AKD Quotidian about — Trade deficit widens in Nov’11

Karachi: According to latest data released by FBS, the Nov’11 trade deficit has surged by 27%MoM to US$2.l7bn against a trade deficit of US$1 .7llbn in Oct’11.

According to AKD Securities, this is largely due to an 18%MoM decline in exports to US$1.55bn (first posting below US$2bn since Aug’11) and a 3%MoM increase in imports to US$3.71bn. As a result, the 5MFY12 trade deficit has expanded by 36.7%YoY to US$9.1bn against a trade deficit of US$6.6bn (revised numbers) in the same period last year. In this regard, exports showed a growth of 7.6%YoY in 5MFY12 to US$9.3bn while imports rose at a much faster clip – up 20.2%YoY to US$18.4bn. Considering sequential Balance of Trade data is disappointing (particularly the MoM decline in exports where details are as yet unavailable), AKD Securities believes the Current Account (CA) deficit in Nov’11 may again spike in Nov’11 even if remittances maintain their growth trajectory. Recall that the CA deficit was abnormally high in Sep’11 where the increase in remittances failed to contain the ballooning deficit. As such, while AKD Securities’ full-year FY12 CA deficit projection is US$3bn (1.3% of GDP), near-term data may again put pressure on the PKR, which has depreciated by 4.1% vs. the US$ in the last month.

The SBP has recently issued the Financial Stability Review, primarily concerning itself with the Banking sector. The key issue appears to be the ongoing slowdown in private sector credit off-take with the GoP crowding out the private sector (federal government has borrowed PKR630bn from banks in 5MFY12 vs. net retirement to the SBP). As such, white SBP borrowing targets will likely be met, there will be a detrimental impact on the fiscal deficit as SBP profits are in turn transferred to the GoP (tax on bank’s income will have a tower impact). In this regard, a potential floor on ADR may provide impetus to private sector credit off-take but the SBP has indicated that implementing this is a long-shot. Other key takeaways include 1) continuation of strong liquidity and capital indicators – while MCR might be an issue for some banks, the sector is well-placed to meet Basel-III requirements going forward, 2) Pakistan’s rank of 69 out of 122 countries based on NIMs which may ease regulatory risk for margins and 3) continuation of NPL formation, particularly in the Textile and Cement spaces although Sugar has depicted improvement.