AKD Securities Limited – AKD Detailed Report (August 29, 2022)

Karachi, August 29, 2022 (PPI-OT): Pakistan Floods: Severe risks arise to economic outlook

Monsoon rains this year have wreaked havoc in different areas of the country, with the country experiencing 2.9x the 30-yr avg. rainfall so far this year (30 yr. Avg: 132.3mm vs. 2022: 385.4mm). So far the floods have claimed 1,000 lives across the country, with an estimated loss of 702,100 heads of livestock and 495,200 houses. The ongoing floods are being compared to the ones experienced in 2010, where an estimated 20mn people were affected by the calamity and 1,800 lives were lost.

In the aftermath of the 2010 floods, production of major crops dropped drastically, with rice production down ~30%YoY and cotton production down ~11%YoY between FY10 and FY11. Area under cultivation for cotton dropped by ~13%YoY, whereas the same for rice dropped by ~18%YoY.

A shortage of local food supply would likely lead to higher food inflation in the coming months, which has a 34.58% weightage in the CPI basket. Owing to the same, we anticipate CPI to average 24%YoY in FY23. To note, in the aftermath of the 2010-11 floods, the SBP increased interest rates by a cumulative 150bps, however, this followed an easing stance prior to the flood. This time around, the situation is different with the SBP having already tightened interest rates considerably since Sep’21 (cumulative 800bps tightening).

Incorporating the direct and indirect effects of the floods, we revise down our GDP growth estimate from 2.76% to 2.14% during FY23, on the basis of agricultural growth of a mere 0.5% as opposed to 1.8% expected previously. To note, when Pakistan experienced flooding in Punjab in 2015, wherein the agricultural growth slowed down to ~0.6%.

With crops at a risk of being rendered unusable, the shortfall from the local production is expected to be met through imports. According to our estimates, every 5% crop damage of cotton/rice, and subsequent import of the same, would burden the import bill by an additional US$174/US$173mn, respectively, or a combined impact of US$1.4bn if similar losses in rice and cotton production are witnessed this year as those in FY11.

However, some respite to the current account could come in the form of: i) higher remittance inflow, ii) lower demand for petroleum products, and iii) grants and aid from developed nations that may bolster exports.

Following the floods of 2010, the stock market posted a negative return of ~5.5% and almost all sectors posted a negative return except Health Equipment and Technology Hardware sector. In next 6 months market posted a return of ~19%, led by Oil and Gas, Chemical, Electronic Equipment, Industrial Engineering and Food sectors.

The ongoing calamity and its ramifications pose a risk to the market’s outlook, driven by: i) possible slowdown in GDP growth, ii) pressures on the current account stemming from energy and food insecurity, and iii) inflationary pressures.