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UBL Research
May 21, 2010
www.ubl.com.pk
All rights reserved. UBL Research 2010
Contents
Political Rhetoric Reaching Crescendo 1
Inflation Rampant 2
External Account Remains Stable 3
Higher GDP Growth as a Result of Lower Base 4
Economy Review
SEE LAST PAGE FOR IMPORTANT DISCLOSURES
U N I T E D B A N K L I M I T E D
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1 | U B L R E S E A R C H
Political Rhetoric Reaching Crescendo
Back in our Economy Review of September 2009, we had ascertained
that the President of Pakistan would be an unlikely survivor and wil
likely finish his four year term. This was in the backdrop of a politically
successful Friends of Democratic Pakistan summit, which was held
around the same time in New York. Since then, a lot happened. There
was the scuffle between the executive and judiciary over the Nationa
Reconciliatory Ordinance (NRO). There was the passage of the 18t
amendment. There is the Pakistan-Afghanistan situation that remains a
hot topic in the West. And economically speaking, there is the powe
crisis and respite in pricing pressures remains yet to be seen. Despite
the obstacles, the Presidency and the current government have till now
navigated the seemingly hot waters with relative ease.
The Heat is onAgain!
And so the list begins. 1) The Interior Ministers future, after a bail-ou
from the President, remains uncertain. 2) The challenge to the
President of holding two offices - leadership of the PPP and the
Presidency - is finding its way in court. 3) The 18th
amendment will be
under scrutiny of the full bench of the Supreme Court. 4
Implementation of Value-Added Tax (VAT) will be from July 1 even
though this has not yet been fully sold to both the general public and
stakeholders. And 5) The latest bomb scare in Times Square, New York
has rekindled the Wests concerns regarding militancy in Pakistan as it
was followed by visits by US Presidents national security advisor and
the head of the Central Intelligence Agency (CIA).
Mixed Signals from IMF
The Internal Monetary Funds (IMF) Executive Board, in its meeting last
week, accepted Pakistan's request for waivers for non-observance of
two quantitative performance criteria under the program. These
related to non-compliance of overall budget deficit and net government
borrowing limits from the SBP both of which have inflationary
implications. However, recent news reports suggest a deadlock
between the IMF and the Government over next years budget target
The Government is requesting a budget deficit target higher than that of
what the IMF is insisting, which is reportedly 3.9%.
In Hot Waters Forever
It may be that the state of affairs of the country has reached a point
where the only thing it has going for itself is its own rhetoric. Looking
back, it took the previous regime four to five years to reach such a
stage. Prolonged navigation through hot waters in this state can prove
challenging in the months ahead.
Saad [email protected]
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Inflation Rampant
Non Food Non Energy (NFNE) Inflation Surges up
NFNE Inflation rose by 70 basis points to 10.6% year on year, having
dropped consistently the nine months prior. As NFNE lays greateweight on less volatile negotiated prices, upward movement in the
index in the absence of a base effect reveals that market participants
expect inflation to remain high, and hence producers have adjusted
their asking prices upward as well.
Much of the 1.73% month-on-month spike in April10 CPI inflation was
attributable to non food non energy subheads, with telecommunication
charges having risen by 37.04%, apparel, medicare, education and
entertainment rising by 2.2%, 2.6%, 2.7% and 10% month-on-month
respectively. Being sticky prices, this is evidence that prices and
expectations are being re-evaluated in the economy, and may continue
to do so in the coming months.
Price Pressures: Downturn in SPI shortlived
Sensitive Price Index (SPI) started to trend downwards in the second
half of April10, on the back of a decrease in food prices. The situation
reversed itself however, as wheat prices, amongst others have once
again started to trend upwards. SPI was again up 41 basis points month
on month at the end of the second week of May10.
Table 1 - Price Indices: CPI, WPI and SPI - April'10 & SPI Trend April-May'10
Index YoY MoM Week ended SPI index % WoW % YoY
CPI 13.26% 1.73% 29-Apr 245.76 -0.63% 16.31%
WPI 21.99% 1.84% 6-May 248.06 0.94% 17.14%SPI 16.72% 0.43% 13-May 249.54 0.60% 17.58%
Source: FBS
These factors indicate strong price pressures, and should lead to CP
inflation for May10 and June10 to be between 14.0%-14.1%, averaging
13.50% for Jan-Jun10 and 12.0% for Jul09-Jun10 period. There may be
some respite however, as international oil prices have declined
considerably since end of April10. Respite in petrol and high speed
diesel prices of up to 4% and 1% respectively is expected, which may
result in some softening of more volatile prices.
Will the Status Quo be Maintained in May
Demand for shorter term (3 month, 6 month) treasury bills was highe
in the latest auction, pulling down cut-off rates, as the system was liquid
and uncertainty prevails regarding future interest rate direction. PKRV
rates also reflect this, with spread between 3-month and 12 month
rates rising to average 30 basis points in May10. Further, with strong
inflationary pressure as depicted by persistent high CPI index and an
uptick in the NFNE inflation index, the State Bank of Pakistan (SBP) may
have to re-asses its status-quo on interest rates.
Figure 1 Consumer Price Indices
Source: SBP, UBL Research
Figure 2 SPI Trend Feb-May10
Source: SBP, UBL Research
Figure 3 T-Bill Auction Cut-off Rates
Source: SBP, UBL Research
Figure 4 PKRV Trend Jan-May10
Source: SBP, UBL Research
Syed Murtaza [email protected]
8%
10%
12%
14%
16%
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
CPI Discount RateProjected CPI Average CPINon Food Non Energy
-1.0%
0.0%
1.0%2.0%
4-Feb
11-Feb
18-Feb
25-Feb
4-Mar
11-Mar
18-Mar
25-Mar
1-Apr
8-Apr
15-Apr
22-Apr
29-Apr
6-May
13-May
Week-on-week Month-on-month
11.7%
11.9%12.1%
12.3%
12.5%
14-Jan
28-Jan
11-Feb
25-Feb
11-Mar
25-Mar
8-Apr
22-Apr
6-May
20-May
3-M 6-M 12-M
11.7%
11.9%
12.1%
12.3%
1-Jan
16-Jan
31-Jan
15-Feb
2-Mar
17-Mar
1-Apr
16-Apr
1-May
16-May
3M 6M 12M
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External Account Remains Stable
Current Account Deficit Narrowed in Apr10
External account continued to improve in Apr10 as Current Account
deficit narrowed and foreign inflows remained strong. Monthly currenaccount deficit declined to USD185million, registering an improvement
of USD28million month-on-month. Though trade deficit for the month
widened to USD969million; reimbursement of USD188million in lieu of
Coalition Support Fund (CSF), which is recorded as services inflows, led
month-on-month reduction in current account deficit. For Jul09
Apr10, current account deficit stood at USD3.06billion compared to
USD8.98billion in the same period year prior. USD2billion reduction in
trade deficit and USD1.5billion incremental current transfers remain the
key drivers in the year-to-date recovery in current account.
Exports Could Outperform Annual Target
Exports retained their momentum from last month, aggregating to
USD1.84billion in Apr10. Month-on-month increases in exports of base
metals (up USD20million) and precious metals (up USD14.2million) were
able to offset seasonal reduction in exports of textiles (down
USD24.7million) and vegetable products (down USD40.4million). Fo
the year, country has been able to export goods worth USD16.2billion,
despite ongoing power crisis and austerity drive. The USD339million
year-on-year increase in exports has been partly facilitated by export of
raw cotton (up USD107million) and depreciation of PKR. At curren
rate, we expect exports to outperform budgeted target of
USD18.8billion and sum above USD19billion for Jul09-Jun10.
FDI Down 45% Year-on-Year
Foreign Direct Investment (FDI) continued to decelerate in Apr10 as
country attracted USD219million (down USD20million month-on-
month). Likewise, USD1.77billion FDI received in Jul09-Apr10 is down
by a half from USD3.2billion inflows recorded in same period last year
During the year, Oil and Gas exploration industry has been top recipient
of FDI, receiving USD605million, followed by communications sector
(USD222million) and Financial sector (USD133million). Amongst various
other factors, deteriorating security situation and macroeconomic
balances are the main reason behind reduction in FDI.
Outlook - Positive on Foreign Inflows
Coalition Support Fund (CSF) payment of USD488million, which was
received in May, and lower effective oil prices will likely facilitate a
current account surplus for the current month, which coupled with
disbursement of IMFs 4th tranche of USD1.13billion will boost externa
sector standing for entire fiscal year. Current account deficit for Jul09
Jun10 is expected at 2.2% of GDP (USD4billion) compared to earlier IMF
projection of 4.2% of GDP (USD7.5billion).
USDMillions
ble 2 External Accounts
USD Millions Apr'10 Chg. Jul'09-Apr'10 Chg.
Current Account -185 28 -3,060 5,921Trade Balance -969 -334 -9,094 2,042
Exports 1,835 -34 16,155 339
Imports 2,804 300 25,249 -1703
Services 8 315 -1,962 1,256
Income -306 -12 -2,570 1,097
Remittances 756 -8 7,307 951
Other Transfers 326 67 3,259 576
Financial Account 560 575 3,703 -630
FDI 219 -20 1,773 -1,432
FPI 136 23 -46 925
BOP 238 242 730 4,987
Source: SBP, UBL Research
gure 5 Exports Break-down
Source: SBP, UBL Research
gure 6Foreign Direct Investment Jul09-Apr10 (USD Millions)
Source: SBP
0.0
0.5
1.0
1.5
2.0
Jul-0
9
Aug-0
9
Sep-0
9
Oct-0
9
Nov-0
9
Dec-0
9
Jan-1
0
Feb-1
0
Mar-1
0
-
USDBillions
Textiles Vegetables Minerals Other
605
222
1331048681
79
463
E&P
Communication
Finance
Transport
Construction
Paper
Chemicals
Others
Asim [email protected]
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Higher GDP Growth as a Result of Lower Base
The government has revised the 2007-08 and 2008-09 GDP growth rates
downward to 3.7% and 1.2% respectively, in what has become a trend
prior to budget announcement in recent years. As a result, curren
years growth estimate has been adjusted upward from 3.3% to 4.1% asa result of a lower base.
The adjustments have been made based on reconciled data for the last
two years. Previously, GDP growth rates for 2007-08 and 2008-09 stood
at 4.0% and 2.0% respectively.
Table 3 Initial & Revised Growth Estimates 2009-10
Initial Estimate Revised Estimate Change
Agriculture 3.8% 2.0% -1.8%
Industry 1.7% 4.9% 3.2%
Large-Scale Manufacturing 1.0% 4.3% 3.3%
Small-Scale Manufacturing 3.0% 7.5% 4.5%
Services 3.9% 4.6% 0.7%
GDP 3.3% 4.1% 0.8%
Source: News Report
Improvement in Industrial Sector
Based on provisional data for current year and taking into account the
downward revisions in previous years, industrial sector seems to be the
prime beneficiary of the revised lower base. Industry is expected to
grow by 4.9% against the initial target of 1.7%. Small-scale
manufacturing growth has been revised to 7.5% compared to initia
estimates of 3.0% while large-scale manufacturings (LSM) growth has
been revised to 4.3% for the current year. However, LSM growth for the
period Jul09-Mar10 has already surpassed that target as it stood at
4.36%.
Agricultural Output Weak
Agricultural sector is expected to grow by 2.0% as compared to the
initial target of 3.8%. Output of all the major and minor crops, excep
cotton, has declined as compared to last year. Cotton output at 12.7
million bales is 7.4% higher as compared to last year. The 2.0% targeted
growth is primarily because of livestock, which has proven to be the
saving grace once again, growing by 4.1% in the current year.
Outlook
Although this development can be considered a positive one as it maychange perceptions and future expectations, the economy still remains
extremely vulnerable to several international and domestic variables
Slow recovery in developed world can hurt external demand, while
unavailability of power and finances can limit domestic output.
Figure 7 Historical GDP Growth & Initial & Revised Target
Source: Economic Survey, News Reports
Figure 8 Sectoral Share in GDP Growth
Source: Economic Survey, UBL Research
Figure 9 YoY LSM Growth & 2010 Estimates
Source: FBS, UBL Research
1%
3%
5%
7%
9%
2003
2004
2005
2006
2007
2008
2009
2010E
Previous Revised
-1%
0%
1%
2%
3%
4%
5%
6%
7%
2006 2007 2008 2009 2010
Initial
2010
Revised
Agri Manufacturing Services
-9%
-5%
-1%
3%
7%
11%
2006
2007
2008
2009
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Actual Initial Revised
Farhan Firdous [email protected]
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