Elixir Securities Limited – Elixir Insight

Karachi, March 16, 2018 (PPI-OT): Pakistan Economy – Unprecedented External Financing Requirement to Hurt Growth Prospects

With imports growing at a faster pace than our expectations we revise our FY18F CAD estimate by 14% to USD16.9bn (5.3% of GDP) and forecast FY19F CAD to stand at USD18.2bn (5.7% of GDP).

As such, we estimate Gross External Financing Requirement to stand at USD23.0bn for FY18F, with USD10.2bn for last five months of FY18F. Rising CAD and External Debt Servicing are expected to raise FY19F Gross Financing Requirement to USD24.6bn (CAD: USD18.2bn / External Debt Servicing:USD6.4bn).

We expect the financing gap for last five months of FY18 to be bridged through WB/ADB loans(~USD0.9bn), Eurobond/Sukuk issue (~USD1bn) and short term commercial borrowings (USD5-7bn).

We maintain that Pakistan will opt for fresh IMF program post General Elections, where the latter’s stringent conditions may restrain GDP growth to around 5%.

CAD Curtailment Remains Elusive: Pakistan’s Current Account Deficit (CAD) has slipped out of handsowing to faster growth in imports (16.4%YoY/16.2%YoY in FY17/7MFY18) amid dismal growth in exports (0.1%YoY/10.5%YoY in 7MFY18) and remittances (-2.8%YoY/3.6%YoY in 7MFY18). While exports (led by Export Incentive Package) and remittances have started to bounce back, we anticipate them to be more than offset by rising imports mainly due to increase in energy (oil and LNG) imports and higher oil prices. In this regard, we revise upwards our FY18F CAD estimate by 14% to USD16.9bn (5.3% of GDP) andforecast FY19F CAD to stand at USD18.2bn (5.7% of GDP).

Our FY18F/FY19F estimates are relatively higher than IMF’s FY18F/FY19F estimates of USD14.9bn / USD15.4bn where the major difference stems from our relatively higher imports and lower remittances forecast.

While IMF in its Post-Program Evaluation welcomed PKR depreciation and monetary policy tightening, it recommended continuation in exchange rate flexibility and monetary policy tightening to addressexternal imbalances. As such, we expect CAD curtailment to remain elusive in near term and would require implementation of structural policies to build capacities for addressing this issue.

Financing Arrangement Remains an Uphill Task: With growing CAD and resultant increase in external borrowings, we estimate Gross External Financing Requirement to stand at USD23.0bn (CAD: USD16.9bn / External Debt Servicing: USD6.1bn) for FY18F with USD10.2bn (CAD: USD7.7bn / External DebtServicing: USD2.5bn) for last five months of FY18F and USD24.6bn (CAD: USD18.2bn / External DebtServicing: USD6.4bn) for FY19. On the other hand, IMF forecasts Gross External Financing Requirement to stand at USD24.5bn/USD27.0bn for FY18F/FY19F, slightly higher than our estimates mainly due to difference in calculation where we have used government’s available definition of Gross External Financing as a sum of CAD and External Debt Servicing, while IMF uses sum of CAD and amortization of long term debt and short term maturing debt.

We expect that the financing gap for last five months of FY18 to be bridged through World Bank (WB) / Asian Development Bank (ADB) loans (~USD0.9bn), Eurobond/Sukuk issues (~USD1bn) and short term commercial borrowings (USD5-7bn). The latter will likely remain challenging due to deteriorating external account metrics which may result in FX reserves falling significantly below current level ofUSD12.3bn, by Jun-18.

Going forward, we maintain that Pakistan will opt for fresh IMF program post General Elections.However, given the deteriorating fiscal discipline, we anticipate tougher measures by the lender. IMF has already hinted towards the need for 1) further depreciation of PKR, 2) further monetary policytightening, 3) privatization of state owned entities, 4) strengthening fiscal discipline through additional revenue measures and controlled current expenditures, and 5) implementation of structural reforms. We believe the said measures will likely take a toll on slowing down of GDP growth where IMF forecasts GDP growth to go down from 5.6% in FY18F to 4.7% in FY19F. We maintain our projection of 6-9% depreciation in PKR over 2018, but project GDP Growth to slow down to 5% in FY19, from 5.8% in FY18.

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