Karachi, April 18, 2014 (PPI-OT): The CA deficit for Mar’14 has clocked in at US$156mn vs. a revised surplus of US$167mn in Feb’14.
As a result, the 9MFY14 CA deficit has been recorded at US$2,173mn (1.2% of GDP) compared to a deficit of US$1,255mn (0.7%of GDP) in the same period last year.
This substantial rise in the deficit was primarily due to 1) 14%MoM increase in balance of trade in goods (Exports up 3%MoM, Imports up 7%MoM), and 2) Balance of trade in Services, up 567%MoM largely due to CSF receipts received in Feb14.
At the same time Remittances continue to provide relief to the current account, up 10%MoM to record at US$1,337mn. AKD Securities notes that while the CA deficit has widened, this is largely due to a high base (hefty CSF receipts last year) and the deficit still remains contained relative to GDP.
In this regard, fx reserves rose to US$10bn (slated to cross US$12bn post Eurobond receipts). The increase in fx reserves is largely due to net inflows where Pakistan received US$1.5bn from Saudi Arabia under the Pakistan Development Fund. Together with the US$2bn raised through Eurobond auction, the PkR has appreciated by 7%CYTD to 96.4 vs. the US$.
Considering positive real interest rates stand at 1.4% and further foreign inflows are expected (3G auction / privatization proceeds) AKD Securities believes SBP may commence monetary easing in May14 and cut the DR by at least 50bps.
Textile Sector: Finally some relief for spinners
In a move to provide some relief to the yarn manufacturing segment of the textile sector, the ECC in its meeting yesterday decided to withdraw the exemption of 5% import duty on yarn. Recall that the spinning segment has been struggling to cope with a slump in the yarn market with yarn import demand from China coming off by 17%MoM during Feb’13.
This reflects a decline of 26% from the all-time high level of 203mn tons of yarn imports witnessed in Aug’13. Yarn manufacturers were facing a tough time in the domestic market as well due to competition from cheaper Indian yarn. While the revival of an import duty on yarn will provide some relief to the local yarn manufacturers, the benefit will be limited to sales in the domestic market.
Furthermore, this move will likely hurt higher value added goods manufacturers who were mitigating increase in electricity costs by sourcing cheaper yarn from India. For fully integrated mills the impact on earnings will depend on two factors i.e. the percentage of yarn sales in the domestic market and the reliance on imported yarn for weaving.
As per FY13 results (assuming yarn forms approximately 75%-80% of the cost of sales), NML meets 22% of its yarn consumption requirements in the weaving division through in-house sources, while the same stands at 46% for NCL.
In this regard, while the imposition of higher yarn import duty will allow spinners to benefit through an increase in local yarn prices, the benefit will come at the expense of manufacturers higher up the value addition chain. AKD Securities expects the impact of higher yarn import duty to be lower for vertically integrated mills such as NML and NCL as compared to pure yarn plays such as GADT.
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