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JS Securities Limited – JS Research (August 29, 2022)

Karachi, August 29, 2022 (PPI-OT): Floods follow up – 2010 one-offs dilute comparison

Following our note, Floods – Initial assessment of the calamity, we discuss parallels with 2010 Floods. We present trends of key variables preceding and following 2010 floods but highlight that inferences, are limited due to peculiar one offs in FY11.

2010 floods had muted PSX impact as drivers of sentiments back then were vastly different. 1) 2010 Floods coincided with historically low PSX volumes (imposition of CGT on equities and lack of leverage product); 2) Healthy Foreign Portfolio Inflows as Frontier Markets rallied and 3) political noise, though elevated was nowhere near the current fever pitch.

On macros, while CPI did witness an uptick, expectation of foreign aid cushioned sentiments. The floods however did not stop SBP’s tightening cycle as interest rates increased by cumulative 150bp in 4 months following the floods.

On external front, respite emerged from abnormally high exports (cotton prices). FY11 exports of US$25.4bn (+29% YoY) could not be repeated till FY21, while one off services export also contributed. Imports however remained sticky (+15% YoY). With global recession fears and damage to cotton / rice crops, an export bonanza buffering external account seems unlikely.

2010 Flood Inferences are limited due to peculiar one offs

Following our note, Floods – Initial assessment of the calamity, released on 26 Aug, 2022 we today draw parallels with 2010 Floods and find inferences for both PSX and macros are limited due to peculiar situations and one-offs in 2010-11.

PSX 2010 – CGT was a bigger concern than floods

Federal Budget for FY11 announced in June 2010 introduced Capital Gains Tax (CGT) on equities for the first time and without clear modalities. This tax was introduced in an already unsettling back drop of no viable leverage product available since the 2008 crisis. Combination of the two meant that PSX was undergoing historically low volumes when Floods of 2010 hit.

From a return perspective however, market remained resilient in the immediate aftermath as 1) intermittent chatter of leverage product kept market interested and 2) Foreign portfolio inflows remained healthy as Frontier Markets globally found traction. Political noise, though elevated was nowhere near the current fever pitch.

Macro – CPI trend could repeat

Food inflation soared from 12.8% in Jul-2010 to 21.2% in two months. During the same time, core inflation remained controlled, in a narrow range of 9% – 10%. Interestingly though the SBP did not hesitate from raising rates in light of the floods and raised rates by a cumulative 150bp in the four months following the floods.

But export bonanza unlikely

On external front, respite emerged from abnormal jump in exports (higher cotton prices) as current account posted nominal surplus of US$200mn. The abnormality of the US$25.4bn exports for FY11 (+29% YoY) can be ascertained from the fact that the same quantum could not be repeated again till FY21. One-off Services export also contributed where the number for Dec-2010 at US$1.3bn was 2.5x of the prevailing average monthly number. Imports however remained sticky (+15% YoY for FY11) where in addition to Food and Oil, auto imports also touched double digit growth indicating limited demand destruction.

Global recession and damage to crops may strain external a/c

Today, we stand at a contrasting domestic and global landscape in many ways, where concerns over global recession are already a risk to the country’ exports. While we reiterate that it is too soon to conclude the impact of ongoing floods on Pakistan’s external and fiscal accounts, we highlight the country’s already lower import cover as the pivotal point that makes any threat of pressure to Pakistan’s import bill as a bigger risk today, as compared to 2010. Material foreign support and mitigating risk of food security by other means are key upsides to our concerns.