JS Securities Limited – Morning Briefing

Karachi, April 19, 2019 (PPI-OT): Financial account surpassing current account in terms of relevance

The current account deficit (CAD) for Mar-2019 declined by 45% YoY to US$822mn (3.6% of GDP); however, it was higher by a massive 196% on MoM basis (i.e. almost thrice the CAD of Feb-2019).

As is usually the case, the increase in CAD was primarily on account of a surging trade deficit.

Despite US$12.6bn in foreign debt (gross receipts) accumulated in the nine months of this fiscal year, SBP’s FX reserves are still down by US$0.5bn during this period (i.e. since Jun-2018).

At least judging by the markets’ narrative in general, the reshuffling at the helm of affairs in the finance ministry should now ideally accelerate the commencement of the IMF program. Yet, whether a softer IMF program this time round turn out to be true – only time will tell.

CAD increases by 196% MoM in March

The current account deficit (CAD) for Mar-2019 declined by 45% YoY to US$822mn (3.6% of GDP), compared to US$1,486mn (5.8% of GDP) in the same month last year. Despite the decline, the number was higher by a massive 196% on MoM basis from Feb-2019, when CAD amounted to 1.2% of GDP. The higher CAD came as a blow, given the US$278mn CAD in February (revised down from US$356mn reported last month). To provide further context, compared to the US$576mn average deficit of the preceding two months, March’s CAD was higher by 43%. As has been the case in most instances in our history, this time too, the higher CAD was spurred by a jump in the trade deficit (up 34% MoM).

Exports posted a growth of 8% MoM (compared to 18% MoM decline in February); however, imports shot up by 20% MoM (down 20% MoM in February), leading to the inflated trade deficit in March. The sharp rise in import bill was higher possibly as a result of higher oil prices, coupled with increased quantity of petroleum products’ imports; we await further clarity from the SBP for detailed breakup of imports before shedding further light on this development. As usual, there was some respite in the form of workers’ remittances, which grew by 11% MoM to US$1.75bn, providing some cushion to the CAD.

Financial account more relevant now than current account

The latest foreign exchange (FX) reserves held by the central bank (as of April 12, 2019) stand at US$9.24bn, compared to US$10.27bn at the end of the previous week, marking a decline of US$1bn owing to principal repayments against Pakistan sovereign bond. Despite US$12.6bn in foreign debt (gross receipts) accumulated in the nine months of this fiscal year, SBP’s FX reserves are still down by US$0.5bn during this period (i.e. since Jun-2018). As per news flows, the final US$1bn tranche of total US$3bn from UAE in lieu of BoP support has not arrived yet; at the same time, debt repayments amounting to ~US$1.75bn are due in the next month in foreign debt repayments as per the international reserves/FX liquidity data shared by SBP.

In this torrid scenario, a case of ‘the sooner the better’ is becoming even more critical day by day when it comes to a financing arrangement, or to be more specific, given the news flows, entering an IMF program. Given our external financing gap, it should not be surprising if we resort to exceptional financing from the international lending agency. It is dire situations such as these, when the odds of painfully tough conditions increase. Also, it is such times when forming a view on interest rates and exchange rate for instance becomes a daunting task! At least judging by the markets’ narrative in general, the reshuffling at the helm of affairs in the finance ministry should now ideally accelerate the commencement of the IMF program. Yet, whether a softer IMF program this time round turn out to be true – only time will tell.

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