By: Saad Khan, Arif Habib Ltd.
Trade deficit takes a hit on due to energy-based import bill
Country’s trade deficit during the 1HFY12 swelled to USD 11.48bn showing a +38.5% YoY rise compared to corresponding period last year, as per figures released by Federal Bureau of Statistics (FBS). Monthly statistics for Dec-11 suggests a ~11% MoM (or +45% YoY) rise. Taking in account of ~4.2% YoY depreciation in PKR, total trade deficit translates in to a ~45% YoY (or +14% MoM) rise to PKR 215bn.
Monthly exports pace ahead of imports posting a ~20% MoM rise
On a positive note Dec-11 exports growth picked paced against imports, registering 19.5% MoM, on the back of healthy textile sector gains (although the complete break-up is not available as yet, but considering the 5MFY12 15% YoY rise, we based our understandings), against a 14.3% MoM in imports. However, 1HFY12 analysis suggests a murky picture as total exports earnings received during the period shows a mere ~4% YoY rise compared ~19% YoY rise in imports.
Widening trade deficit reflects overall consumption holding firm…
In our view, country’s widening trade deficit is indicative of rising domestic demand where supply deficits are met through increased import bill. Hence, leading to currency devaluation and inducing higher import based inflation. Looking at the import data suggests that the overall machinery imports moved by a mere +1% (5 months moving average) compared to food (+31%), agri-based (+8%) and petroleum (+1%). To the extent that food imports presents consumption based product and therefore may not be contributing to overall exports growth.
…this could limit SBP’s policy-based economic recovery
A trade deficit would have been less worrisome if it was based on imports commodities that in future would have translated in to export based growth recovery. The SBP 1QFY12 slashed the policy rate by 150bps, in a turn allowing the trade deficit to widened by +39% YoY, in 1HFY12. This in our view is major source of concern which could impose limitations on the SBP current mode of policy-driven recovery.
Remittances hits a USD ~6bn mark, during 1HFY12
Overall remittances for the period 1HFY12, showed a ~20% YoY rise to USD 6.3bn, almost USD 6bn short of our USD 12.4bn FY12 projections. Monthly analysis suggests that the total remitted amount during the month of Dec-11 is almost up by 25% (or +17% MoM) to USD 1.09bn.
As of the current elevated Arab Light oil prices at USD ~113/bbl (+18% YoY) in our view; will push the import payments to the higher side allowing for PKR to depreciate further, inducing inflationary pressures and making it trickier for the SBP to cut the policy rates going forward. In the last MPS announced the decision to keep the policy rate unchanged came primarily after witnessing initial first round effect of higher oil prices, visible by double digit growth in core prices. We believe any sharp rise in oil prices going forward, could trigger re-tightening cycle sooner than initially envisaged.