Home / Brokerage / AKD Quotidian about — 5MFY12 CAD up 3.6x YoY US$2.1bn

AKD Quotidian about — 5MFY12 CAD up 3.6x YoY US$2.1bn

Karachi: According to the latest data released by SBP, the 5MFY12 Current Account deficit has widened by 3.6xYoY to US$2104mn as compared to a deficit of US$589mn in the corresponding period last year.

According to AKD Securities, This followed a sharply higher CA deficit of US$478mn in Nov’11 vs. US$287mn in Oct’11, up 67%MoM. The expansion in the CA deficit was primarily due to widening of the overall trade deficit, which reached US$7.Gbn in 5MFY12 as compared to US$5.6bn in 5MFY11, a result of the rising import bill (up 21%YoY).

As such, the robust trend in foreign remittances (up 18%YoY to US$5.24bn in 5MFY12) has failed to contain pressure on the external front. Moreover, financial inflows are now witnessing deceleration – Nov’11 remittances were down 9%MoM. On the Balance of Payments front, FDI continued its lackluster trend on the back of 1) deteriorating Pak-US relationship and letter of comfort needed from IMF as well as 2) political noise and security concerns. With dried up financial inflows, foreign exchange reserves have slipped below US$l7bn while the PKR/US$ parity has depreciated by 3.3%FYTD.

The latter has both enhanced the burden of debt repayments and pushed the CA deficit higher. In AKD Securities’ view, unless financial inflows revive quickly, Pakistan will likely have no option but to seek IMF assistance in the medium-term.

Mounting Trade deficit: 5MFY12 exports were recorded at US$10.1bn, up 11.5%YoY as compared to exports of US$ 9.0bn in 5MFY11. In this regard, Pakistan’s exports particularly textile, cotton and leather have been losing steam, specifically in the US and EU (27% share in total exports) largely due to the ongoing Eurozone crisis and concerns regarding the global economy. Specific to Pakistan, concerns emanate from lower cotton prices (down 61% since peak) and sharp currency depreciation of competitors (INR has depreciated by 17.3%FYTD vs. the US$).

On the imports front, higher imports of petroleum products and power machinery, in conjunction with a weaker PKR, have increased the 5MFY12 import bill by 21%YoY to US$16.5bn against imports of US$13.7bn in 5MFY11. As a result, the SMFY12 trade deficit of goods has reached US$6.4bn in 5MFY12, up 38%YoY. AKD Securities maintains AKD Securities’ FY12 estimate of trade deficit at US$15bn.

FY12 CA Estimates: AKD Securities retains AKD Securities’ view that the Current Account should post a deficit of at least US$3bn in FY12 (13% of GDP). While AKD Securities’ CA projections appear manageable in the near-term, overall macroeconomic management remains challenging in view of 1) a chronic high fiscal deficit, 2) exit from the IMF SBA program and subsequent repayments, 3) continued decline in FDI and 4) ongoing Pakistan-USA tension/slowdown in aid.

Considering global financial conditions remain weak (which effectively rules out prospects for privatization proceeds), foreign exchange reserves rundown remains a realistic possibility (reserves already below US$17bn). Unless financial inflows revive quickly, a return to IMF in the near to medium term appears likely.

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