Anticipated Strength in Dec 2013 External Account Materializes

Economy Overview (Pakistan News) Account
Economy Overview (Pakistan News)

-After a weak November 2013, anticipated MoM external account improvement materialized where December 2013 Current Account (C/A)  clocked in a surplus of US$285mn vs. a US$572mn deficit a month prior.

-The sequential improvement in Pak C/A was led by (1) sharp 28% MoM increase in exports which outpaced import growth; (2) a 23% MoM surge in remittances and (3) notable compression in interest payments which were 62% MoM lower in December 2013.

-Balance of Payments (BoP) was also positive in December 2013 with a BoP surplus of US$211mn vs. US$529mn deficit in November 2013. With (1) disbursement of IMF’s 2nd EFF tranche & (2) sharp MoM decline in IMF SBA repayments in December 2013 the reserves position also improved.

Economy Overview (Pakistan News) Account
Economy Overview (Pakistan News)

-Cumulative 1HFY14 C/A deficit stands at US$1.59bn (~0.6% of full-year GDP) vs. US$83mn deficit recorded in 1HFY13 though excluding CSF flow trims the difference substantially (1HFY14 ex-CSF C/A deficit of US$1.91bn vs. 1HFY12 ex-CSF C/A deficit of US$1.89bn).

-Looking ahead, we maintain our FY14E C/A deficit outlook at 1.0% of GDP, in-line with the IMF’s revised FY14E C/A target of 1.0% of GDP but somewhat lower than SBP’s recent guidance of 1.0-1.8% C/A deficit.

Anticipated uptick in Dec-13 current account materializes

After a weak November 2013, expected improvement in December 2013 external accounts materialized, as per the data released by State Bank of Pakistan (SBP) yesterday. December 2013 Current Account (C/A) clocked in a surplus of US$285mn vis-à-vis a deficit of US$572mn a month prior, where improvement in C/A numbers was led by:

Sharp 28% MoM (and 27% YoY) increase in Pak exports (with 25% MoM and 20% YoY higher textile exports in the driving seat) which outpaced import growth (+12% MoM) and delivered 10% MoM reduction in the trade deficit. Note that December 2013 trade deficit of US$1.21bn is ~15% lower than YTD FY14 average monthly trade deficit. This was in tandem with a notable 43% MoM reduction in the services trade deficit as well for December 2013.

Strong growth in December 2013 remittances, where inwards remittances for the month came in 22% YoY and 23% MoM higher at US$1.39bn (+7% vis-à-vis YTD FY14 average monthly number). Remittance growth was broad-based with flows from the USA up 27% MoM (+38% YoY); remittances from Saudi up 23% MoM (+17% YoY); inflow from the GCC up 29% MoM (+23% YoY) and remittances from the EU up 25% MoM (+36% YoY).

-Notable compression in interest payments, which receded by 62% MoM (albeit up 27% on a YoY basis) to US$89mn vs. US$235mn in November 2013. Note that December 2013 C/A numbers appear less robust on a YoY comparison, where December 2012 C/A surplus stood at US$601mn. That said, the latter was driven primarily by a US$688mn Coalition Support Fund (CSF) payment (ex-CSF December 2012 C/A clocked up a US$87mn deficit).

Positive trend carries to overall Balance of Payments

Meanwhile on the overall Balance of Payments (BoP) front, data for December 2013 remained positive with a BoP surplus of US$211mn vs. a US$529mn deficit in November 2013 where the key driver of BoP improvement (along with the above detailed C/A improvement) was a 33% MoM reduction in loan amortization in tandem with flattish MoM disbursements (of US$283mn). With December also heralding (1) disbursement of the IMF’s 2nd EFF tranche (of US$554mn) and (2) a sharp MoM decline in repayments of the IMF’s 2008 SBA loan (US$257mn IMF repayment in December 2013 vs. US$577mn in November 2013), the overall reserves position also improved in the month. SBP’s gross reserves rose by US$516mn MoM to close December at the US$4.86bn mark while net liquid reserves also rose by US$430mn to US$3.48bn (in-line with the IMF’s revised December 2013 reserve target of US$3.48bn (earlier target was US$5.32bn). The above, coupled with strict SBP monitoring also yielded 2.8% MoM appreciation of the Pak Rupee vs. the US Dollar in December 2013.

1HFY14 C/A deficit of US$1.59bn; some slack for 2H

With the first half of the ongoing fiscal year in the bag, cumulative 1HFY14 C/A deficit stands at US$1.59bn (~0.6% of full-year GDP). While this compares fairly negatively to the US$83mn deficit recorded in 1HFY13, recall that 1HFY14 CSF disbursement is well lower at US$322mn YTD FY14 vs. US$1.81bn of CSF inflow in 1HFY13. Ex-CSF, 1HFY14 C/A deficit of US$1.91bn is marginally weaker than 1HFY12 ex-CSF C/A deficit of US$1.89bn. Meanwhile in 2QFY14 alone C/A deficit stood at US$383mn, lower than the IMF’s revised 2Q C/A deficit outlook of US$1.35bn. This, in our view, could build in some slack with regards to achieving IMF’s revised FY14E full-year C/A deficit target of US$2.29bn (1.0% of GDP, revised up from 0.6% in September 2013) where the Fund has so far penciled in 3Q expected deficit of US$46mn and a surplus of US$336mn in 4Q. From our vantage point, we maintain our FY14E C/A deficit outlook at 1.0% of GSP, in-line with the IMF’s revised FY14E C/A target of 1.0% of GDP but somewhat lower than SBP’s recent guidance of 1.0-1.8% C/A deficit. We flag materialization of targeted external flows (CSF, IFIs and bilateral) as key to achieving the same.


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