Morning Call about Current Account – Arif Habib Limited

Karachi, June 20, 2012 (PPI-OT): Deficit widens by 48x in 11MFY12

CA deficit swells to USD 3.8bn on account of 48% YoY rise in trade deficit
The current account deficit in 11MFY12 swelled by 48x YoY amounting to USD 3.8bn.

According to Arif Habib Limited, however in May-12 the deficit shrank by 24% YoY to USD 414mn compared to USD 545mn corresponding period last year. As a result of the soaring CA deficit, the country’s overall balance of payment posted a deficit of USD 327mn in May-12 as compared to a surplus of USD 143mn during May-11. Moreover, a severe deterioration of 112% YoY in BoP was registered in 11MFY12. The primary reason behind this was the trade deficit, which widened to USD 16.5bn, depicting a rise of 48% YoY. Notwithstanding the robust increment in remittances, current account balance remained in the red zone mainly on account of swelling import bill.

11.3% YoY increase in imports barricade growth in current account
Imports during 11MFY12 increased by 11.3% YoY amounting to USD 43.7bn as compared to USD 39.2bn in 11MFY11. The major factor behind this hike was international crude oil price (Arab Light), averaging USD 111.8/bbl depicting a rise of 19% YoY. The import of petroleum group products (as of Apr-12) grew by 43.5% YoY during 10MFY12. Meanwhile, total volume of petroleum goods imported stood at 16.2mn tons during 10MFY12, depicting a decline of 5.8% YoY. It is evident from this break up that the hike in imports was mainly due to price increase rather than volumetric increase. Declining oil prices are expected to provide breathing space for the current account going forward. The government has targeted imports of around USD 43bn in FY13, which given the declining oil price is likely to be achieved.

Exports seek positive triggers to climb up
Regardless of an increase in the unit values of the majority of items during 11MFY12, a decline in the export volume was observed due to the adverse effects of the energy crisis domestically, and the sluggish international demand. The circular debt issue remained the root cause for declination in the petroleum group exports during 11MFY12, with crude oil imports going down by 9% YoY. A negative export growth of 3% in 11MFY12 to USD 27.2bn was largely attributed to the lackluster exports of high value added items such as knitwear, bed wear, towels and readymade garments. Furthermore, the declining cotton prices pose yet another question mark on the country being able to meet its export target of USD 25.8bn.

Higher remittances shaping as a major relief to BoP
Inflows in the form of remittances during 11MFY12 reached to USD 12.1bn,a 20% YoY improvement, when compared with USD 10.1bn in the corresponding period last year. The target of USD 13bn seems quite achievable, looking at the upward trend of inflows. Remittances continued the momentum of their strong growth, posting a 14% YoY increase in May-12 to USD 1.2bn compared to USD 1.05bn in May-11.