The country’s external account position continues to portray a constrained picture in FY14 so far. The central bank has reported the country’s external account deficit of US$261mn taking cumulative deficit to US$2.1bn in 7MFY13 versus a deficit of US$796mn in the same period last year. Bifurcating the numbers, the country’s current account deficit widened to US$2.1bn in 7MFY14 while some respite was provided by US$177mn and US$251mn inflows in the capital and financial account, respectively. Further, pressure on the forex reserves came from net retirement of US$544mn to IMF (International Monetary Fund). Though, we foresee the IMF loan repayment to subside in residual of FY14, external account outlook hinges on i) realization of envisioned foreign and ii) progress on recently reported arrangement of deferred oil payments for 300‐ days.
CA widened: perturb trade cycle likely played the hand
The low realization of CSF (coalition support fund) followed by higher trade deficit has forced the country’s CA deficit to widen to US$2.1bn (1.4% of GDP) in 7MFY14 versus US$441mn in 7MFY13. Investigating further, we believe the increased deficit also comes from perturb trade cycle of the country. In tandem reading of PBS and SBP trade statis reveals an emergence of divergent trend. Against a contraction of 1% in imports by PBS, the central bank numbers reveal a growth of 4% in import in 7MFY14. Similarlu, export numbers of SBP (up 3% YoY) has grown at a slower pace than reported by PBS (up 4% YoY). Not completely ignoring other reasons, we believe the fear of PkR weakness has caused forex loss mitigating behavior from the importer and vice versa for the exporter. This has caused normalized current account deficit (excluding CSF payments) to widened to approx. US$400mn/month in FY14 versus approx. US$320mn/month in the same period last year. Therefore, arresting the fear related to PkR outlook may cause the normalization of CA deficit and thus, diluting the pressure on the external account.
Financial account providing some respite
Financial account has started to show some respite during FY14 but this is largerly thanks to surplus of US$254mn in Jan’14. During 7MFY14, the financial account posted a surplus of US$251mn versus a deficit of US$384mn in the corresponding period last year. Though still in a peculiar position, but timely materialization of key inflow namely proceeds from 3G auction, residual amount from Etisalat, issuance of Eurobond/Sukuk is likely to be a major swing factor in days ahead.
The last reported numbers show a net retirement of US$544mn to the IMF during 7MFY14. Furthermore, the country has paid another US$292mn to the fund in Feb’14 taking the net retirement to US$836mn in FY14YTD. However, we expect the pressure related to IMF repayment to subside given scheduled outflow of US$792mn in the remaining FY14 against the expected EFF inflow of US$1.1bn.