AKD Quotidian about — Looming Risks on External Front

Karachi, May 20, 2013 (PPI-OT): The Current Account has registered a deficit of US$354mn in Apr13, down a sharp 36%MoM.

According to AKD Securities this leads to a 58%YoY contraction in the 1OMFYI 3 CA deficit to US$1,418mn vs. a deficit of US$3,354mn in IOMFY12. In this regard, the MoM improvement is due to i) 3%MoM reduction in the trade deficit, ii) a modest 6%MoM increase in remittances and iii) a 13%MoM reduction in interest payments. That said, AKD Securities expects the CA balance to stay in the red on a sequential basis with further implications for fx reserves, already down 24%FYTD to US$ll6Olmn, where the import cover stands at 3 months (on SBP reserves: 1.8months).

Concerns largely emanate from upcoming IMF repayments even as FDI trend, up 3O%YoYto US$853mn in IOMFY13, is very encouraging. As such, the incoming government faces critical challenges with a need to balance prudence (looming BoP crisis) with GDP growth revival. In this regard, recent news reports indicate that the PML-N may seek immediate4erm alternatives to an IMF re-entry e.g. through grants/deferred oil payments from CCC countries. Despite this however, it may be difficult to avoid an IMF program beyond the next 3-6 months where any inadvertent delay in seeking assistance could cause pressure on PkR. Within such a scenario, the EandP, Power and export- oriented sectors may outperform.

Emergent positives on CA front.. The CA deficit in Apr’13 contracted by
36%MoM to US$354mn vs. US$549mn in Mar’13 where the MoM improvement is due to i) 3%MoM reduction in the trade deficit to US$1 ,243mn, ii) a modest 6%MoM increase in remittances to US$1 ,2l6nin and iii) 1 3%MoM reduction in interest payments.

This brings the 1OMFY13 CA deficit to US$1418mn, down 58%YoY. On the exteri al front, FDI rose by a robust 30%YoY to US$853.5mn during 1OMFY13 vs. US$658.2mn in 1OMFY12 while FPI clocked in at a net inflow of US$219.4mn during 1OMFY13 vs. a net outflow of US$63.5,rin in the same period last year. At the same time, the recent drop in Arab Light prices, by 12.1% CYTD peak to US$102lOfbbl should provide some respite as well.

but BoP risks loom large: At present, Ix reserves stand at US$11 6Olmn (561′ reserves: US$6542mn), leaving 3 months import cover (on SBP reserves: 1.8 months). Considering the schedule of ME repayments, Pakistan could face a BoP crisis over the next few months. In this regard, recent news reports indicate that the PML-N nay seek immediate-time alternatives to an IMF re-entry e.g. through wants/deferred oil garments from GCC countries. In AKD Securities views however. this may at best delay re-entry into an IMF program where any inadvertent delay in drawing assistance, both multilateral and bilateral sources, could cause pressure on the PkR where the currency has depreciated by 4.1 7%FYTD.

Investment perspective: The incoming government faces challenges on several fronts including i) a precarious BoP position, ii) Looming risks on the PkR and iii) 1OMFY13 liscal deficit at 5.1% of GDP. That said, recent news reports indicate the incoming government may seek alternatives to an imminent re-entry into an IMF program. In this regard, lower oil phces and potential assistance from friendly countries are key positives. That said, it may be difficult to avoid an IMF program beyond the next 3-6 months where any inadvertently in seeking assistance could cause pressure on PkR. Within such a scenario, the E and P, Power and export-oriented sectors may outperform.

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