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The Bell about Economy – Elixir Securities Limited

Karachi: The State of Pakistan’s Economy: No wiggle room left

According to Elixir Securities Limited,

 

Macroeconomic Projections FY12 FY11 FY12
Budget SBP  projections
GDP 2.40%  4.2% 3.0% – 4.0%
CPI 13.70% 12% 11.5% – 12.5%
Remittances USDbn 11.2 12.0 12.0 – 13.0
Exports USDbn 25.4 25.8  24.6 – 25.1
Imports USDbn 35.7 38.0 40.3 – 41.0
Trade Deficit USDbn 10.3 12.2 15.2 – 16.4
Fiscal Deficit % of GDP 6.6 4.0 5.5 –  6.5
CAD USDbn  0.3 1.4  3.5 –  5.9
CAD % of GDP (0.1) 0.6  1.5 –  2.5
Source: Elixir Research, SBP

 

No wiggle room left

SBP released FY11 State of Pakistan’s Economy report yesterday. SBP’s estimates for major FY12 macroeconomic targets are lower than GoP’s budget projections. Though SBP has crisply highlighted the factual aspects of macroeconomic risks, Elixir Securities Limited feels the underlying tone contained a positive tilt as SBP tried addressing concerns over trade account outlook through its optimism over remittance growth and decline in international oil prices, while it also indicated that projected FY12 CAD (USD3.5‐6.0bn) is relatively small given Pakistan’s past performance.

Elixir Securities Limited believes SBP’s analysis ignored the likely year end FX reserves (USD12.0 – 14.0bn) that CAD of USD3.5‐6.0bn would yield, in case the country is unable to mobilize external funding for CAD financing. While highlighting the need for taking key fiscal measures – broadening of tax base, improving collection machinery, removing subsidies and restructuring PSEs ‐ SBP highlights that:

“In the current state of Pakistan’s economy, there is no wiggle room left.”

Elixir Securities Limited believes it sums it all up.

Bleak macro economic outlook as external sector joins an otherwise unchanged core issues list

Fiscal indiscipline continues and SBP expects FY12 fiscal deficit to range between 5.5% ‐ 6.5% of GDP, which would largely be funded through domestic sources, leading to crowding out of the private sector. With banks already facing liquidity issues in satisfying increasing GoP borrowing needs, interest rates are likely to rise.

Inflation would likely average 12% in FY12 and would likely increase in FY13, due to the low base effect of 1HFY12. With acute power shortage, energy crisis, and high interest rates, investment / GDP is unlikely to revive going forward which means the growth would remain around 4% in the medium term. Weakness in external account poses high risk to FX reserves balances, which could fall to USD12.0‐14.0bn by Jun‐12, given SBP’s forecasted FY12 CAD of USD3.6bn to USD5.9bn. Elixir Securities Limited’s biggest concern emanate from estimated debt servicing of USD5.0bn in FY13, where likelihood of FX inflows remain minimal after the suspension of the IMF program.

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