–After a relatively benign October, Pak external account weakened in November 2013 where Current Account Deficit (CAD) clocked in at US$589mn while the Balance of Payments deficit stood at US$529mn.
-Resultantly, State Bank of Pakistan’s (SBP’s) net liquid reserves declined by US$1.18bn MoM (to US$3.05bn) coupled with a 1.5% MoM decline in the value of the Pak Rupee (vs. the US Dollar) in November 2013.
-December 2013 should paint a prettier external account picture given (1) recent multilateral inflow; (2) likely release of IMF’s second EFF tranche (US$553.3mn) within the month; and (3) considerably lower MoM repayment of IMF’s SBA loan (US$146mn due in December 2013).
-We factor in a better December as well as a pick up in textile exports post January 2014 but weak YTD CAD numbers (0.7% of GDP in 5MFY14) suggest our earlier estimate (US$2.09bn or 0.8% of GDP) is now unlikely to be met. We raise our FY14E CAD outlook to US$2.50bn (1.0% of GDP).
November 2013 spelt trouble on the external front
After a relatively benign showing in October 2013 (supported by US$322mn of Coalition Support Fund (CSF) inflow), Pakistan’s external account weakened considerably in November 2013 where Current Account Deficit (CAD) for the month clocked in at US$589mn while the overall Balance of Payments deficit stood at US$529mn. The above was on the back of (1) a widening services deficit in the absence of fresh CSF flows; (2) rising interest payments on external debt; (3) a 16% MoM dip in workers’ remittances and (4) hefty debt repayment to the tune of US$577mn to the IMF and US$407mn to other lenders. The interplay of these factors, despite gross non-IMF disbursements worth US$315mn, resulted in a US$1.18bn MoM decline in State Bank of Pakistan’s (SBP’s) net liquid reserves (to US$3.05bn) coupled with a 1.5% MoM decline in the value of the Pak Rupee (vs. the US Dollar) in November 2013.
YTD FY14 Current Account Deficit already at 0.7% of GDP…
November 2013 Current Account Deficit clocked in at US$589mn vis-à-vis October 2013 CAD of US$96mn (though the October deficit would rise to US$418mn excluding CSF). Though the same is still better than November 2012 CAD of US$698mn, resultant 5MFY14 CAD stands at US$1.89bn (already ~0.7% of fullyear FY14E GDP) as against US$684mn in the corresponding period last year. Recall that by this time last year CSF inflow had already crossed US$1.10bn whereas YTD FY14, Pakistan has received US$322mn under this head with a fullyear CSF outlook of ~US$1.2bn.
…though December 2013 should better fortunes
While November numbers were grim, December 2013 should paint a prettier overall external account picture where (1) recent media reports and SBP numbers confirm a US$421mn uptick in SBP reserves (as of mid December) on account of inflows from Department for International Development (DFID), IDB and other multilaterals (US$144mn, US$137mn and US$149mn respectively); (2) likely release of IMF’s second EFF tranche (US$553.3mn) within the month post successful completion of the 1st review; and (3) considerably lower MoM repayment of IMF’s SBA loan (US$146mn due in December 2013). While only the first will boost BoP numbers for the month, overall FX reserves pressure is expected to cool off in December 2013, reflective in the month-to-date 2.1% appreciation of the Pak Rupee.
C/A Deficit now eyed higher than earlier estimates
Though we factor in (1) a stronger MoM external account performance in December 2013 and (2) an uptick in Pak textile exports post January 2014 as a result of the GSP Plus (duty free / preferential duty regime) status being awarded to Pakistan by the EU, we believe our earlier CAD estimate (US$2.09bn or 0.8% of GDP) is now unlikely to be met. Lifting our estimates for interest payments and trimming services exports, we raise our FY14E CAD outlook to US$2.50bn (1.0% of GDP) where we flag any potential slippage in CSF payments and unexpected spike in international commodity prices as key risk factors. Meanwhile, recent Pak Rupee strength notwithstanding, we maintain our June 2014 Pak Rupee parity outlook at Rs111/USD.