JS Securities Limited – Morning Briefing

Karachi, December 21, 2017 (PPI-OT): C/A deficit maintains high run rate in Nov-2017, clocks in at US$1.44bn

As per the State Bank of Pakistan (SBP), the Current Account (C/A) deficit clocked in at US$1.44bn for Nov-2017 compared to US$1.30bn in Oct-2017, led by (1) increased Services imports, (2) expansion in Primary Income balance and (3) drop in Home Remittances.

As a result, C/A deficit reached US$6.43bn in 5MFY18 compared to US$3.37bn in 5MFY17, an increase of 91% YoY; while C/A deficit in YTD 2017 now averages at US$1,292mn/month compared to an average of US$586/month in 2016.

We expect overall (Goods + Services) Trade balance deficit of US$35bn in FY18, translating into a C/A deficit of US$16.5bn for the year (5.1% of GDP).

The deterioration in C/A deficit has trickled down to overall Balance of Payments (BOP), a deficit of US$3.29bn in 5MFY18, as surplus of Financial Account also shrunk by 26% YoY to US$2.69bn.

On a slightly positive note, Foreign Direct Investments (FDI) improved by 65% YoY to US$1.14bn in 5MFY18, where 73% of these investments were from China; with 47% and 24% of the total FDI in the Power and Construction sectors, respectively.

C/A deficit at US$1.44bn in Nov-2017

As per the State Bank of Pakistan (SBP), the Current Account (C/A) deficit clocked in at US$1.44bn for Nov-2017 compared to US$1.30bn in Oct-2017, even though Goods trade balance declined by US$134mn as exports improved by US$170mn vis-a-vis imports increase of US$36mn during the month. The increase in deficit by US$140mn during the month was led by (1) US$66mn higher Services trade balance owing to increased Services imports, (2) US$111mn expansion in Primary Income balance and (3) US$77mn drop in Home Remittances.

As a result, C/A deficit reached US$6.43bn in 5MFY18 compared to US$3.37bn in 5MFY17, an increase of US$3.06bn (or 91% YoY); while the C/A deficit in YTD 2017 now averages at US$1,292mn/month compared to an average of US$586/month in 2016. The deterioration in C/A deficit during 5MFY18 is mainly owing to US$3.10bn (or 34% YoY) expansion in Goods trade balance because of US$4.15bn (or 23% YoY) higher imports vs. US$1.05bn (or 12% YoY) improvement in exports. Home Remittances, during this period, edged up by US$102mn (or 1% YoY), covering for 55% of C/A deficit (excluding Remittances). The C/A deficit clocked in at 4.5% of GDP in 5MFY18 vs. 2.7% of GDP in 5MFY17.

C/A deficit to likely clock in at US$16.5bn in FY18

We expect imports of goods and services to jump to US$64bn (goods: US$53.4bn, services: US$10.7bn) in FY18, whereas exports of the same are likely to clock in at US$29bn (goods: US$23.7bn, services US$5.5bn) for the year, creating an overall Trade balance deficit of US$35bn. We expect Home Remittances to clock in at US$19.5bn in FY18, translating into a C/A deficit of US$16.5bn for the year (5.1% of GDP).

C/A worries trickling down to BOP

The deterioration in C/A deficit has trickled down to overall Balance of Payments (BOP), as BOP recorded a deficit of US$3.29bn compared to a surplus of US$313mn in the corresponding period last year, with surplus of Financial Account also shrinking by 26% YoY to US$2.69bn. On a slightly positive note, Foreign Direct Investments (FDI) improved by 65% YoY to US$1.14bn in 5MFY18, where 73% of these investments were from China compared to 30% in the corresponding period last year; with 47% and 24% of the total FDI in the Power and Construction sectors, respectively.

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