AKD Quotidian about — Pakistan Economy: CAD Nov13 review

Karachi, December 23, 2013 (PPI-OT): The Current Account deficit for Nov’13 has registered at a steep US$589mn (US$mn) vs.

According to AKD Securities, a minor deficit (revised) of US$96mn in Oct’13. This substantial rise in the deficit was primarily due to i) 11%MoM decline in exports to US$1,850mn (slowdown in textile exports, petroleum group and other manufacturing items) and ii) 16%MoM decline in remittances. As a result, the 5MFY14 Current Account deficit has shot up to US$1,885mn (0.78% (150) of GDP), showing significant deterioration compared to a deficit of (300) US$684mn during 5MFY13.

The latter however was largely due to big- (600) ticket CSF receipts. That said, with release of second installment of US$544mn from the IMF, AKD Securities expects incremental improvement on the external front particularly within the backdrop of 1) approval of GSP status by EU and 2) expected release of foreign inflows.

This will provide cushion CA deficit vs Remittances US$mn to SBP’s reserves (currently at US$3.46bn) and the currency in the near US$mn term. AKD Securities maintains AKD Securities’ end-Jun’14 PkR/US$ exchange rate forecast of 107.64 implying 8.8%YoY depreciation. From an investment perspective, coming on the back of the KSE-100′s 51%CYTD returns (on top of 49% returns in CY12), AKD Securities recommends complementing growth stocks (UBL, DGKC, NML) with a selection of defensive names (HUBC, FFC, POL).

5MFY14 CA deficit: The CAD for Nov’13 has registered at US$589mn, up sharply from a minor deficit of US$96mn in Oct’13 (restated from a deficit of US$166mn). The sequential rise in deficit was primarily due to i) 11%MoM decline in exports to US$1,850mn (due to slowdown in textile exports particularly cotton cloth, petroleum group and other manufacturing items and ii) 16%MoM Net Liquid reserves vs. USD/PkR decline in remittances. As a result, the Current Account for 5MFY14 registered a deficit of US$1,885mn (0.78% of GDP) compared to a deficit of US$684mn 113.00 in 5MFY13.

The latter however, was largely due to CSF receipts amounting to 108.00 US$1.2bn in Aug’12. Going forward, Pakistan expects the US to release 103.00 US$900mn in CSF across FY14 compared to release of US$1.8bn in full-year FY13.

Incremental improvement ahead? The release of the IMF’s second installment of US$544mn will likely take the SBP’s fx reserves higher after they bottomed out at US$2.9bn recently. Going forward, further improvement on the external front should arise on the back of 1) approval of GSP status by EU and anticipated increase in textile exports, and 2) expected release of foreign inflows (3G auction/multilateral and bilateral donors).

This should serve to check pressure on the currency in the near-term which has appreciated by 2.2%MoM in Dec13TD vs a normalized depreciation run rate of 0.9%MoM in CY13. As such, AKD Securities maintains AKD Securities’ Jun’14 end PkR/US$ exchange rate forecast of 107.64 implying 8.8%YoY depreciation.

Investment perspective: Coming on the back of the KSE-100′s 51%CYTD returns (on top of 49% returns in CY12), AKD Securities recommends complementing growth stocks (UBL, DGKC, NML) with a selection of defensive names (HUBC, FFC, POL) with a view to limiting portfolio downside in the event of a correction (the KSE-100 Index has gained 14.4% across the last 3m).

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