Pakistan Economy: External financing pressures come to the fore
IMF in its recent PPM report highlighted risks to Pakistan's debt sustainability in medium-term and capacity to mobilize additional financing at favorable rates (on account of rising global interest rates). In this regard, the fund projects gross financing needs at US$24.5bn for FY18F (7.5% of GDP) with external debt to reach US$93.3bn by Jun'18 (28.5% of GDP vs 27.3% in FY17), primarily on the back of: 1) rising CAD projected at US$15.7bn in FY18F (4.8% of GDP) driven by CPEC related outflows, 2) increasing external debt servicing at US$6.3bn (26.2% of exports vs 30.2/22.2% in FY17/16) and 3) declining FX reserves despite borrowing from the international markets. Additionally, IMF estimates gross FX reserves at US$12.1bn (2.7x import cover) by Jun'18 against SBP target of US$12.5bn. However, based on Assessing Reserves Adequacy matric (ARA EM), Pakistan's total liquid reserves stand at 50% of ARA vs. IMF's benchmark of 100-150% signifying reserves' inability to provide adequate capacity for the country to respond to adverse economic shocks. On the other hand however, the market implied risk-neutral sovereign probability of default stands quite low at ~6.5% (CDS spread at 342bps vs avg. spread of 1100bps in CY11 when debt to GDP stood at 30%). Going forward, with declining FX reserves we believe capacity to maintain US$/PkR parity remains limited where using time-series econometric analysis we forecast currency to depreciate by 7% by end CY18.
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