Karachi, July 26, 2022 (PPI-OT): Contracting import cover and implications for sectors

Shrinking import cover and free fall of PKR against the US$ have reportedly led to prioritizing of imports with preference given to oil and other essential imports over others, at least till the country witnesses IMF and other prospective disbursements and foreign exchange support.

This has begun to impact the listed space as news reports regarding sectors such as auto manufacturers shutting production over scarcity of forex to import raw materials have been making rounds. Persistence of the same could eventually lead to other sectors to follow suit.

We believe delays in ‘non-essential’ imports are likely to negatively impact the Cement, Steel, Chemical, Textile, Auto and Auto Parts sectors from the listed space. On the other hand, sectors/companies such as Glass and Ceramic, Paper and Board and PAEL may benefit from reduction in competition from imports, if any.

Limited forex – Essential imports given precedence

Pakistan is short of dollars once again, with import cover treading between 6 to 7 weeks. A window of dollar inflows has emerged as Pakistan has reached the Staff Level agreement with IMF, however the window would unlock only with the approval by the IMF’s Executive Board, scheduled on 24 August, 2022, expected to be followed by ~US$8bn worth of external support from friendly countries.

The path between now and reaching a comfortable position still needs to be navigated with caution. The July 2022 import bill will likely be comparatively benign (estimated at US$5.5bn, -30% MoM), as Jun-2022’s numbers possibly reflect an aspect of pre-buying in POL products over anticipation of increase in prices. Having said that, one should not rule out exporters’ preference to postponing FCY remittances as much as possible, to avail the most of ongoing PKR depreciation, limiting forex inflows this month. The situation has reportedly led to a prioritizing of imports with preference given to oil and other essential imports over others.

Gainers and losers, both, may emerge in the listed space

From the listed space, news reports regarding auto manufacturers shutting production over scarcity of forex to import raw materials have been making rounds. The continuation of proportionating imports or delay among the ‘non-essential’ imports will likely lead to other sectors to follow similar announcements, creating production hiccups with late arrival of respective raw materials and/or machinery.

On the flip side, as some sectors also face competition from finished goods imports, any rationing of imports in those sectors would push arrival of goods of some competitors to later months, or at least till the situation normalizes.

Sector-wise analysis suggests the ongoing situation may delay raw material imports for the Auto, Auto Parts, Textiles, Chemicals, Cement and Steel sectors from the listed space. On the other hand, sectors/companies such as Glass and Ceramic, Paper and Board and PAEL are likely to benefit from reduction in competition from imports, if any.