By: BMA Capital Management Limited
Economy: As per the latest data published by State Bank of Pakistan (SBP), external account of the country continues to post improvement as evident from 51%MoM/61%YoY reduction in current account deficit (CAD) to USD216mn (0.9% of GDP) in Nov’15. The MoM recovery was merely a factor of uptick in non‐recurring ‘heads’ of current transfers (excluding remittances) and 20%YoY lower income deficit. The YoY progress was mainly carried by 18%YoY higher remittances to USD1.6bn. Cumulatively, 5MFY16 CAD witnessed an improvement of an impressive 59%YoY primarily due to i) 18%YoY decline in goods and services trade deficit to USD8.2bn and ii) 8%YoY growth in remittances to USD8.1bn. Reduction in CAD coupled with 15%YoY uptick in financial account surplus to USD1.6bn kept the overall BoP position in the surplus of USD837mn in 5MFY16 compared to deficit of USD901mn in 5MFY15.
Going forward, we foresee CAD to further improve in next two months primarily due to further reduction in oil import bill (oil prices down 34% in last two months). In full year FY16, we foresee CAD to remain in the vicinity of 0.6%‐0.7% of GDP compared to 1.0% in FY15. The continued influx of IMF installments (remaining: USD1.5bn), fresh approval of USD900mn from World Bank and ADB and CSF payments will likely stretch total reserves of the country beyond ~USD21bn mark by end FY16. Beyond FY16, potential revival in FDI will remain the key to the sustainability of reserves and thus, critical to the direction of PKR/USD.