Karachi: Macro: C/A deficit fails to recover in Jan‐12 According to KASB Securities Limited,
• A higher current account deficit in Jan‐12 recently reported by SBP (US$305mn vs. US$14mn in Dec‐11) and repayment of IMF loan starting Feb 24 (1st tranche) could depress sentiment and as a result keep near term pressure on currency intact.
• Given higher than expected C/A deficit and QTD average oil price at US$115/bbl, KASB Securities Limited revises KASB Securities Limited’s FY12 projection to US$4.0bn vs. earlier estimate of US$2.9.
• Possible respite could emanate from (1) potential FX inflows from 3G auction licenses in 4QFY12E; and (2) negotiations with US leading to gradual improvement in relations/flows.
• However KASB Securities Limited remains cautious in the mid term where adverse oil price movement in 2012, paucity of sovereign inflows and accelerated decline in SBP’s FX reserves in FY13‐14E on higher repayments to IMF could drive negative sentiments on the external front.
Near term pressure on currency likely to remain intact
As per data released by State Bank of Pakistan (SBP), current account (C/A) deficit increased to US$305mn in Jan‐12 from a deficit of US$14mn in Dec‐11 (restated from a surplus of US$160mn). Despite having little impact on inter‐bank dollar demand, repayments to IMF starting Feb 24 (1st tranche of ~US$420mn) could depress sentiment in the forex market. While risk to international crude oil price movement and paucity of sovereign inflows warrant word of caution in KASB Securities Limited’s view, (1) potential FX inflow from successful auctioning of 3G licenses (depending on buyers’ profile); and (2) improvement in relations with US, albeit slowly, could provide the much needed respite to the PRs/USD parity.
C/A deficit at US$2.6bn in 7MFY12; FY12E raised to US$4.0bn
Details reveal that the higher C/A deficit in Jan‐12 came in on the back of trade deficit expanding 10% MoM to US$1.3bn while remittances remain relatively flat at US$1.1bn. This has taken July‐Jan cumulative C/A figure to a deficit of US$2.6bn (90% of KASB Securities Limited’s full year estimate) vs. only US$96mn deficit in corresponding period of last year mainly due to a firm oil price trend. Given that oil prices in 3QFY12TD are above expected at US$115/bbl, KASB Securities Limited anticipates oil import bill to remain under pressure in the next 2‐3 months. As a result, KASB Securities Limited revises KASB Securities Limited’s FY12E C/A deficit up to US$4.0bn from earlier US$2.9bn.
Potential upside exists
Amongst key near term triggers is the buying interest of global players for local 3G licenses where bidders profile will eventually determine whether successful auctioning would result in FX inflow in 4QFY12E. Moreover improvement in Pak‐US relations will also be keenly watched for its potential impact on FX inflows with regards to realization of coalition support fund receipts. Recall that Pak‐US relations reached its lowest ebb following the NATO attack on Pakistan border in late Nov which has also closely tracked the fall in exchange rate where Pak Rupee has depreciated consistently by 2.7%/1.3%/0.5% in Nov/Dec/Jan.
But warrants caution on geopolitical front
With stubborn oil prices already keeping current account under pressure, the Iran‐West standoff over oil imports which continues to keep oil prices volatile will to be closely tracked. KASB Securities Limited highlights that a US$10/bbl increase in price of Arab Light crude is projected to increase current account deficit by ~US$1.6bn (0.7% of GDP) (See table alongside). Moreover in the medium term, higher loan repayments to IMF (US$3bn each in FY13/14) leading to decline in FX reserves could drive negative sentiments on the external front.