ubl research report - economy review - may 2010

8/9/2019 UBL Research Report - Economy Review - May 2010

1/6

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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U N I T E D B A N K L I M I T E D Economy Review May 2010

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


Figure 3 T-Bill Auction Cut-off Rates


Figure 4 PKRV Trend Jan-May10


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


4/6



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


gure 5 Exports Break-down


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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