EUR 87.04 For Business Accounts Only

Pakistan Economy: Life with IMF & its Likely Impact

• Pakistan’s External Account woes continue to worry investors as outlook on Foreign Exchange (FX) reserves and Current Account Deficit (CAD) seems alarming at a time when Pak-US relations are not good.
• Pakistan’s FX reserves are down 40% to US$11.8bn as of March 22, 2018 (2.6 months of import cover) since its peak of US$19.5bn in Oct 2016.
• With this situation, there are three possible scenarios that can unfold: 1) strict measures including further PKR devaluation and interest rate hike, 2) entry into IMF’s program and 3) bailout from friendly countries.
• We are of the view that the first two scenarios will likely unfold where the Govt. will take strict measures and enter an IMF program in 2H2018 post general elections.
• However, the intensity and after effects on economic activity of IMF bailout will not to be as profound as witnessed post 2008 and may not be as mild as seen after the 2013 program.
• Pakistan can avoid knocking IMF’s door, though probability of it happening is low, if the Govt. manages to arrange decent external financing from friendly countries (China & Saudi Arabia) by 3Q2018 along with taking corrective measures.
• Considering our base case where Pakistan will seek IMF funding, we anticipate further devaluation of 10% in FY19 and 7% in FY20 which is likely to take PKR/USD parity from current Rs115 to Rs136 by FY20.
• We also anticipate SBP policy rate to be increased from current 6.00% to 8.75% by FY20 under IMF program.
• With reform measures, CAD will likely clock in below 3% of GDP by FY20 vs. 5.1% expected in FY18 & foreign exchange reserves will improve to US$15bn by FY20 vs. US$11.8bn as of Mar 22, 2018.
• While we expect CPEC to continue, measures under IMF program could affect projects’ progress to some extent. 
• Due to aforesaid reasons, Pakistan’s GDP growth is likely to slowdown to 4.6% in FY19, 4.7% in FY20 and 5.1% by FY21 as against 5.7% of growth expectations in FY18.
• Timing and quantum of currency devaluation, policy rate hike and smooth transition of democratic government (General Elections likely in Jul 2018) will be key triggers for the market.
• We maintain our index target of 50,000 pts by Dec 2018 with PE range of 8.5-9.0x, which we had mentioned in our Dec 2017 Pakistan Strategy report. The market is currently trading at 2019F PE of 8.3x.
• We have ‘Overweight’ stance on Banks, E&Ps & Textile sectors that are likely to be beneficiaries of policy rate hike and currency devaluation.