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Morning Call about Current account balance and exchange rate – Arif Habib Limited

Karachi: Widening c/a balance calling in for rupee pressure

Imports drop to lowest during the 5MFY12
The latest balance of payments data for the period 5MFY12 pointed to a current account (c/a) deficit of USD2.1 billion, against USD 478mn corresponding period last year.

According to Arif Habib Limited, however interestingly the break-up of current pattern of deficits reveals that it is not based on rising import bill, which for the month stood at USD 2.99bn, down by ~7% MoM. While not so encouragingly the overall energy based import still showed a handsome growth of +8%MoM (+2% YoY). On the other hand the capital-based goods (machinery) import rose to USD 320m, +21% MoM, which in Arif Habib Limited’s view seems encouraging.

Revising Arif Habib Limited’s FY12 c/a deficit forecast to USD ~3.3bn
Arif Habib Limited expects a sharp downward adjustment in the c/a deficit in FY12. Arif Habib Limited’s revise estimate suggests c/a deficit likely to reach USD 3.3bn by FY12-end or 1.4% of total GDP.

This in Arif Habib Limited’s view is likely to come on the back of sluggish export growth of ~5%YoY to USD 26bn, due to lower commodity prices but also due to the noticeable slowdown in energy constraints. While Arif Habib Limited’s import projections remain on the higher side at USD ~41.1bn (+~15% YoY) owing high energy based consumption. Incorporating these changes Arif Habib Limited estimates the trade deficit likely to hover around USD ~14.7bn against USD 10.5bn in FY11.

Widening deficit putting pressure on PKR
Responding to widening c/a deficit the PKR depreciated sharply after hitting a 112-day low of PKR 89.635/USD in interbank, on Dec-15 2011 followed by a slight rebound to 89.565 on Dec-16 2011. The rupee has seen more volatility since the start of Dec’11, primarily owing to liquidity shortage and secondly as concerns over Pak-US ties intensified. Over the period the PKR has shredded almost 4.2% FY12TD while on annual comparison this translates into 9.5% depreciation.

PKR likely to reach 91.6/USD by Jun’12
In coming weeks Arif Habib Limited expects PKR should broadly remain stable after a recent boost in FX reserves of USD 10mn, allowing the total reserves to reach its USD ~16.69bn mark. However Arif Habib Limited maintains Arif Habib Limited’s depreciation bias over the remaining period to FY12-end. Arif Habib Limited thinks by Jun’12 the PKR is likely to touch 91.63/USD bringing in FY12 average at PKR88.7/USD (~4%YoY). Arif Habib Limited expects the PKR to face sharp depreciation in the 2HFY12, averaging 3% owing primarily to debt repayments.

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