-February 2014 external account showed a marked improvement where (1) the Current Account (C/A) clocked up a US$164mn surplus while (2) the overall Balance of Payments (BoP) booked a US$916mn surplus.
-While the receipt of ~US$352mn of Coalition Support Fund (CSF) tipped February 2014 C/A into the black, ex-CSF numbers were also positively skewed. Ex-CSF February 2014 C/A clocked up a US$188mn deficit with sequential improvement led by a 25% MoM narrowing of the trade deficit.
-Overall 8MFY14 C/A deficit stands at US$2.02bn vs. US$831mn in the corresponding period last year. The massive difference is primarily due to difference in realized CSF flows, where ex-CSF, 8MFY14 C/A deficit would stand at US$2.69bn vs. US$2.63bn ex-CSF C/A deficit in 8MFY13.
-Overall BoP numbers should be strong in March 2014 as well, given a further US$750mn inflow though C/A should be MoM weaker given absence of CSF. The same is expected in April 2014 suggesting that upbeat sentiment on the external account and PKR should remain intact.
-We maintain our FY14E C/A deficit at US$2.51bn (1.0% of GDP) and flag that development on external flows (3G auction, Eurobond, part of Etisalat dues, privatization proceeds, CSF and an IMF tranche) will be key to further BoP improvement and sustaining positive sentiment on PKR.
Strong Feb 2014 external account reading
Pakistan’s economy appears to be on a roll these days. State Bank of Pakistan (SBP) yesterday released February 2014 external account numbers where (1) the Current Account (C/A) clocked up a US$164mn surplus for the month vis-à-vis US$427mn deficit in January 2014 while (2) the overall Balance of Payments (BoP) booked a US$916mn surplus for the month. Resultant uptick in net liquid SBP foreign exchange (FX) reserves (+US$738mn MoM to US$3.92bn) comes as no surprise. SBP had already released Feb-end reserve numbers where the uptick in reserves starting mid-Feb 2014 played a big role in sharp recent Pak Rupee appreciation. As of yesterday, the PKR has strengthened by 6.6% against the US Dollar vs. its January 2014 closing value. Note that SBP FX reserves have continued to rise in March 2014 as well where March 07, 2014 SBP reserves were reported at US$4.62bn.
Delving into the details – CSF not the only improvement
While the receipt of ~US$352mn of Coalition Support Fund (CSF) flow mid-month was the driving force that tipped February 2014 C/A into the black, barring CSF overall numbers were also positively skewed last month. Notably, ex-CSF February 2014 C/A clocked up a US$188mn deficit as against US$427mn deficit a month prior and US$387mn February 2013 C/A deficit. The improvement in C/A numbers barring CSF is on the back of (1) a 25% MoM and 1% YoY narrowing of the trade deficit to US$1.07bn where 4% MoM decline in exports was outpaced by a 12% MoM lower import bill; (2) upbeat remittances, which while down 3% MoM rose by a sharp 18% YoY; and (3) lower interest payments in February 2014 (-27% MoM and -60% YoY). Meanwhile on the overall external account front, US$916mn BoP surplus was largely led by the realization of US$750mn under the Pakistan Development Fund (PDF), later revealed by the Finance Minister as a ‘gift’ from Saudi Arabia. The same delivered a US$759mn Capital Account surplus in February 2014 while (1) fresh loans worth US$290mn (LT project loans of US$192mn + ST commercial loans of US$98) more than netted off US$221mn of government debt amortization in the month, resulting in a US$91mn Financial Account surplus as well.
FY14 outlook unchanged for now – all eyes on future flows
With 8MFY14 in the bag, cumulative YTD FY14 C/A deficit stands at US$2.02bn as against US$831mn in the corresponding period last year. The massive difference is primarily due to difference in realized CSF flows in the two periods (US$674mn in 8MFY14 vs. US$1.81bn in 8MFY13) where ex-CSF, 8MFY14 C/A deficit would stand at US$2.69bn vs. US$2.63bn C/A deficit ex-CSF in the same period last year. Looking into March 2014, overall BoP numbers again promise to be strong following a further US$750mn inflow to the PDF though C/A should be MoM weaker given the absence of March 2014 CSF flow. The latter is expected in April 2014 (our base case builds in US$1.2bn CSF inflow in FY14E) suggesting that upbeat sentiment regarding the external account and PKR currency should remain intact. We maintain our full-year FY14E C/A deficit at US$2.51bn (1.0% of GDP) and flag that positive development on expected external inflows before June 2014 (3G auction, Eurobond, part of Etisalat dues, privatization proceeds, CSF and an IMF tranche) will be key to further improvement in the BoP and sustaining the current positive market sentiment on the PKR exchange rate.