Morning Call about CAB USD1.2bn down, Investment cycle begins with 1QFY12 – Arif Habib Limited

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Karachi: The country’s current account (CA) deficit for quarter ending September FY12 clocked in at USD ~1.2bn or 2.0% of the GDP.

According to Arif Habib Limited, this showed a worsening picture when compared to last year CA deficit of USD 597mn (1.1% of GDP). Strong growth in remittances along with robust export earning continues to remain underlying factors for current account deficit shrinkage. While continual slowdown in financial accounts posts a larger threat to overall balance of payments (BoP) which posted a USD 759mn deficit against a surplus of USD 88mn for same period last year. In addition to this the CA for full year FY11 has been revised to post a surplus of USD 437mn 0.2% of the GDP from a previous USD 542mn. Alternatively Arif Habib can also view CA deficit as factor of saving-investment gap widening, with investment taking over saving owing to recent rate easing and loose fiscal policy.

Balance of Payment

 

USDmn	Sep-11	Aug-11	%MoM	1QFY12	1QFY11	%YoY	FY11
Current Account	(908)	(201)	n.m.	(1,209)	(597)	n.m.	437
Exports	1,892	2,128	-11%	6,141	5,241	17%	25,440
Imports	3,381	3,626	-7%	10,178	8,233	24%	35,727
Trade Deficit	(1,489)	(1,498)	n.m.	(4,037)	(2,992)	n.m.	(10,287)
Remittances	890	1,310	-32%	3,297	2,646	25%	11,201
Capital Accounts	2	3	-33%	7	23	-70%	171
Financial Accounts	98	213	-54%	483	687	-30%	1,878
Direct Invest. (FDI)	170	21	710%	282	395	-29%	1,574
Port. Invest. (PI)	1	(18)	n.m.      (46)	66	-170%	345
Overall Balance	(731)	(101)	n.m.	(759)	88	n.m.	2,493
SBP Gross Reserves	15,614	16,556	-6%	15,614	14,262	9% 16,614
Source: State Bank of Pakistan, AHL Research

 

Of good: Exports and remittances

The first quarter ending Sept’11 the exports remained well healthy reporting a YoY rise of 17% to the tune of USD 6.14bn. Major export commodities were textile related goods, occupying ~55% of the total export basket, followed by food group ~17% (major ~7% rice weight-age). However a word on caution over easing global commodity prices, in particularly that of cotton prices (1QFY12 averaged USD ~116/lb against 1QFY11 USD ~139/lb, -16% YoY) might hurt the export bill. While volumetric growth may also suffer due to overall weight-age to US and EU (~31% of the total exports) albeit with a lesser extent. In addition to the robust export earning, worker’s remittances posted a strong growth of ~25% (USD ~3.3bn) during the period. Major countries remitting these flows were Saudi Arabia +26%, up from +23% from last year quarter, followed by UAE and USA at 23% and 19%, respectively. Ongoing Arif Habib remains bullish over worker’s remittances which so far have registered above USD ~1bn/month on average during the quarter. Continuation of this trend holds a potential growth opportunity of 17%YoY in remittances to the tune of USD ~13bn.

…Bad: Imports and foreign Exchange reserves

The trade deficit stretched to USD ~4bn from USD 3bn last quarter. The deterioration was on the back of 24% YoY rise in import bill which during the quarter ending stood at USD 10.1bn (Sept’11 imports 3.4bn, a 33-month high). Around ~43% of the imports of USD ~4.4bn was related to petroleum products and reflected the sharp rise in oil prices ~+46% (1QFY12 Arab light Gulf average USD 108.30/bbl, against USD 74.01/bbl same quarter last year). Arif Habib expects oil prices to weaken going forward which given the persistent export growth, will likely improve trade deficit albeit with a lesser extent for FY12 close to USD ~7.8bn, against ~10.2bn full year FY11. This in Arif Habib’s opinion would largely be funded through banking sector borrowing, given the absence of foreign inflows in the shape direct and portfolio investments which may post a considerable drain on foreign exchange reserves.

…and not so ugly: Foreign capital flows

The financial account balance remained shallow owing to falling foreign inflows. The Foreign Direct Investments (FDI) which posted a YoY decline of ~29% (USD 282mn in 1QFY12). Similarly the portfolio investments recorded an outflow of USD ~46mn from last year same period inflows of USD ~66mn. In Pakistan the decline in foreign investments trend underlines factors faced primarily on the domestic and then on external macro-economic front. Arif Habib tends to highlight a few factors underlying the impeding growth in foreign inflows.

Financial Inflows: Highlighting the issue

The country after witnessing peak investment inflows of USD ~10bn, both direct and portfolio investment, started to experience a slowdown with the emergence of global credit crisis late in FY08. The portfolio outflows picked up sharply during FY09 (USD -1.03bn), while restoring to pre-FY08 crisis back in FY10 (USD -64mn), owing to slight recovery in global investment sentiments. However, since the 2HFY11 the emergence of sovereign debt crisis in Euro-zone kept the investors at shore. While the exogenous factors played a handsome part in keeping the capital flows at bay, the turbulent domestic situation exaggerated the phenomenon. Domestic factors such as political instability, high inflation and high lending rates, held back the overall investment inflow. Despite the impeding factors, major sectors such Oil and Gas exploration followed by power continued to attract healthy investments. During the 1QFY12, they both accounted for almost ~72% of the total FDI.

Finally Arif Habib might see an outflow trend reversal going forward

On the domestic front, Arif Habib believes some of the concerns affecting the FDI and PI have finally softened up. With inflation hovering just above single digit territory and given the recent 150bps rate cut, Arif Habib expects the sentiment of re-investment and growth to pick up albeit with a slower pace. Although Arif Habib tends to disagree with this very growth track of government, loose fiscal policy combined with monetary easing, rather the focus should be on productive resources, a case in point circular debt. Finally Arif Habib foresees global growth in a rebalancing act, first to come with a probable to a possible resolution to EU debt (in the medium to long-term) and concerns over slowdown in US growth seems to dissipate. This in Arif Habib’s view will likely mean a reversal of outflow trend going forward (long-term). Although this may be a long-term view with PI’s gathering a momentum over the FDI.