Elixir Securities Limited – Elixir Insight

Karachi, April 18, 2018 (PPI-OT): Pakistan Economy – Is Economic Growth at the Crest?

Pakistan provisionally posted 12-year high economic growth of 5.79%YoY in FY18, up from 5.37%YoY in FY17. The growth was led by rising incomes, dovish monetary policy, and fast paced infrastructure development.

The government has set an ambitious GDP growth target of 6.2%YoY for FY19, however we maintain that growth will slow down to 5% in FY19.

Economic slowdown is likely to be a result of interest rate lift-off and expectations of tighter fiscal/monetary policies to address fiscal/external accounts imbalances with likely entry into fresh IMF program post-elections in 1HFY19.

Economic Growth Continues its Uptrend: According to the recent accounts compiled by National Accounts Committee, Pakistan provisionally posted 12-year high GDP growth of 5.79%YoY in FY18, up from 5.37%YoY (upwards revised) in FY17. The economic growth was led by 1) rising incomes buoying consumerism, 2) dovish monetary policy amidst low inflation, 3) fast paced infrastructure development further aided by spillover effects of CPEC.

Nominal GDP growth dropped to 7.61%YoY in FY18F from 9.93%YoY in FY17, as GDP deflator was relatively lower at 2.05%YoY in FY18 vs, 3.96%YoY in FY17. As such, income per capita grew by 5.46%YoY to PKR180,204 in FY18 vs. 7.18%YoY growth to PKR170,877 in FY17. Owing to higher depreciation in average PKR/USD exchange rate of 4.92%YoY to 109.85 vs. 0.45%YoY to 104.70 in FY17, Income per capita in dollar terms rose merely by 0.51%YoY to USD1,640 in FY18 vs. 6.71%YoY to USD1,632 in FY17.

In Real Terms, Agriculture Sector Showed the Strongest improvement:Agriculture sector provisionally grew 3.81%YoY in FY18 vs. 2.07%YoY in FY17. Strong Agriculture sector growth was attributable to improved crop production (3.83%YoY in FY18 vs. 0.91%YoY in FY17) and livestock farming (3.76%YoY in FY18 vs. 2.99%YoY in FY17). The former was attributable to higher crop prices, better crop yield, increase in agricultural loans (4.2%YoY in 8MFY18 vs. 0.5%YoY in FY17), and subsidies on fertilizer and tractors.

Industrial Growth inched up to 5.80%YoY in FY18 from 5.43%YoY in FY17. The growth was mainly led by improvement in Large Scale Manufacturing to 6.13% in FY18 vs. 5.62%YoY in FY17. The improved industrial production was attributable to 1) improved energy supplies, and 2) growing domestic demand amidst rising incomes and consumerism.

Services sector growth remained robust standing at 6.43%YoY in FY18 vs, 6.46%YoY in FY17. Stable growth was mainly attributable to robust wholesale/retail trade growth of 7.51%YoY in FY18 vs. 7.46%YoY in FY17. However, Transport activity slowed down to 3.58%YoY in FY18 compared with 4.44%YoY in FY17.

Slowdown in Private Consumption and Investment: Based on real expenditure approach, rising Government Consumption and slowdown in net imports growth drove GDP growth. The former rose at a sharp pace by 14.15%YoY in FY18 vs. 5.26%YoY in FY17. Net imports growth slowed down to 25.77%YoY in FY18 vs. 58.87%YoY in FY17 as 1) exports were galvanized by exports package, and 2) imports growth slowed down owing to PKR/USD depreciation and imposition of regulatory duties on import of luxury/non-essential items. Private Consumption/Investments growth slowed down to 6.27%YoY/5.67%YoY in FY18 vs. 8.73%YoY/9.55%YoY.

GDP Growth to Slow Down Amidst Deteriorating Macros: The government has continued to lag behind its growth targets where it achieved 5.79%YoY growth in FY18 vs. GDP growth target of 6.0%. This will likely continue to be the case as the government has slightly revised down its FY19 GDP growth target to 6.2%YoY from 6.5%YoY, amidst concerns over deteriorating macros. The target seems over ambitious as we forecast GDP growth to stand at 5.0%YoY in FY19 owing to interest rate lift-off (expecting cumulative 125bps increase during 2018) due to rising inflationary expectations and tighter monetary/fiscal policies to curb financial/external accounts imbalances.

Abysmal SBP’s FX reserves of USD11.4bn (import cover: 2.1 months) and significantly high Current Account Deficit (CAD) (5.4%/5.7% of GDP in FY18F/FY19F) would call for every source of financial inflows. In this regard, we believe that it is a matter of time that Pakistan would be knocking again at the IMF’s door most likely post-elections in 1HFY19. The lender would likely set tougher conditions and call for more stringent fiscal/monetary policies to achieve economic stability but at the cost of slower economic growth. IMF may likely call for 1) increase in tax net, 2) reduced subsidies, 3) retirement of SBP’s debt creating crowding out effect as the government’s borrowing will shift to commercial banks, and 4) stricter fiscal targets which will likely result in cuts in development spending.

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Elixir Securities Limited – Elixir Insight

Karachi, April 18, 2018 (PPI-OT): Pakistan Economy – Is Economic Growth at the Crest?

Pakistan provisionally posted 12-year high economic growth of 5.79%YoY in FY18, up from 5.37%YoY in FY17. The growth was led by rising incomes, dovish monetary policy, and fast paced infrastructure development.

The government has set an ambitious GDP growth target of 6.2%YoY for FY19, however we maintain that growth will slow down to 5% in FY19.

Economic slowdown is likely to be a result of interest rate lift-off and expectations of tighter fiscal/monetary policies to address fiscal/external accounts imbalances with likely entry into fresh IMF program post-elections in 1HFY19.

Economic Growth Continues its Uptrend: According to the recent accounts compiled by National Accounts Committee, Pakistan provisionally posted 12-year high GDP growth of 5.79%YoY in FY18, up from 5.37%YoY (upwards revised) in FY17. The economic growth was led by 1) rising incomes buoying consumerism, 2) dovish monetary policy amidst low inflation, 3) fast paced infrastructure development further aided by spillover effects of CPEC.

Nominal GDP growth dropped to 7.61%YoY in FY18F from 9.93%YoY in FY17, as GDP deflator was relatively lower at 2.05%YoY in FY18 vs, 3.96%YoY in FY17. As such, income per capita grew by 5.46%YoY to PKR180,204 in FY18 vs. 7.18%YoY growth to PKR170,877 in FY17. Owing to higher depreciation in average PKR/USD exchange rate of 4.92%YoY to 109.85 vs. 0.45%YoY to 104.70 in FY17, Income per capita in dollar terms rose merely by 0.51%YoY to USD1,640 in FY18 vs. 6.71%YoY to USD1,632 in FY17.

In Real Terms, Agriculture Sector Showed the Strongest improvement:Agriculture sector provisionally grew 3.81%YoY in FY18 vs. 2.07%YoY in FY17. Strong Agriculture sector growth was attributable to improved crop production (3.83%YoY in FY18 vs. 0.91%YoY in FY17) and livestock farming (3.76%YoY in FY18 vs. 2.99%YoY in FY17). The former was attributable to higher crop prices, better crop yield, increase in agricultural loans (4.2%YoY in 8MFY18 vs. 0.5%YoY in FY17), and subsidies on fertilizer and tractors.

Industrial Growth inched up to 5.80%YoY in FY18 from 5.43%YoY in FY17. The growth was mainly led by improvement in Large Scale Manufacturing to 6.13% in FY18 vs. 5.62%YoY in FY17. The improved industrial production was attributable to 1) improved energy supplies, and 2) growing domestic demand amidst rising incomes and consumerism.

Services sector growth remained robust standing at 6.43%YoY in FY18 vs, 6.46%YoY in FY17. Stable growth was mainly attributable to robust wholesale/retail trade growth of 7.51%YoY in FY18 vs. 7.46%YoY in FY17. However, Transport activity slowed down to 3.58%YoY in FY18 compared with 4.44%YoY in FY17.

Slowdown in Private Consumption and Investment: Based on real expenditure approach, rising Government Consumption and slowdown in net imports growth drove GDP growth. The former rose at a sharp pace by 14.15%YoY in FY18 vs. 5.26%YoY in FY17. Net imports growth slowed down to 25.77%YoY in FY18 vs. 58.87%YoY in FY17 as 1) exports were galvanized by exports package, and 2) imports growth slowed down owing to PKR/USD depreciation and imposition of regulatory duties on import of luxury/non-essential items. Private Consumption/Investments growth slowed down to 6.27%YoY/5.67%YoY in FY18 vs. 8.73%YoY/9.55%YoY.

GDP Growth to Slow Down Amidst Deteriorating Macros: The government has continued to lag behind its growth targets where it achieved 5.79%YoY growth in FY18 vs. GDP growth target of 6.0%. This will likely continue to be the case as the government has slightly revised down its FY19 GDP growth target to 6.2%YoY from 6.5%YoY, amidst concerns over deteriorating macros. The target seems over ambitious as we forecast GDP growth to stand at 5.0%YoY in FY19 owing to interest rate lift-off (expecting cumulative 125bps increase during 2018) due to rising inflationary expectations and tighter monetary/fiscal policies to curb financial/external accounts imbalances.

Abysmal SBP’s FX reserves of USD11.4bn (import cover: 2.1 months) and significantly high Current Account Deficit (CAD) (5.4%/5.7% of GDP in FY18F/FY19F) would call for every source of financial inflows. In this regard, we believe that it is a matter of time that Pakistan would be knocking again at the IMF’s door most likely post-elections in 1HFY19. The lender would likely set tougher conditions and call for more stringent fiscal/monetary policies to achieve economic stability but at the cost of slower economic growth. IMF may likely call for 1) increase in tax net, 2) reduced subsidies, 3) retirement of SBP’s debt creating crowding out effect as the government’s borrowing will shift to commercial banks, and 4) stricter fiscal targets which will likely result in cuts in development spending.

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