Pakistan Economy: Rising oil prices add on to the economic woes
Benefiting from a prolonged period of low oil prices and fast-paced growth momentum (largely on CPEC related developments), the recent resurgence in oil prices to its 3.5yr high calls for an update in macro assumptions. We believe oil prices are likely to hover around these levels (Arab light to average at US$70/bbl in FY19F vs US$60/bbl earlier) backed by geopolitics setting the roadmap (likely fallout of Iran oil in light of US withdrawal from the JCPOA) and planned ARAMCO IPO (expected in 2019). Consequentially, CPI inflation is estimated to rise to 6.13%YoY/6.55%YoY in FY19F/CY19F (vs. 5.76%YoY/5.9%YoY earlier with oil prices assumed at US$60/bbl). In this backdrop, we believe MPC can take a more hawkish stance in setting the policy rate. Additionally, pressures on the external account are likely to remain elevated in the upcoming year where current account deficit is likely to be recorded around the same level at 4.9% of GDP (US$16.2bn) in FY19F (vs. FY18E). Looming macroeconomic headwinds can potentially dampen the positives arising out of growth momentum and can give rise to a defensive investor mindset. In this regard, sectors like banks (anticipation of rate hike), E&P (uptick in profitability), Energy (US$ hedged) and export revenue based sectors should thematically be considered to counter market volatility.
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