External Account Economics| Pakistan February 13, 2015 February 13, 2015 Pakistan Economic Watch Morning Shout Rising comfort on twin deficits; but challenges remain Stronger external account, though fiscal targets still unclear Sarah Mazhar [email protected] KASB Securities Limited +92 21 111 222 000 We believe the fiscal and external accounts should reap the benefit of recent positive macro newsflow; adhoc revenue measures, US$0.7bn Coalition Support Fund (CSF) receipts, and soft trade deficit data for Jan-15 (US$0.99bn-lowest since Apr-11). Resultantly, we revise our FY15 current account deficit (CAD) estimate to US$1.3bn (0.5% of GDP) from US$1.7bn earlier, since we had assumed only US$1.1bn under CSF head for this year (vs US$1.4bn received FYTD). However, we opine challenges to fiscal targets remain as the govt has cut FBR tax target by 4% to PRs2.61tn due to loss in revenue; which would likely have to be compensated with stricter spending targets. Reserves likely to cross key threshold Chart 1: SBP FX reserves increased to 2.7-months in Feb-14 from <1-month of import cover last year 16.0 14.0 12.0 We highlight the upcoming HBL first phase transaction in Mar-15, expected to generate US$0.5bn, will be another key test for further increase in reserves. Other major inflows in FY15 potentially include two more IMF tranches in the best case of smooth progress on reviews. As a result, we believe total forex reserves to close Jun-15 at US$17.3bn, whereby reserves held by SBP should be above 3mths of import cover (now at 2.7-mths). This is an important threshold level of reserve adequacy recognized globally and also by IMF in its third review document, and may point to a more stable exchange rate outlook. We see upside risk to our exchange rate estimate (5.3% and 4% for FY15/16E). 10.0 3Q fiscal deficit and govt borrowing from SBP to get cushioned 8.0 6.0 4.0 2.0 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 0.0 SBP FX reserves Source: SBP, KASB research Import cover The realization of budgeted CSF (non-tax) receipts, along with recent 5% hike in regulatory duty on some items and 10% hike in GST on POL products, should ease concerns on fiscal deficit in FY15 to some extent. However, all is not rosy on the fiscal side; (1) another budgeted revenue stream that seems unlikely to materialize within FY15 is that of the 4G auction as PTA has not yet hired any consultant services (PRs56bn or 0.2% of GDP budgeted by federal govt), (2) PRs150bn National Action Plan announced although financing plan of the same is unclear for now and (3) increasing pressure to quickly resolve circular debt may require more government spending. In the immediate term, however, thanks to recent inflows, the government should be able to comfortably retire its borrowing from SBP to bring the stock within ceiling limit of PRs1.905tn for end of Mar-15. Currently, the stock of govt borrowing from SBP lies at PRs1.912tn (down PRs88bn from Dec-14 target). Key risks 1- Legal and political challenges in 4QFY15 related to reforms (privatization, SBP autonomy bill) and lost revenue stream (GIDC stay order). 2- Commodity price movements, though unlikely to see major swings in near term, could affect external and fiscal account estimates. KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi This report has been prepared by KASB Securities Ltd. and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. From time to time KASB Securities Ltd. and any of its officers or directors may, to the extent permitted by law, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided solely for the information of professional advisers who are expected to make their own investment decisions without undue reliance on this report and the company accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. 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Page 1 Pakistan Economic Watch – February 13, 2015 Morning News KSE-100 Intra-day Movement FIPI 34,232 34,138 High 34,237 34,044 33,950 33,856 33,762 33,668 th 33,574 33,480 Low 33,493 9:30 AM 10:55 AM 12:19 PM 1:45 PM 3:10 PM Source: KASB Research Index Data & Volume Leaders Close KSE30 KSE100 KSE All Share ENGRO DGKC EFERT JSCL MLCF Power sector receivables cross PRs590bn mark (BR): Power sector receivables have crossed PRs590bn as of December 31, 2014 with an addition of PRs77.7bn in the first six months of FY15. The Ministry of Water and Power claims that it is current on payment to PSO but PRs172bn are still outstanding and being paid in installments. Despite significantly reducing generation on furnace oil (FO) at the end of the year, the sector was unable to improve recoveries until Dec-14; in our view, this was partly because the government almost completely passed on the lower fuel cost advantage to the consumers. We think the level of receivables in Jan-15 and Feb-15 will shed more light on the efficacy of the recent measures taken by the government. Vol. US$ mn % Chg 21,846.34 33,786.42 -1.3% -1.2% 96.96 144.50 24,389.28 274.56 128.15 84.66 23.02 56.77 -1.3% -2.4% -1.7% -1.9% 1.9% -1.0% 187.94 26.95 12.29 11.13 9.50 8.54 MLCF conference call on 12 Feb - Key Takeaways (Analyst Comment): In a conference call yesterday addressed by Mr. Waleed Saigol (Director MLCF) and Mr.Sohail Sadiq (GM Finance MLCF), MLCF highlighted that they have managed to get a stay order on the retrospective application of the Alternate Corporate Tax applicable on the company through the Finance Bill 2014. The company believes it is likely to win the case which will result in reversal of provisions made for ACT in FY13 and FY14. The company revealed plans to set up a local coal-based power plant of about 23MW, which will be able to cater to 50% of the company’s power requirement; however, the project is only under the planning/consideration phase while no timelines/details of any financial drawdown/L/C opening/plant suppliers have been disclosed as yet. Moreover, the company has shed light on a shift in the management’s policy towards paying out to shareholders in a modest, but sustainable way, along with honoring their financial liabilities and planned capital expenditure going forward. MLCF has also clearly stated that they do not have any expansion plans in the near term. When the company was asked to comment on the sustainably of the coal transportation advantage MLCF has over other players due to its contract with the Pakistan Railway, the company said that the advantage is sustainable, even in view of decreasing truck freight cost for other players due to decline in POL prices, as revision in the railway transportation freight charged to MLCF takes into account/ is pegged to the respective movement in truck freight for other players. Source: KSE KSE-100: Top Gainers & Losers FIPI FFBL AHCL Technical View NATF Ahmed Hanif [email protected] JSCL ATLH KSE-100: Looking to target 50DMA MUREB ISL CEPB The index broke its critical support of 33,900 and tested its daily lower Bollinger band, closing in the red. The index could now target 33,000, its 50DMA, as it has given a closing below its 20DMA. NETSOL RSI has also broken its double bottom, which is again a bearish sign. JGICL Only a closing above 34,350 (20DMA) could change our view form bearish to bullish. It is recommended to liquidate trading positions on strength. -5% -3% 0% 3% Source: KASB Research Page 2 Pakistan Economic Watch – February 13, 2015 World Markets and Commodity Prices International Equity Markets Asian Markets (Last trading session’s) Price All Ordinaries Shanghai Composite Hang Seng BSE 30 Jakarta Composite KLSE Composite Nikkei 225 NZSE 50 Straits Times Seoul Composite Taiwan Weighted KSE-100 Index European Markets (Last Trading Session’s Rates) Abs. Chg. 5,707.70 3,223.17 24,422.15 28,805.10 5,343.41 1,789.07 17,979.72 5,749.32 3,419.17 1,941.63 9,496.31 33,786.42 -24.0 65.5 107.1 271.1 6.9 -9.9 327.0 -39.9 -25.4 -4.1 34.1 -417.6 % Chg. -0.42 2.07 0.44 0.95 0.13 -0.55 1.85 -0.69 -0.74 -0.21 0.36 -1.22 Price ATX BEL-20 CAC 40 DAX AEX General Swiss Market FTSE 100 American Markets Dow Jones Ind. Average NASDAQ Composite NASDAQ -100 S&P 500 Index, RTH Abs. Chg. % Chg. 2,375.85 3,566.91 4,726.20 10,919.65 460.43 8,611.00 6,828.10 54.6 29.0 46.8 167.5 2.2 33.2 9.9 2.4 0.8 1.0 1.6 0.5 0.4 0.1 17,972.38 4,857.61 4,347.97 2,088.48 110.2 56.4 50.7 19.9 0.6 1.2 1.2 1.0 Source: Bloomberg Foreign Portfolio Investment in Equities Country Pakistan India Indonesia Japan Philippines South Korea Sri Lanka Taiwan Thailand Vietnam Abu Dhabi Qatar Day (US$mn) (5.7) (60.0) 74.0 22.5 57.9 0.2 265.4 55.2 6.4 8.5 (6.0) WTD (US$mn) (10.7) (300.8) 170.1 (4,004.4) 49.1 (200.6) 6.4 791.7 55.8 27.0 12.3 16.4 MTD (US$mn) (62.3) (108.2) 367.3 (4,004.4) 254.4 235.0 11.0 1,633.6 240.0 23.9 38.3 56.1 YTD (US$mn) 12M (US$mn) (61.5) 2,470.6 385.8 (11,960.5) 783.7 (7,983.3) 11.9 3,777.0 112.3 28.6 9.5 (18.8) 277.9 18,936.2 3,772.5 20,981.2 2,170.1 7,319.1 196.1 18,554.4 (75.5) 75.0 1,006.3 1,835.2 Date 12-02 11-02 12-02 02-02 12-02 12-02 12-02 12-02 12-02 12-02 12-02 11-02 Source: Bloomberg, NCCPL Forex and Money Market snapshot 6-Month KIBOR (Offer) 12-M T-Bill (Average) 10- year PIB (Average) PkR/ US$ Current Previous Chg. 8.49 8.31 9.88 101.49 8.50 8.32 9.88 101.46 -0.01 -0.01 0.00 0.03 Price Abs. Chg. % Chg. 2.37 3.13 4.10 4.9 0.3 1.8 Source: KASB Money Market Commodity Prices WTI (Crude Oil) Gold CRB Index 51.21 1,222.15 226.10 Source: Bloomberg Page 3
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