Morning Briefing for July 04, 2012 – Standard Capital

Karachi, July 04, 2012 (PPI-OT): Thaw in Pak – US relations to bring positives

Many participants in the market were of the opinion that any thaw in Pak-US relations shall guarantee upward movement at KSE.

According to Standard Capital, just now Defense Committee of the Government of Pakistan which is called DCC has finally decided to unblock NATO supplies via Pakistan to Afghanistan. This is being done after US Secretary of State Hillary Clinton tenders long awaited apology on one incident in which Pakistani soldiers were killed by unprovoked act of firing on mountainous region and Pakistan in retaliation blocked NATO trucks that were taking necessary supplies for coalition forces to Afghanistan.

This ostensibly means that now Pak-US relations shall again be on-course wherein

• Pakistan may again go to IMF for balance of payment and exchange rate support program which was reminiscent of 2008 situation when Pakistan needed similar support in that period. US have more clout at the IMF due more Special Drawing Rights called SDRs along with Japan. IMF nod to Pakistan for any similar facility of balance of payment and exchange rate support would be at the behest of US government interests since IMF is also headed by US government appointee.

• Again Pakistan’s exchange reserves are under pressure given pressure on Pakistan to meet deadlines to repay instalments to IMF along with heavy interests (Pakistan is recipient of IMF aid of US$7.2billion and now repayment period has started). Further depletion in reserves could endanger rupee stability plus Pakistan’s credibility as a tradable economy.

• Pakistan shall get coalition support fund (CSF) amount which could be around US$1billion. This amount is envisaged to support Pakistan since Pakistan has rendered sacrifices in ‘US war on terror’.

• Given this war on terror, Pakistan economy has suffered badly. Pakistan is facing problems on ever increasing current a/c deficit, budgetary support in an election year wherein its domestic borrowing is overblown. Rupee has started losing lustre wherein it has touched Rs 95 – 96 vs. Dollar in the open market.

• Pakistan’s current a/c deficit may face some reprieve since for few years Pakistan was a recipient of some peanuts like portfolio investment and as a result current a/c remained at a minuscule surplus for some time. Though, the bigger reason remained expats remittances (this year Standard Capital expects remittances to cross US$12billion).

• Pakistan’s trade deficit too may find some reprieve since US still remains Pakistan’s biggest trading partner given their preferential trading access to Pakistani textile goods. Recent gesture by EU to extend preferential GSP plus to Pakistani textiles is also at the behest of US.

• In the longer term, relations with US would also define opportunity for Pakistan to play its role in development of war torn Afghanistan where India has taken the lead due to its affinity with US. Indian firms are getting numerous contracts such as in telecom, road building, education, steel and mining but Pakistan is still lagging behind given host of reasons.

• NATO supplies were routed via Karachi to all provinces thus many of the truckers, roadside vendors and small economy thrived from Karachi to Landikotal and Chaman. Infact many sections in Pakistan wanted to open NATO supplies for their own advantage and market community was one of them.

In the wake of this development Standard Capital delineates Standard Capital’s top picks such PPL, MARI, HBL, BAFL, UBL, EFOODS and LUCK. Standard Capital also adds NML to the list.