AKD Securities Equity Research – Pakistan Economy: CA surplus – An unusual trend

Karachi, May 19, 2015 (PPI-OT): Pakistan’s current account seems to be following an unusual trend where Jul-Apr’15 CAD has clocked in at US$1.36bn, nearly half the level seen in the same period in FY14, after recording a surplus of US$275mn in April’15.

The downtrend has primarily been on the back of 1) receipt of US$717mn under CSF in Feb’15, 2) a deceleration in imports growth in 10MFY15 at 2%YoY owing to decline in int’l oil prices and 3) 16%YoY uptick in remittances in 10MFY15 to US$14.97bn.

However, AKD Securities Limited stills remain skeptical about the sustainability of the trend given the decline in exports (10MFY15 exports down 5%YoY) where falling commodity prices and stable exchange rate are the key factors for the decline. Looking forward, while AKD Securities Limited flags risks to the current account emanating from lower exports, AKD Securities Limited remains positive on the FY15 outlook, with expectations of CAD coming in lower than 1% of the GDP.

Surplus again: Pakistan’s current account balance managed to post a surplus of US$275mn for April’15 as per SPB’s recently released figures. Consequently this has allowed 10MFY15 CAD to round-off at US$1.36bn, almost 53% lower than US$2.93bn in the same period last year. The positive and unusual trend has been primarily on the back of US$717mn CSF receipts in Feb’15 consequently lowering services trade balance for Jul-Apr’15 to US$1.69bn (vs.US$2.4bn in 10MFY14). Moreover, 16%YoY uptick in remittance at US$14.97bn in 10MFY15 vs. 11.5% (US$12.9bn) in Jul-Apr’14 has also been a positive contributor.

Is it sustainable? While the CA is no doubt moving in a positive direction, AKD Securities Limited remains skeptical about the sustainability of the current trend. The surplus of US$163mn posted last month has been revised down to a slight deficit of US$20mn, mainly accounting for revisions in the trade balance. Improvements in CA performance can be largely attributed to deceleration in imports growth in the backdrop of the slump in int’l oil prices where oil constitutes over one-third of Pakistan’s import bill. This allowed petroleum imports to drop by 19%YoY in 9MFY15 to US$8.71bn.

That said, weaker export growth (down 5%YoY in 10MFY15) remains a key hurdle where factors such as 1) a relatively strengthened PkR against the US$ (1.7% CYTD depreciation) and 2) decline in global commodity prices will continue to put pressure on exports. Furthermore, the country’s low competitiveness and dependence on low value exports in textile (63% contribution to total exports) and foods(21% contribution to total exports) tends to further aggravate the decline.

Outlook: While flagging risks to the current account emanating from lower exports, AKD Securities Limited remains positive on the current account outlook for FY15, with expectations of CAD coming in lower than 1% of the GDP.

Pressures on the external a/c are expected to continue easing off with fx reserves rising to US$17.7bn (taking total import cover to 4.6m) and expected to grow further with US$500mn from IMF anticipated to be received by Jun’15 end. AKD Securities Limited sees this helping the currency to sustain its current levels for the remainder of FY15 as well as strengthening the case for continued monetary easing in the next MPS (AKD’s expectation: 50bps cut in DR).