JS Securities Limited – Morning Briefing

Karachi, March 18, 2019 (PPI-OT): CAD drops by 59% MoM in February

Current Account Deficit (CAD) declined by 59% MoM and 73% YoY during February to US$356mn (1.5% of GDP).

The drop in CAD is attributable to contraction in trade deficit of 23% MoM and 27% YoY, led by shrinking imports.

For FX reserves to stay close to current levels of US$9.1bn, monthly CAD during final four months of FY19 needs to be offset by FDI, ST financing and commercial borrowings, since support from friendly countries is expected to be more than cancelled out by a surge in debt repayments.

CAD declines 59% MoM / 73% YoY in Feb-2019

As per the latest numbers revealed by the State Bank of Pakistan (SBP), the country’s Current Account Deficit (CAD) showed further improvement in Feb-2019, shrinking to US$356mn (-1.5% of GDP), marking a decline of 59% MoM and 73% YoY. CAD has refreshingly been on a downwards trend in recent months, standing at US$873mn in Jan-2019, whereas February’s CAD number was 70% lower than the average monthly CAD of US$1.2bn during the preceding 7MFY19. Cumulatively, CAD during 8MFY19 stood at US$8.8bn (4.5% of GDP), compared to US$11.4bn (5.3% of GDP) in the same period last year. For the month, the decline in CAD was mainly attributable to a 23% MoM reduction in trade deficit.

Although exports dropped by 18% MoM, imports – which are typically double in absolute numbers compared to exports – contracted by 20% MoM, leading to a shrinking trade deficit. Looking at Pakistan Bureau of Statistics (PBS) data, all sub categories of imports registered a decline during the month, led by transport (down 36% MoM), metals (down 22% MoM), food (down 22% MoM) and petroleum (down 9% MoM). Workers’ remittances declined 10% MoM, however, posted a 9% YoY growth during the month, taking cumulative growth to 12% YoY during 8MFY19. Moreover, foreign direct investment (FDI) improved by 28% MoM during the month, however, was cumulatively lower by 23% YoY during 8MFY19.

Higher inflows needed to maintain FX reserves

Foreign exchange (FX) reserves held by SBP stand at US$8.1bn as of last week (March 8, 2019), or US$9.1bn if we incorporate the US$1bn received from UAE last week (to reflect in next week’s readings). Since end of Jan-2019, SBP’s FX reserves have remained relatively stable, with no major change observed in the latest readings either. Considering that there was lackluster activity in the capital and financial accounts, the flat FX reserves number was predictive of a drop in CAD during the month.

Although CAD has declined significantly in recent months, one cannot ignore the corresponding dull activity in financial account. Due to the latter, our earlier assumption of US$10bn SBP’s FX reserves by end of FY19 needs to be revisited. Going forward, expected inflows from friendly countries during the rest of FY19 are ~US$3bn (US$2bn from China and US$1bn from UAE). However, this is expected to be more than offset by a surge in debt repayments during the final four months of the year (Mar-Jun) which as per media reports could average more than US$1bn per month. Let us emphasize that the situation on the external account front is highly sensitive at this point.

Assuming that if CAD stays within the average CAD for 2MCY19 of US$615mn for the final four months of FY19, financial account inflows (FDI, short-term financing and commercial borrowings) would need to completely match the monthly CAD in order to maintain FX reserves at current levels. One thing is becoming clearer by the day – the current situation cannot sustain and we might need to take the IMF or an alternative route (possibly more Chinese funding) decision sooner rather than later. The upcoming meeting with IMF in the end of March might offer a more conclusive answer.

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