JS Securities Limited – Morning Briefing

Karachi, June 21, 2018 (PPI-OT): May-2018 Balance of payments: The status quo prevails

The central bank released balance of payments (BOP) data for the period ending May-2018 last evening which largely shows a status quo situation except further slowdown in financial account inflows.

Current account (C/A) deficit for May-2018 and 11MFY18 stood at US$1.9bn and US$15.9bn, up by 33% and 43% Y/Y respectively.

SBP FX reserves are down by 39% YTD FY18 to ~US$10bn, which against FY19E gross external funding requirement in excess of US$25bn (as per IMF estimates), have already approached an alarming level.

All the talk on external account vulnerabilities at the moment seem likely to turn into broader concerns on the economic growth in coming months

May-2018 BOP deficit at US$1.9bn

C/A deficit remained almost flattish at previous month’s level of US$1.9bn (7.8% of GDP) in line with the capital market expectations in general. Growth in imports outpaced exports by over 300bps MoM and trade balance clocked in at US$2.8bn, up by 7% MoM as well as on YoY basis. And as if that weren’t enough, financial account balance sharply fell by 77% MoM to US$366mn amid absence of any major non-debt creating inflows. Besides, the financial account reflected long term as well as short term net debt repayments amounting to US$326mn during May- 2018 as against raising US$1.6bn worth of net debt during the preceding month. This along with US$333mn in errors and omissions resulted in an overall balance of payment deficit to the tune of US$1.9bn. Just to give a better perspective, also note that the average balance of payments deficit during FY18 had so far remained below US$500mn.

It’s time for emergency management

We’ve been here before and we are confident this shall too pass! However, what’s more important is the need to realize and take this opportunity to consider the prevailing macroeconomic situation as a moment of reflection.

Over the past many decades, we’ve struggled broadly owing to (1) our negligence towards investing in education, research and innovation, and (2) badly misplaced priorities and abysmal governance. Its high time that we rebuild our economy for a stronger and sustainable growth and development. And for all that to happen, we need to initiate the process of institutional reforms on an emergency basis. In that, we wish if the interim government could initiate this reform process with political consensus on a war footing. Besides, there has also been a trend that inflection points in our economy often coincides with a change in the government which makes it even more critical to constitutionally allow caretaker governments to have more responsibilities than merely have a transitional role.

Mind the fat tail risks

Let us reiterate that potentially sharp monetary tightening and fiscal consolidation pose downside risks to equity valuations particularly in cyclical industries. More policy space is rather needed to explore unorthodox solutions amid acute supply side constraints and narrow manufacturing/ export base. With this backdrop, we recommend a cautious stance on the equity market. Banks and E and Ps remain our preferred sectors. Moreover, how the stock market correlation with the region/ MSCI EMs/ US will play out would be another interesting theme to watch out into FY19. Don’t get anchored with the recent past (sky rocketing stock price levels). Instead, focus on the potentially emerging outlook as stock markets are mostly forward looking.

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