JS Securities Limited – Morning Briefing

Karachi, December 29, 2017 (PPI-OT): Reported debt repayments to exert more pressure, PKR/USD may move again ahead of likely amnesty

In a discussion with local journalists, the newly appointed Minister for State for Finance Rana Afzal has highlighted that Pakistan is required to repay US$6bn of external liabilities before the end of FY18.

We believe, if correct, repayment of US$6bn during the next six months is alarming as we estimate Pakistan will need an additional ~US$8bn to finance its Current Account deficit during the 2HFY18.

We estimate Pakistan’s foreign exchange reserves can potentially take a hit of around US$12bn, if no other inflows/outflows are accounted for.

We believe it will be inevitable for the newly appointed economic team to make another foray into the bond market. However, proposed amnesty scheme will be of critical importance in managing the Balance of Payments (BOP) imbalances, in our view.

We believe, possibility of another round of depreciation/devaluation in the near term has increased, especially as the newly appointed economic team look to aggressively address the prevailing external account imbalances.

We also are of the view that the depreciation/devaluation of PKR will be required to make the amnesty scheme a success.

Minister’s comments on debt repayments alarming

In a discussion with local journalists, the newly appointed Minister for State for Finance Rana Afzal has highlighted that Pakistan is required to repay US$6bn of external liabilities before the end of FY18. We believe, if correct, repayment of US$6bn during the next six months is alarming as we estimate Pakistan will need an additional ~US$8bn to finance its Current Account deficit during the 2HFY18. Incorporating US$2bn for Foreign Direct Investments (FDI) and other small heads during this period, Pakistan’s foreign exchange reserves can potentially take a hit of around US$12bn, if no other inflows/outflows are accounted for.

It is worth highlighting that Pakistan’s foreign exchange reserves, following the US$2.5bn worth of bond issues in Nov-2017, were expected to increase to around US$22.2bn (bonds receipts + FX reserves of US$19.63bn on Nov 24, 2017). However, repayments of short-term loans acquired to stabilize reserves have resulted in foreign exchange reserves to stand at US$20.19bn as at Dec 22, 2017; almost offsetting the impact of the recent bond issues. The reserves of State Bank of Pakistan (SBP) presently stand at US$14.13bn, based on which the country’s import cover (goods + services) computes to ~2.7x months.

Pak to go back in for bonds, but amnesty to be critical

We believe it will be inevitable for the newly appointed economic team to make another foray into the bond market, as also mentioned by the minister, to provide another temporary support to foreign exchange reserves. However, a proposed amnesty scheme to help bring back money from abroad, particularly in the wake of global crackdown on tax evaders, will be of critical importance in managing the Balance of Payments (BOP) imbalances, in our view. It is difficult to estimate the quantum of money that can likely flow back in, however some reports suggest US$15-20bn can be potentially be attracted back.

PKR/USD to move again in Jan-2018, in our view

After a long wait, the PKR/USD finally moved up by ~5% during Dec 8-12, 2017 period, contrary to consensus that had been formed over depreciation/devaluation of the currency by around 10-15% during Jul-Aug 2018 period, which would have coincided with the interim government setup ahead of the elections. We believe possibility of another round of depreciation/devaluation in the near term has increased, especially as the newly appointed economic team look to aggressively address the prevailing external account imbalances. We also are of the view that the depreciation/devaluation of PKR will be required to make the amnesty scheme a success. In a pure conjecture, we expect another bond issue in Jan-2018, followed by another 5% depreciation/devaluation and then a possible amnesty scheme by Feb-Mar 2018.

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