By: Saad Khan, Arif Habib Ltd.
FY12TD the PKR has almost lost 4.9% of its value against USD, compared to 2.0% in FY11. Although it is fairly difficult to assess what factors (domestic and external) have contributed more towards the PKR depreciation over the period but in our view, the current slide in PKR owes to deterioration in balance of payments (BoP). This was due to higher than expected current account (C/A) deficit and relatively slow growth in financial and capital account. The net effect of which resulted in overall draw down in foreign exchange (FX) reserves. In addition to this unwarranted circumstance, speculative activities picked-up in the latter half of Nov-11 causing the PKR to fall dramatically against the USD.
Concerns over the sustainability of Pakistan balance of payments
The single most important factor which has resulted in PKR depreciation is the widening of C/A deficit, which negatively impacts the country’s BoP. The worsening in the C/A is almost fully explained by high trade deficits on account of high energy-based imports. During the period 6MFY12 the C/A posted a deficit of USD 2.1bn (1.8% of the GDP) compared to 8mn surplus in 6MFY11, higher than what the government initially envisaged (FY12 targeted USD 1.4bn or 0.6% of the GDP).
C/A balances seems manageable in short-term
However we think C/A deficit will remain manageable in the short-run. We base this due to higher exports as percentage of imports and workers’ remittance. But we remain concerned about potentially sharper than expected depreciation in PKR may occur in the event of capital flight.
Problem lies in weak capital inflows
Pakistan extensive reliance on foreign flows to fill in its deficit gap, which given the soggy global economic environment presents a worrisome picture. Despite global rebalancing act over a period has remained skewed towards emerging and developing markets, the prospects of Pakistan benefiting of this preference shift are fairly narrowed.
Tight liquidity condition
In addition to drying up of foreign inflows, heavy government reliance on domestic sources for budgetary borrowing has kept the banking system liquidity position tight. These combined factors fuelled in speculative activities and FX reserves saw sharp depletion.
We believe that the factors, which were largely responsible for sharp PKR depreciation, have either been incorporated or have partially been subsided. Non-materialisation of funds under 3G license and CSF along with high oil prices will be some of the key risks to PKR call in our view.
PKR likely to lose ~4% YoY of its value in FY12
We expect PKR to touch 92.4 by Jun-12 bringing the FY12 average at 89.2/USD, which translates into a 4% YoY depreciation. Though we expect the volatility to remain (given uncertain global outlook), we are of the view that recent development in macroeconomic indicators and those carried out by SBP will to sustain USD/PKR parity and trade close to the PKR 90 mark for the time being.