AKD Quotidian about — SBP 2nd Quarterly Review: Key Takeaways

Karachi: The SBP has recently issued its 2nd Quarterly Review (2QFY12), indicating some positives to the economy with improvement in the real sector, easing in price pressures, modest increase in M2 growth and robust tax collection (up 28% FYTD).

According to According to AKD Securities, on the growth side, the commodity producing sector has performed better than expected owing to strong agricultural output in major crops. Despite these positives, SBP has reiterated risks to macroeconomic stability stemming from the external sector and continued fiscal slippages. The 8MFY12 CA deficit has already surged to US$2.95bn (FY12F: upto 2.5% of GDP) and as yet there are no concrete signs of materialization of envisaged foreign flows of US$2.2bn (3G auction/Etisalat/CSF) in the current fiscal year. In this regard, the scheduled IMF repayments of US$1.2bn in 2012 will likely draw down SBP forex reserves. At the same time, challenges in meeting the revised fiscal deficit target of 4.7% of GDP will likely place financing onus on commercial banks. While AKD Securities expects Banks to continue posting solid nominal earnings growth, broader macroeconomic concerns include 1) anemic Pvt. sector credit off take despite a 200bps cut in DR, 2) renewed GoP borrowing from SBP leading to higher inflationary expectations and 3) increasing OMO operations.

Outlook for Real Sector: SBP noticed some signs of improvement in private consumption and investment which include 1) increase in consumption demand with higher production of consumer goods and renewed interest in auto finance primarily supported by growth in remittances, stable corporate profits and lower taxes, 2) FDI inflow in selected industries, 3) modest revival in construction activities and 4) downward pressure on price of agri-based raw materials that has benefitted the sugar and cotton yarn industries. However, with persistent energy shortages and supply bottlenecks, sequential LSM growth decelerated from 2.8% in 1QFY12 to -1% in 2QFY12.Going forward, the SBP expects FY12 real GDP growth of 3%-4%, consistent with earlier estimates. Inflation is expected to tag in the 11%-12% range.

External Account: 8MFY12 CA deficit has widened to US$2,952mn.The expansion in CA deficit is primarily due to a widening of the trade deficit, which reached US$12.4bn in 8MFY12, up 53%YoY following a rising import bill (up 16%YoY) and flattish exports (up 5%YoY) with slowdown in global economic activity. Sequentially the pace of deterioration in the financial and capital account accelerated in 2QFY12, with a deficit of US$O.2bn in 2QFY12 from a surplus of US$O.6bn in 1QFY11. The overall impact of the deteriorating external account has not only exerted considerable pressure exchange rate projection is 92.8, AKD Securities does not rule out build-up of speculative pressure on the currency.

Fiscal deficit to breach 4.7% of GDP: The data for consolidated fiscal operations indicates a deficit of 25% of GDP for 1HFY12, lower than 1HFY11 (2.7% of GDP) primarily from improvement in tax collection (up 27%YoY). Furthermore it was also noted that financing this deficit was more challenging than the same period last year with non-materialization of expected external flows. The fiscal deficit is expected to widen in 2HFY12 and will likely breach the revised target of 4.7% of GDP and potentially reach a high 66% of GDP. At the same time, 2QFY12 also witnessed a significant increase in deficit monetization by the GoP whereby the limit of `zero’ net quarterly borrowing from SBP could not be met. The dearth of external financing is likely to further aggravate the burden of financing on domestic sources. On the upside however, rollover of external debt payment (EUR420mn owed to IDB) during 2QFY12 provided a breather.

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