Morning Call about – IMF back in: USD 5.3bn to replicate debt repayments with EFF – Arif Habib Limited

Karachi, July 05, 2013 (PPI-OT): IMF management and BoD to finalize funds disbursement in Sep’13 Finally, Pakistan gov’t and the IMF have reached an agreement over much- awaited funding that is expected at USD5.25bn (additional funding of USD2bn also requested depending upon performing conditional measures).

According to Arif Habib Limited as per country’s finance minister, the upcoming loan agreement is largely to repay the existing IMF loans for which the amount coming due in FY14 (Jul-Jun’14 period) stands roughly USD 3.0bn and the rest in FY15 onwards (Pakistan is to repay a total of ~USD 6.2bn to the IMF, including last SBA of USD 7.6bn drawn during 2008-11).

New deal’s particulars and Pak-IMF background
It has been well over two decades that Pakistan has been a regular client of the IMF. Since 1988, Pakistan has entered in 11 IMF funding deals (9 during civilian regimes –6 during PPP regime, 2 during PML’N –while two under military regime –Musharraf era).

It is pertinent to recall that, in the last two decades, on average, almost 64% of the total lending amount was drawn, mainly due to the inefficiency and inability of the previous gov’ts to adhere to the strict measures as mapped out by the IMF. Only the Musharraf gov’t (1998-2007) was able to draw on the entire amount and was able to successfully adhere to the terms put forward by the IMF.

The new deal would be an Extended Fund Facility (EFF) with disbursement spanning over 36 months (front load expected around USD2.5-3.0bn followed by flows materialization contingent upon disciplinary measures to be taken). The repayment period for the new loan deal is expected to be 10 years, with a grace period of 4 years, repayable at an effective interest cost of 3% (floater).

Positive impacts ensuing new funding deal
Though apparently no net additions to reserves amid repayments coming due, additional time should give Pakistan an extensive time leverage to restructure the economy and build capacity to repay. Further, the EFF would prove beneficial for Pakistan as the long-standing LoC from the IMF with new funding would unlock more inflows from other multilateral donors as well (WB and ADB).

Further, with the restoration of the LoC, Pakistan’s credit ratings may also take a positive turn as may be highlighted by the rating agencies on timely availability of the much-needed support to the country’s external account (though standing at a manageable 1% of GDP at the moment).

Disciplinary conditions for new funding likely on same footings
The new deal, understandably, puts largely the same sort of conditions/measures to be taken as with the last Stand-By Agreement.

These broadly include pulling down fiscal deficit from 8.8% in FY13 to 4% in 3 years (~2% per year), energy sector reforms (circular debt already on the resolve) and restructuring, and then privatization of the distressed PSEs (PIA’s board of directors already finalized, BoDs for power distribution companies being finalized), effective trade policy for exports accretion (circular debt amount being settled to ensure power availability to industries), inflation control through more effective measures through the monetary policy (this might include tightening as well when needed).

New gov’t commitments on track so far
The measures taken by the PML’N for the economy so far (it’s been hardly a couple of months for PML’N coming into power) underscore the new gov’t’s firm commitment to put the economy back on the sustainable growth track.

Examples by far are half way resolution of the circular debt amount just in time (PKR 322bn arranged and major amount paid in cash out of total PKR 503bn) as well as earlier-than-planned resolution of the full amount in Jul’13 instead of Aug’13, and IMF’s initial node for new funding taking place earlier-than- expected (though the loan has to be approved by the IMF board and the first installment may take place not before Sep’13).

Impact on equity market and key stocks
Arif Habib Limited believes, new deal with the IMF should play a key role in stabilizing FX reserves, and stabilize PKR and its impacts on inflation and the monetary policy. Pak equities have already been rallying on the potential IMF funding arrangements.

Additionally, Etisalat’s node to provide the long-pending USD800mn on account of PTCL’s privatization, and Obama administration’s request for USD1.6bn funding for Pakistan in FY14 (though lower than last year’s) should provide needed breather to country’s externals.

These developments would just meet investor expectations and therefore should provide further confidence to Pakistan capital market in general and energy/oil and gas stocks in particular (since tariff will be raised to improve overall liquidity for power/ oil and gas companies alongside their restructuring through various other parallel steps).

Arif Habib Limited flags IPPs (HUBC, KAPCO, NCPL, NPL), OMCs (PSO), EandPs (PPL) to be the main beneficiaries while keep Cements (LUCK, DGKC, FCCL, KOHC), Fertilizers (ENGRO, FFBL, FFC) and Textiles (NML, NCL) on a high liking based on their persistently strong fundamentals.

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