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Morning Call about Trade and Remittances – Arif Habib Limited

Karachi: When an optimistic situation is still pessimistic case

Remittances hit USD 924mn mark in Nov’11
Pakistan remittances receipts continue to paste a bright picture.

According to Arif Habib Limited, the 5MFY12 total receipts under the head now stand at USD 5.24bn, which is ~18% YoY higher than the previous year. Saudi Arabia continues to be the major remitting country, (24%) share, followed by UAE (22%) and USA (19%).

As per the government target total remittances flows for FY12 are expected to reach USD 12bn, (5.4% of the GDP, compared to an average 2.4% for the developing countries, IMF). Where Arif Habib Limited’s estimates suggest given the current pace, remittances this FY12 might hit above USD 12bn mark to USD 12.4bn.

Trade deficit surged by 56% YoY during Nov’11, to USD 2.2bn
On the flip, latest data on country’s trade reveals total trade deficit for 5MFY12, plunged to USD 9.06bn against USD 6.63bn up by ~36%YoY (by FBS, at CIF basis). The break-up of the trade statistic are not yet available, but considering the previous trend Arif Habib Limited anticipates high oil import payments of roughly USD ~1.1bn (35% share, in Oct’11), would have led to this deterioration in overall trade balance.

So far the import during the period was up by 20% YoY to USD 18.5bn while exports have started to feel the pinch of easing commodity prices (cotton in particular) and managed to drag in a disappointing earnings of USD 9.4bn, up by 7.6% YoY during the period under consideration.

Remitting its way for C/a balance stability
Over the past few years Pakistan’s trade balance has continued to deteriorate. The trade deficit as a percentage of GDP increased to 5% in FY11, while during 5MFY12 it stands at 3% of the GDP. However, strong growth in workers’ remittances has ensured that the C/a balance remains within the manageable range. Thus helping moderate the negative impact of a widening trade deficit on the overall C/a balance.

Outlook on Pakistan remittances
Remittances are likely to remain one of the important sources of foreign inflows into the country. Although Arif Habib Limited has witnessed a rising trend in these inflows, 5YR CAGR @ 19.6%, however in the midst of global slowdown inflows can feel the pressure. Based on the recent trends Arif Habib Limited expects remittances may not be able to witness a sustainable growth of over the remaining months to FY12 end.

Arif Habib Limited estimates the trade deficit during the FY12 could reach USD 14.7bn, compared to Arif Habib Limited’s remittances target of USD 12.4bn (5%YoY, growth). This could have adverse impact on the C/a balance (4MFY12, C/a deficits stands at USD 1.55bn).

Bottom Line
The situation of current account balance can be well aggravated with exports facing a headwind, and external inflows facing constraints, the burden is likely to be shifted on domestic sources. Thus making it trickier for the policy maker to cut interest rates and stimulate growth (widening external account deficit was one of the reason behind keeping the rates unchanged at 12%).

In the recent round treasury bills auction (14th Dec’11) the SBP rejected the entire bids in the 3, 6 and 12 month tenure papers. Lack of market liquidity on the back of high government borrowing, Arif Habib Limited suspects will keep the secondary markets yields close to discount rate.

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