AKD Quotidian about — CSF receipts lead to CA surplus

Karachi, September 19, 2012 (PPI-OT): Receipt of US$1.18 billion Coalition Support Funds (CSF) – which is classified as export of services – has propelled the Aug’12 Current Account balance into a surplus of US$1.24 billion.

According to AKD Securities, as a result, the CA balance has registered a surplus of US$919 million is 2MFY13 vs. A deficit of US$261 million in the same period last year. In addition, there have been emergent positives on the trade deficit (goods) which has contracted by 21%MoM to US$1.06 billion in Aug’12 largely due to an 8%MoM decline in imports. That said, this is likely due to deferred payments where AKD Securities understands there is a 3m lag vs. PBS data. While the strong CA surplus strengthens the case for further monetary easing, note that the last 150bps cut in DR came post receipt of CSF i.e. a CA surplus in Aug’12 was already expected. Furthermore, the CA is likely to show slippages across the course of the fiscal year particularly if foreign inflows do not materialize as expected. In this regard, sticky int’l oil prices pose a key risk. AKD Securities maintains a FY13F CA deficit estimate of US$4n (~2% of GDP). Important flags on the macroeconomic calendar include upcoming IMF-Pakistan talk.

Dissecting the CA: The CA registered a surplus of US$1.24 billion in Aug’12 vs. a deficit of US$321 million in Jul’12. As a result, 2MFY13 CA surplus came in at US$919 million (0.4% of GDP) vs. a deficit of US$261 million in 2MFY12. In this regard, the trade deficit (goods) contracted by 21%MoM to US$1.06 billion in Aug’12, mainly due to 8% decline in imports (3m lag effect). Inclusive of services, the 2MFY13 trade deficit was US$1.75 billion down 41%YoY. This is largely attributable to inflows from US as part of CSF flows (US$1.18 billion) while remittances were also supportive (+4%MoM in Aug’12).

CA outlook – risks remain: AKD Securities estimates FY13F CA deficit close to US$4 billion (~2% of GDP) where AKD Securities assumes Arab Light average at US$110/bbl (oil imports account for roughly a third of Pakistan’s import bill). By way of sensitivity, a US$5/bbl increase in int’l oil price would increase the FY13F import bill by US$700 million. Nevertheless, a full-year CA deficit of US$4 billion would still represent an improvement of 11%YoY while upside risks emanate from potential uptick in textile exports on strong Chinese cotton yarn demand. That said, latent risks to the Balance of Payments position remain in view of 1) IMF repayments of US$1.7 billion in 2HFY13, 2) delays in release of further CSF flows, 3) sticky int’l high prices and 4) non-materialization of targeted receipts (3G license fees, Etisalat payment). Upcoming IMF-Pakistan talks (both technical and policy level) are the next key checkpoint for Pakistan’s macroeconomic outlook.

Monetary easing in near-term: Considering CPI remains in single-digits (Aug’12: 9.05%YoY), the PKR /US$ parity has been stable and that the cumulative FY13 CA balance should stay in surplus over the next few months, the SBP is likely to continue lowering the DR (space exists for at least a 50bps cut in DR to 10% in the next MPS). Beyond the immediate-term however, SBP’s hitherto dovish stance could reverse by mid-CY13, particularly if potential fx reserve erosion amidst speculative pressures on the currency warrant a return to an IMF program.