deteriorating balance of payments position (foreign currency reserves), volatility in exchange rate (rupee-dollar parity), and a widening fiscal deficit.

Size of Pakistan’s economy is $313.13 billion, says SBP

“For the next six months (January-June 2018), respondents (of SBP Systemic Risk Survey conducted in January 2018) believe that political uncertainty, deterioration of balance of payments and uncertainty over exchange rate could potentially undermine financial stability,” it added.

“Encouragingly, under resilience analysis, banks are expected to absorb shocks in domestic and global stressed scenarios in the medium-term. Nevertheless, declining profitability and deceleration in deposit growth are key concerns,” the central bank said.

Equity market volatility, within reasonable bounds, is essential to restore investor confidence. The projected path of financial vulnerability index does not show any major deviations in CY18. Nevertheless, the uncertainties surrounding the projections reflect rising odds of upside risk.

SBP sees gloomy growth for Pakistan in FY19

The likelihood of occurrence of a high-risk event in the financial system of Pakistan over the short-term is relatively higher than the medium-term, it said.

In the short-term, risks to domestic financial stability may elevate further “if external account challenges remain, fiscal imbalances persist, and savings in the economy (especially, deposit growth) stay low,” the review said.

In the medium-term, risks to the financial system may decline in perspective of sustained growth momentum, rising opportunities from the China-Pakistan Economic Corridor (CPEC), improving energy availability, and expected increase in exports on the back of improving global demand, it added.

“State Bank of Pakistan (SBP), taking a proactive and holistic view of the emerging vulnerabilities, is not only strengthening its own regulatory and supervisory regime but is also collaborating with the Securities and Exchange Commission of Pakistan (SECP) to address systemic concerns,” it said.

Assets grow 12.8%

The assets of financial sector grew 12.8% to Rs24.8 trillion in the year ended December 2017, revealed SBP data. The share of banks in the total assets stands at 74%.

The banking sector has registered an asset expansion of 15.86% largely due to robust growth in advances to private sector. The key thrust in financing demand has come from textile, sugar, cement, and agribusiness sectors.

Impact of currency depreciation to come with a lag

Owing to rise in advances, non-performing loans to advances ratio – at 8.4% – has touched a decade low level and Capital Adequacy Ratio (CAR) at 15.8% is well above the minimum regulatory requirement of 11.275%.

The challenging macro-financial conditions, particularly in the second half of 2017, have influenced the performance of the non-bank financial sector as well.

“Mutual funds have shifted a significant portion towards money market funds in response to volatile equity prices and risk-averse sentiments. However, mutual funds portfolio is still dominated by equities that are exposed to equity price risk,” SBP said.

The other non-bank intermediaries like modarabas and leasing companies have been lagging behind in performance due to structural inefficiencies and insufficient availability of low cost funds, it said.