Pakistan Economy: Out of the Woods
- Decline in imports; external account within manageable limits: Significant decline in imports has resulted in reduction of Current Account Deficit (CAD). Imports during first 4 months of FY20 stood at USD15.3bn, down 19.3% YoY or USD3.7bn. Exports, however, have remained flat at around USD2bn.
- Primary fiscal account is in surplus: Pakistan has posted a primary fiscal surplus (excludes debt servicing cost) of 0.06% of GDP during Jul-Aug’19. This is encouraging as it allays concerns on Pakistan’s inability to meet the International Monetary Fund’s (IMF) primary deficit target of -0.6% for FY20. Federal Board of Revenue (FBR) tax collection for July-Oct’19 period has shown decent growth of 15% YoY. This is despite the slowdown in collection of taxes at import stage.
- GDP growth remains subdued: For the first 2 months Jul-Aug’19, large scale manufacturing (LSM) index has shown a decline of 6% over corresponding period last year. Furthermore, cotton crop target has been revised down to 10.2mn bales from 15mn bales earlier. This subdued performance will keep GDP growth at 3% for FY20.
- Inflation trending lower; Interest rate cut likely this month: As per our estimates, Sept’19 Consumer Price Index (CPI) inflation was peak inflation for FY20. Going forward, inflation (on new base) is expected to remain in double digits till Feb’20 after which we expect it in single digits. Based on these inflation expectations, we expect State Bank of Pakistan (SBP) to cut interest rates by 50 basis points this month.
- Stable economics is market positive: Back in Jul’19 when we had published our strategy report, longer tenure government paper (5/10-yr) was trading at 13.75/14.00%. Given stabilizing economics and lower expectations of inflation, this has come down to 11.25-11.50%, a reduction of 250 basis points. We now expect the KSE-100 Index to close FY20 at 45,000-47,000 range compared to earlier expectations of 42,000-44,000. We remain Overweight on E&Ps, Banks, Fertilizers, Textiles, and Chemicals.
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