Start of Slowdown?

Pakistan Economy – Quarterly Update

Oct 01, 2018

Zeeshan Afzal AC REP-147
Zeeshan.afzal@insightsec.com.pk
+92 (21) 32402558
www.Jamapunji.pk

Type INSL <GO> to reach our research page on Bloomberg Analyst certifications and important disclosures are at the end.
Pakistan Economy

PTI Govt: Putting derailed economy back on track

PTI Govt. came in with a promise to eliminate the root Consumer Confidence Index (Survey)
causes of Pakistan's continuous economic breakability. 52
Though its just been a month in business, everybody 50
48
(including business/investor community) is impatiently
46
looking for visible improvements as a year long policy 44
inaction and uncertainty have eroded the confidence 42
over the economy almost entirely. 40

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18
So far, PTI Govt. has taken some long due unpopular Source: State Bank of Pakistan
decisions, including increase in Natural Gas prices,
withdrawing tax exemptions to individuals, trimming
development spending and increasing import duties.

These measures would help narrow fiscal & trade gap and reduce gas system losses, while increase
in electricity prices (likely next week) would help slowing down circular debt accumulation and
subsidies requirement.

2
Pakistan Economy

Though the austerity is more targeted towards ‚Middle Middle-Class‛ and above, but a rising tide
lifts all boats. We feel the consumption pattern across all income classes would tilt from
discretionary spending while tamed optimism could also induce more savings.

Similarly, decision to keep subsidies for vulnerable class, reduction in energy prices for export sector
and reducing duties on export inputs could help generating employment and increasing exports.

Encouraging developments on foreign affairs is also a sigh of relief while we still await tangible
developments to improve overall governance (bureaucracy reforms, devolution of power to local
governments and accountability).
Key Economic Indicators 2016 2017 2018 2019F 2020F 2021F

Real GDP growth (%) 4.7% 5.4% 5.8% 4.3% 4.8% 5.7%
Inflation (%) 2.9% 4.2% 3.9% 7.7% 7.3% 6.6%
Fiscal Deficit (%) 4.6% 5.8% 6.6% 5.2% 4.6% 4.3%
Investment to GDP ratio (%) 15.7% 16.1% 16.4% 15.1% 15.1% 15.6%
Current Account as % of GDP -1.2% -4.1% -5.8% -4.2% -3.3% -3.2%
FX reserves (US$ bn) 23.1 20.0 16.6 22.9 26.1 26.7
Remittances (US$ bn) 19.9 19.4 19.6 20.6 21.6 22.7
Source: MoF, PBS, SBP, Insight Research 3
Pakistan Economy

Recent events hint consumption slowdown

In our last mid-year economic update, we forecasted GDP growth of 4.8%, CPI 8.5%, CAD
US$12.1b, 11% currency devaluation and +200bps policy rate increase to 8.5% in FY2019.

So far, CPI inflation has remained fairly stable (5.8% YoY in Jul & Aug, 5.2% likely in Sep) despite
currency devaluation, increasing regulatory duties and rising petroleum prices. Similarly, CA Deficit,
which remained around US$2.0b during Apr-Jul, slimmed to US$0.6b in August, in which across the
board slowdown in import bill was witnessed.

On domestic front, decline in sales of automobile, cement and fuel is also being witnessed while the
growth in broader Large Scale Manufacturing Index has slowed to 0.5% YoY in July. In addition,
consumer confidence index and Current Economic Conditions Index (released by State Bank of
Pakistan) charts are also arrowed down, all hinting some slowdown in consumption. The indication
of slowdown from various sectors must have some significance, but waiting for more data in the
time series would strengthen the thesis.

These developments were actually desired to control fiscal & trade gaps but the real test would be
to keep the slowdown in moderate range as any big/sharp steps (sharp currency deval or large
interest rate changes) could be interpreted as unusual events and might take the economy towards
4
recession.
 Pakistan Economy

Key economic indicators

Fiscal Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019F 2020F 2021F
Population (million) 166 170 174 177 181 184 188 192 195 199 208 212 216 221
GDP (US$ b) 170 168 177 214 224 231 245 271 283 305 313 293 306 331
Real GDP growth (%) 5.0% 0.4% 2.6% 3.6% 3.8% 3.7% 4.1% 4.0% 4.7% 5.4% 5.8% 4.3% 4.8% 5.7%
Income Per Capita (US$) 1,053 1,026 1,072 1,274 1,320 1,334 1,389 1,514 1,529 1,632 1,641 1,534 1,597 1,718

Agriculture growth 1.8% 3.5% 0.2% 2.0% 3.6% 2.7% 2.5% 2.5% 0.3% 2.1% 3.8% 3.6% 3.7% 3.7%
Manufacturing growth 6.1% -4.2% 1.4% 2.5% 2.1% 4.9% 5.7% 3.9% 3.7% 5.8% 6.2% 5.5% 5.8% 6.4%
Services growth 4.9% 1.3% 3.2% 3.9% 4.4% 5.1% 4.5% 4.3% 5.6% 6.5% 6.4% 4.3% 4.5% 5.9%
Inflation - CPI (%) 12.0% 20.8% 10.1% 13.7% 11.0% 7.4% 8.6% 4.5% 2.9% 4.2% 3.9% 7.7% 7.3% 6.6%
Trade Deficit (% of GDP) -8.7% -7.5% -6.5% -4.9% -7.0% -6.6% -6.8% -6.4% -6.5% -8.8% -9.9% -9.5% -8.6% -8.4%
Remittances (US$ b) 6.4 7.8 8.9 11.2 13.2 13.9 15.8 18.7 19.9 19.4 19.6 20.6 21.6 22.7
Current A/C (US$ b) (13.9) (9.3) (3.9) 0.2 (4.7) (2.5) (3.1) (2.7) (3.4) (12.4) (18.1) (12.3) (10.2) (10.4)
Current A/C (% of GDP) -8.2% -5.5% -2.2% 0.1% -2.1% -1.1% -1.3% -1.0% -1.2% -4.1% -5.8% -4.2% -3.3% -3.2%
FDI (US$ b) 5.4 3.7 2.2 1.6 0.8 1.4 1.6 0.9 1.9 2.7 2.8 3.4 4.4 4.9
FX reserves (US$ b) 11.4 12.4 16.8 18.2 15.3 11.0 14.1 18.7 23.1 20.0 16.6 22.9 26.1 26.7
SBP FX reserves (US$ b) 8.6 9.1 13.0 14.8 10.8 6.01 9.1 13.5 18.1 16.1 9.8 15.6 18.3 18.4
Total Investments to GDP 19.2% 17.5% 15.8% 14.1% 15.1% 15.0% 14.6% 15.7% 15.7% 16.1% 16.4% 15.1% 15.1% 15.6%
National Savings to GDP 11.0% 12.0% 13.6% 14.2% 13.0% 13.9% 13.4% 14.7% 13.9% 12.0% 10.7% 10.8% 11.9% 12.6%
Total Public Debt (% of GDP) 56.9% 57.5% 60.6% 58.9% 63.3% 64.0% 63.5% 63.3% 67.6% 67.2% 72.5% 75.8% 76.1% 74.4%
Total Tax Revenues (% of GDP) 9.9% 9.1% 9.9% 9.3% 10.2% 9.8% 10.2% 11.0% 11.6% 11.4% 11.8% 12.0% 12.2% 12.4%
Budget Deficit (% of GDP) 7.3% 5.2% 6.2% 6.5% 6.8% 8.2% 5.5% 5.3% 4.6% 5.8% 6.6% 5.2% 4.6% 4.3%
Policy Rate 9.5% 6.5% 5.8% 5.8% 6.5% 8.5% 8.5% 8.5%
US$/PKR parity 68.4 81.0 85.5 86.1 94.7 99.8 98.9 101.8 104.8 104.8 121.7 138.7 144.9 151.4
Moody's' Rating (end period) B2 B3 B3 B3 B3 Caa1 Caa1 B3 B3 B3 B3
S&P Rating (end period) B CCC+ B- B- B- B- B- B- B- B B
Source: Economic Survey of Pakistan, SBP, PBS, ISL Estimations 2019 onwards
1
Avera ge for the peri od (except FX Res erves , Interes t Ra tes a nd PKR Pa ri ty)
5
Pakistan Economy

Avoiding IMF might be a long shot

Instead of opting IMF bailout, Govt. seems more interested in correcting the imbalance through self-
reforms, i.e. austerity, import controls, export opportunities and investment flows. This is in a
contrast to Pakistan’s history of rushing to IMF at import cover of 2 months.

The IMF delegation is currently in Pakistan to conduct ‘Article IV’ consultations. At the same time,
Saudi Delegation is present in Pakistan while PM is likely to visit China too in few days. It looks like
Govt. would decide it future strategy by Oct 10th, 2018.

Pakistan history with IMF in relation to the Import Cover

12
Entry in
10 IMF Entry in IMF
Entry in
8 IMF Programs IMF
1993-97
6
4
IMF
2 Program
0 Suspended
Jul-95
Jul-96
Jul-97
Jul-98
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Source: SBP, Insight Research
6
Pakistan Economy

Aug CAD fell to $0.6b; Expect $1.0-1.5b in Sep-Dec

After US$2.0b a month during Apr-Jul, Pakistan Current Pakistan Current Account as percent of GDP
Account Deficit has slimmed to US$0.6b in Aug-18, -20% CA Deficit Monthly
-15% 12 per. Mov. Avg. (CA Deficit Monthly)
thanks to across the board slowdown in import bill. -10%
-5%
PKR depreciation, higher financing costs, increased 0%
5%
import duties and overall tough economic outlook seem 10%
to be the major reason behind month on month fall,

Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
though flows management might had its contribution.
Source: SBP, Insight Research

These sudden falls (or jumps) in a single month are also Current Account Deficit
not unusual. Last time in Aug-17, Pakistan CAD slowed to -10%
$545m vs. US$1.9b in July 2017 and US$1.1b in Sep-17. -8%
-6%

We feel that $600m CAD was another anomaly in the -4%

-2%
first month of new Govt, and expect CAD to settle
0%
between $1.0-1.5b for next few months, until the effects

FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
of recently announced budget cut and regulatory duties
Source: SBP, Insight Research Estimated FY2019 onwards
start to kick in.
7
Pakistan Economy

Aug imports fell after inflated July; Slowdown?

Comparing trade number by SBP and PBS, it is apparent that country import payments were
managed at the end of FY2018, especially petroleum imports payments which fell in June quarter
(at the time when dividend repatriation remains high) but sharply shot up in July.

In Aug 2018, across the board fall in import heads indicate that deteriorating consumer/business
confidence over economic outlook also had its effects, though part of the improvement could be
due to flows management. PBS (Pakistan Bureau of Statistics) compiles data on actual movement of
goods while SBP records payment of goods.

(US$ mn) Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18
Exports - Goods - SBP 2,102 2,056 2,315 2,246 2,246 2,012 2,009 2,087
Imports - Goods - SBP 4,912 4,316 4,932 4,949 5,166 5,133 5,493 4,466
Trade Balance - SBP (2,810) (2,260) (2,617) (2,703) (2,920) (3,121) (3,484) (2,379)

Exports - Goods - PBS 1,971 1,902 2,231 2,133 2,144 1,887 1,646 2,017
Imports - Goods - PBS 5,607 4,797 5,280 5,109 5,814 5,694 4,838 4,992
Goods Balance - PBS (3,636) (2,896) (3,049) (2,977) (3,670) (3,807) (3,192) (2,975)

Difference Exports (SBP-PBS) 131 154 84 113 102 125 363 70

Difference Imports (SBP-PBS) (695) (481) (348) (160) (648) (561) 655 (526)
8
Source: SBP, PBS, Insight Research
Pakistan Economy

Consumer confidence showing weakness

Overall Consumer Confidence Index (CCI) fell by 5.3% during 2018 to date. Though overall Inflation
Expectations have remained unchanged, economic issues seems to be the major reason of the
pessimism as Current economic conditions index (CEC) has fallen 12% in 2018 to date.

Consumer Confidence Index is an indicator to measure consumer confidence and optimism over
the Pakistan economy. Consumer Economic Conditions index narrates the views of general
households over the Pakistan economic conditions.

Current Economic Conditions Index Consumer Confidence Index

54 52
52 50
50 48
48
46
46
44 44
42 42
40 40
Sep-15

Jan-16
Jan-15

Jan-16

Jan-17

Jan-18

Jan-15

Jan-17

Jan-18
Sep-15

Sep-16

Sep-17

Sep-16

Sep-17
May-18
May-15

May-16

May-17

May-15

May-16

May-17

May-18
Source: State Bank of Pakistan Source: State Bank of Pakistan
9
Pakistan Economy

Signs of slowdown are also visible in sectoral sales

Looking at low current account deficit and uncertain business outlook, there is an argument worth
debating, whether Pakistan economy is finally showing signs of a slowdown.

Apart from CAD numbers, domestic data suggests contrasting results. Sales of cement, steel
products, automobile sales, petroleum products and fertilizer have turned negative (growth slowed
down in some cases). However, possible explanations (other than the economic slowdown) could
be restriction on non-filers to buy new vehicles, distortion in monthly sales due to fertilizer subsidy
announcements and low diesel inventories in expectation of price cuts.

On the other hand, we could not see visible reduction in Credit off-take or auto financing, so far,
while passenger car and motor bike sales also remained healthy.

We feel it might be too early to verdict slowdown in economy, but LSM growth of 0.5%, across the
board fall in imports and falling consumer confidence index indicate that we might be in the earlier
stage of consumption slowdown.

10
Pakistan Economy

Cements: North region led the dispatches fall

Growth in cement dispatches has slowed down since May 2018, but in August 3months moving
average turned negative 6.0%, which remained in positive double digits until May 2018.

This hints slowdown in construction activities despite muted monsoon this year.

Most of the fall was in North region, which accounts for most of the country’s economic activity.

Cements: Local volume growth

30%

20%

10%

0%

-10%

Feb-18
Apr-17

Apr-18
Feb-17
Aug-16

Aug-17

Aug-18
Dec-16

Dec-17
Oct-16

Jun-17

Oct-17

Jun-18
Source: APCMA, Insight Research 3 Months Moving Average
11
Pakistan Economy

Steel: Production slowed down while import fell

In line with cements, steel production growth also fell in Apr 2018 while steel imports growth
turned negative in Jun 2018 where fall in steel scrap contributed the most.

This in conjunction with the cements could mean that there is overall slowdown in construction
activity which could partly be explained by slowdown in Govt. projects during the early months of
new setup.

Steel: Production growth Steel: Imports growth

60% 80%
50% 60%
40%
40%
30%
20%
20%
10% 0%

0% -20%
Apr-17

Apr-18

Apr-17

Apr-18
Feb-17

Feb-18

Feb-17

Feb-18
Aug-16

Aug-17

Aug-18

Aug-16

Aug-17

Aug-18
Dec-16

Dec-17

Dec-16

Dec-17
Oct-16

Jun-17

Oct-17

Jun-18

Oct-16

Jun-17

Oct-17

Jun-18
Source: PBS, Insight Research 3 Months Moving Average Source: PBS, Insight Research 3 Months Moving Average
12
Pakistan Economy

OMCs: MS & HSD fell 15% in Jun-Aug

Petroleum products sales of Oil Market Companies have fallen from July onwards in which most of
the fall has been witnessed in Diesel (HSD) sales. In Aug 2018, 3 months moving average HSD sales
fell 25% YoY while 2% fall in MS (Petrol) took overall sales to fall by 15%.

Rising oil prices could have dented consumer demand while sharp decline in HSD sales could be
linked to expectations of price cut by the new Govt. However, this trend matches with the fall in
tractors & HCVs sales.

OMCs: MS & HSD sales growth

25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Apr-17

Apr-18
Feb-17

Feb-18
Aug-16

Aug-17

Aug-18
Dec-16

Dec-17
Oct-16

Jun-17

Oct-17

Jun-18
Source: Insight Research 3 Months Moving Average
13
Pakistan Economy

Automobiles: Restriction on non-filers had its toll

Auto vehicle sales are depicting mixed trend where growth in passenger vehicle category (cars and
motor cycle) remained firm, though slow in Jul & August.

However, LCVs, Trucks, Tractors and buses sales are narrating completely different story, which
fell 16% in Aug (3months moving average), where tractors and LCVs led the fall. The slow down
could be explained by restriction on non-filers to buy new vehicles from July 2018.

Autos: Cars Sales growth Autos: LCVs, HCVs Sales growth

25% 3 Months Moving Average 80% 3 Months Moving Average
20%
60%
15%
10% 40%
5% 20%
0%
0%
-5%
-10% -20%
Apr-17

Apr-18

Apr-17

Apr-18
Feb-17

Feb-18

Feb-17

Feb-18
Aug-16

Aug-17

Aug-18

Aug-16

Aug-17

Aug-18
Dec-16

Dec-17
Oct-16

Jun-17

Oct-17

Jun-18

Oct-16
Dec-16

Dec-17
Jun-17

Oct-17

Jun-18
Source: PAMA, Insight Research Source: PAMA, Insight Research
14
Pakistan Economy

Auto financing growth remained positive

Ban on non-filers seems to be the bigger factor behind the recent slowdown than the economic
slowdown as passenger car demand has remained relatively strong despite series of PKR
devaluation and hike in car prices.

The same is indicated by auto-financing data in which consumer auto loan portfolios has increased
28% in Aug 2018 (3 months moving average) to stand at PKR197.7b. However, on month on
month, it fell 0.4%.

Autos: Auto finance growth

40%

35%

30%

25%
Apr-17

Apr-18
Feb-17

Feb-18
Aug-16

Aug-17

Aug-18
Oct-16

Dec-16

Dec-17
Jun-17

Oct-17

Jun-18
Source: SBP, Insight Research 3 Months Moving Average
15
Pakistan Economy

Credit growth remains healthy at 16.5%

Growth in credit to private sector has so far remained fairly stable and in a comfortable double digit
zone (16.5% in Aug – 3 months moving average).

Higher interest rates, PKR depreciation, fall in consumer confidence should have affect country
credit growth. This could be explained by ample liquidity available with the banks at the time when
Govt. is borrowing from central bank while SBP is conducting mop-ups operations at lower rates.

Credit to Private Sector Growth

40%

30%

20%

10%

0%

-10%
Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18
Source: State Bank of Pakistan 3 Months Moving Average
16
Pakistan Economy

LSM growth slowed to 0.5% in July 2018

Aggregating all the sectoral slowdown, production trend in Pakistan has slowed down, where July
2018 LSM growth stood at 0.5% while the 3 months moving average slowed to 0.9% compared to
3.2-10.0% in last 12 months.

Fall in textiles, pharmaceuticals, fertilizers and steel sector had the major impact. On the other
hand, food, petroleum and automobile remained on the growth trajectory.

Large Scale Manufacturing Growth

12%

8%

4%

0%

-4%
Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18
Jul-11

Jul-16
Jul-09

Jul-10

Jul-12

Jul-13

Jul-14

Jul-15

Jul-17

Jul-18
Source: State Bank of Pakistan 3 Months Moving Average
17
Pakistan Economy

Economic Outlook

18
Pakistan Economy

GDP growth revised down to 4.3% in FY2019

At our base case, of 10% further currency depreciation (after the GDP growth to slide back to 4.3% in FY2019
recent 15.5% depreciation since Dec 2017) and further 100bps 6%
interest rates increase (after the +175bps hike), we expect GDP
5%
growth to further slim to 4.3% in FY2019 vs. 4.8% previously
forecasted. 4%

SBP forecasts GDP growth of 5.0% in FY2019. 3%

2019F
2020F
2021F
2016
2011
2012
2013
2014
2015

2017
2018
Reasons to the revision include, i) slower trade, ii) readjustment Source: Pakistan Economic Survey, Insight Research
of cotton, wheat & rice production, and iii) slower LSM growth.
Pakistan GDP Growth Segment Contribution (%)
8%
For sustainable growth though, private sector investment and Services Industrial Agriculture
export led policies are essential, where the target should be 6%
narrowing the savings-investment gap & avoiding fiscal slippages. 4%

2%

0%
Recap: GDP growth touched 5.8% in FY2018, on better financial

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21
sector performance (high fiscal deficit & credit growth),
improvement in Govt. services in election year, higher Source: Economic Survey of Pakistan, Insight Research

manufacturing output and new power plants. 19

Pakistan Economy

GDP Growth Trend

GDP Growth Segment Contribution (%) Per capita income rises to US$1,641 GDP Size Trend (US$ b)
8% 1,800 350
Services Industrial Agriculture
6% 1,600 300
4% 1,400 250
2% 1,200 200
0% 1,000 150
FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

2019F
2020F
2021F
2010
2011
2012
2013
2014
2015
2016
2017
2018

2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: Pakistan Economic Survey, ISL Research Source: Pakistan Economic Survey, ISL Research Source: Pakistan Economic Survey, ISL Research

Pakistan Services Growth Trend Pakistan Industrial Growth Trend Pakistan Agriculture Growth Trend
8.0% 8.0% 8.0%

6.0% 6.0% 6.0%

4.0% 4.0% 4.0%

2.0% 2.0% 2.0%

0.0% 0.0% 0.0%

FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21

FY21
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21

FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Source: Pakistan Economic Survey, ISL Research Source: Pakistan Economic Survey, ISL Research Source: Pakistan Economic Survey, ISL Research

Estimated after May 2018

20
Pakistan Economy

CAD to fall to 12.3b in FY2019; 4.2% of GDP

Import duties, export incentives, 11% further PKR devaluation in Balance of Trade (Good & Services) US$ b
FY2019 (on top of recent 15.5% PKR depreciation during Dec-17 -40
to Aug-18) and +100bps further monetary tightening (after the -30
175bps hike), would eventually hit trade deficit in FY2019. -20
-10
We expect continued 9.5% exports growth to US$27b. Imports
are likely to remain stagnant at US$55b as we expect respite in 0

FY07

FY09

FY11

FY13

FY15

FY17

FY19

FY21
imports of non-essential consumer items. Similarly, completion of
major power projects would also trim machinery import bill in Source: SBP, Insight Research Estimated after May 2018
FY2019.
Balance of Trade (% of GDP)

In total, we expect country to run CAD of US$12.3b in FY2019 -15%

(4.2% of GDP) vs. US$18.1b (5.8% of GDP). Here, recent -12%

readjustment in fiscal spending (lower development spending) -9%

and increase in import duties would help to a great extent. -6%

-3%
0%
Recap: After US$18b Current Account Deficit (CAD) in FY2018,

FY07

FY09

FY11

FY13

FY15

FY17

FY19

FY21
the deficit remained at $2.2b in Jul and $0.6b in Aug 2018.
Source: SBP, Insight Research Estimated after May 2018

21
Pakistan Economy

Trade Balance and Current Account

Balance of Trade (Good & Services) US$ b Pakistan Exports Break up Current Account Deficit
-40 -10%
Food
-30 -8%

Textile -6%
-20
-4%
-10 Manufacturing
-2%

0 Others 0%
FY17
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16

FY18
FY19
FY20
FY21

FY06

FY08

FY10

FY12

FY14

FY16

FY18

FY20
Source: SBP, Insight Research Source: State Bank of Pakistan, Insight Research Source: SBP, Insight Research

Balance of Trade (% of GDP) Pakistan Imports Break up - FY2018 Remittances Inflow US$ b
-14% Food 25
-12% Machinery 20
-10%
Transport 15
-8%
Petroleum
-6% 10
Textile
-4%
Agri. & Other Chemicals 5
-2%
0% Metals 0

FY14
FY07
FY08
FY09
FY10
FY11
FY12
FY13

FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY13
FY07
FY08
FY09
FY10
FY11
FY12

FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21

Misc. Items

Source: SBP, Insight Research Source: State Bank of Pakistan, Insight Research Source: SBP, Insight Research

Estimated after May 2018

22
Pakistan Economy

More loans despite ease in CA Deficit

Even in this scenario of controlled CA Deficit at $12.3b, funding Current Account Deficit - % of GDP
requirement would be huge (i.e. US$16b in FY2019 and US$17.3b in -10%
FY2020). -8%
-6%
There are chances of support from friendly nations (investments + -4%
loans), global lenders, including IMF, might have to approached to -2%
meet large funding needs. 0%

FY07

FY09

FY11

FY13

FY15

FY17

FY19

FY21
But more importantly, strong willingness to implement reforms would
Source: SBP, Insight Research Estimated after FY2018
required as accumulating loans without reforms would eventually
reduce debt repayment capability; hence enhanced problems in later Gross Loan Accumulation - % of GDP
years and lower credit rating.
7%
6%
To repay approx. US$20b maturing debt and to improve the import 5%
4%
cover back to 4 months, Pakistan needs to raise US$38b in next two 3%
years (US$19b in FY2019) vs. estimated US$13.4b of new loans in 2%
FY2018. 1%
0%

FY07

FY09

FY11

FY13

FY15

FY17

FY19

FY21
In last two IMF programs, Pakistan import cover was increased to 4
months in 2-3 years. Source: SBP, Insight Research Estimated after FY2018

23
Pakistan Economy

Foreign Investment & Loan Outlook

Pakistan FDI (Equity Investment) Country Reserves (US$ b) Total Foreign Public Debt (US$ b)
6.0 30 120

Thousands
5.0 25 100
4.0 20 80
3.0 15 60
2.0 10 40
1.0 5 20
0.0 0 0

FY21
FY07

FY09

FY11

FY13

FY15

FY17

FY19
FY07

FY09

FY11

FY13

FY15

FY17

FY19

FY21

FY07

FY09

FY11

FY13

FY15

FY17

FY19

FY21
Source: SBP, Insight Research Source: SBP, Insight Research Source: SBP, Insight Research

Gross Loan Accumulation - % of GDP Net Loans (less Repayments) % of GDP External Debt to GDP
8% 5% 35%
6% 4% 30%
3%
4% 25%
2%
2% 1% 20%
0% 0% 15%
FY17
FY07

FY09

FY11

FY13

FY15

FY19

FY21

FY21
FY07

FY09

FY11

FY13

FY15

FY17

FY19

FY07

FY09

FY11

FY13

FY15

FY17

FY19

FY21
Source: SBP, Insight Research Source: SBP, Insight Research Source: SBP, Insight Research

Estimated after Aug 2018

24
Pakistan Economy

Balance of Payments Projection

US$ m FY16 FY17 FY18 FY19 FY20 FY21

Exports - Goods 21,972 21,938 24,772 27,118 29,997 31,497

Imports - Goods 40,450 48,506 55,846 54,971 56,318 59,133
Trade Balance - Goods (18,478) (26,568) (31,074) (27,853) (26,321) (27,637)
Trade Balance - Services (2,964) (4,291) (5,311) (3,859) (3,375) (3,246)
Primary Income Balance (5,335) (5,039) (5,282) (5,546) (6,138) (6,445)
Workers Remittances 19,917 19,351 19,625 20,606 21,637 22,718
Current account balance (3,394) (12,439) (18,130) (12,322) (10,201) (10,414)
Capital Account, 273 339 376 400 400 400
Net lending (+) / net borrowing (–) (3,121) (12,100) (17,754) (11,922) (9,801) (10,014)
Financial Account (5,188) (8,348) (10,611) (16,757) (11,097) (8,384)
Foreign Direct Investment 1,904 2,731 2,765 3,365 4,365 4,865
Foreign Portfolio Investment (329) (251) 2,211 2,750 2,800 2,850
Disbursements (Loans) 6,159 9,280 8,433 13,500 13,500 9,500
Long-term 4,498 8,117 6,624 12,000 10,000 8,000
Short-term 1,661 1,163 1,809 1,500 3,500 1,500
Amortization (Repayment) 2,714 4,374 4,110 6,708 11,143 10,879
Other Sector 314 2,300 1,240 2,100 1,850 2,350
Net Errors and Omissions 168 178 (662) - - -
Overall Balance 2,652 (1,946) (6,379) 5,774 2,695 173
SBP Reserves 18,143 16,144 9,789 15,563 18,258 18,431
Total Country Reserves 23,099 21,402 16,582 22,950 26,079 26,708
Total Public Debt (Inc. PSE) 64,252 69,046 78,121 89,578 96,350 99,886
USD/PKR (Average) 104 105 110 132 142 148
Pakistan GDP (US$ b) 283 305 313 293 306 331
External Debt to GDP 22.7% 22.6% 25.0% 30.5% 31.4% 30.2%
Import Cover (Months) 5.4 4.0 2.1 3.4 3.9 3.7
Source: SBP, IMF, Insight Research 25
Pakistan Economy

REER falls to 108; but further 10% deval. on cards

We expect further 10% currency devaluation which would bring Pak REER falling back to 100
rupee at fairly valued level. However, one must not overlook the 130 NEER REER
depreciation in regional currencies and continuous overvaluation of 120
US Dollar. 110
100
90
In last two IMF programs, country REER fell to the bottom of 92.5 in 80
Dec 2009 (IMF program started in Nov 2008) and 99.8 in Oct 2013 70
(IMF program started in Sep 2013).

Jul-16
Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-17

Jul-18
Recap: Pak rupee remained overvalued since Jun 2014 by more than Source: SBP, Insight Research Estimation after April 2018

10% on the back of handsome foreign inflows but eventually resulted

in uncontrolled increase in trade deficit and sharply falling forex Regional Currencies Trend
reserves. This increased the fear of repeat of Egyptian pound or vs. USD 2013 TD 2016 TD 2017 TD
Pakistani Rupee -15.1% -15.8% -10.7%
Nigerian Naira depreciation of 40-50%, right after when their central Japanese Yen -7.1% 3.1% -0.6%
banks scrapped the currency peg. Indian Rupee -14.9% -6.5% -12.1%
Bangladeshi Taka -8.5% -6.5% -2.1%
Sri Lankan Rupee -22.7% -11.4% -9.3%
However, in last 9 months (Dec 2017 to Sep 2018) Pak Rupee has Indonesian Rupiah -18.3% -9.6% -8.9%
Thai Baht 1.1% 10.8% 0.6%
been devalued 15.5% along with other corrective actions, which has Malaysian Ringgit -20.8% 8.4% -2.2%
started translating positive results. REER (Real Effective Exchange Philippine Peso
Vietnamese Dong
-17.9%
-10.3%
-8.3%
-3.2%
-7.6%
-3.4%
Rate), which touched the peak of 127.1 in Dec 2016, has now Source: Insight Research TD = To Date
trimmed to 108 in Jul 2018 and our calculations suggests it would be
26
at 109 as on Aug 2018.
Pakistan Economy

Forex Reserves and Domestic Currency

US$/PKR and Forex Reserves (US$ b) PKR movement vs. CA balance (Quarterly) Foreign Currency Derivative Position
25 130 PKR Change (LHS) CA Balance (RHS) -7,000
Reserves (LHS) US$/PKR (RHS)
125 5% 5.0

Thousands
20 120 3% 3.0 -5,000
115 1% 1.0
15 110
-1% -1.0 -3,000
10 105
100 -3% -3.0 -1,000
5 95 -5% -5.0
1,000
Oct-13

Oct-14

Oct-15

Oct-16

Oct-17
Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17
Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

2010
2011
2012
2013
2014
2015
2016
2017
US$ b

Source: SBP, Insight Research Source: SBP, Insight Research Source: SBP, Insight Research

PKR-USD and Goods Import Cover USD - PKR Historical Trend Discount Rate Historical Trend
130 7 130 16%
US$/PKR Import Cover (RHS)
120 120
5 12%
110
100 3 110
8%
90 100
1
80 90 4%
70 (1)
80 0%
Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18

2017
2010
2011
2012
2013
2014
2015
2016

2018

2010
2011
2012
2013
2014
2015
2016
2017
2018
Months

Source: SBP, Insight Research Source: SBP, Insight Research Source: SBP, Insight Research

Estimated after Aug 2018

27
Pakistan Economy

Inflation: 7.75% in FY2019; 10.3% peak in Mar-19

Currency devaluation, rising domestic petroleum prices, hike in gas Real Interest Rates (Policy Rate - Forward CPI)
and electricity tariff are likely to result in cost push inflation. 12% Real Interest Rates
10% CPI Monthly
8%
Since, PKR depreciation so far could not pull CPI, we revise down our 6%
4%
FY2019 CPI expectation to average 7.75%. SBP forecast for FY2018 2%
CPI is 6.5-7.5%. 0%
-2%

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19
In Aug 2018, Policy rate and CPI spread stood at 1.7%, slightly below
5 year average. However, Policy rate and 12 month forward CPI Source: PBS, Insight Research Estimated after Aug-18
spread has turned negative at -0.4% as monthly CPI is likely to peak
to 10% in the latter half of FY2019, compared to current policy rate Pakistan CPI Outlook (Sep 2018 onwards)
of 7.5%. 12%
CPI vs. SBP Policy Rate
10%
12%
Inflation Policy Rate 8%
9% 6%
6% 4%
2%
3%

Mar-18

Jan-19
Nov-17
Jan-18

Nov-18
Sep-17

Sep-18

Mar-19
Jul-17

Jul-18
May-18

May-19
0%
Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Source: PBS, Insight Research

Source: PBS, ISL Research Estimated after Aug-18

28
Pakistan Economy

Inflation and Interest Rates

Real Interest Rates (SBP Policy Rate - CPI) CPI vs. SBP Policy Rate Recent Trend of CPI and Core CPI
16% Real Interest Rate 12% 10%
Inflation Policy Rate YoY… Core Inflation NFNE
12% SBP Policy Rate
9%
8%
6%
8%
6% 4%
4%
3% 2%
0% 0%
0%

Feb-15

Feb-16

Feb-17

Feb-18
Aug-14

Aug-15

Aug-16

Aug-17

Aug-18
-4%

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018

Source: PBS, SBP, Insight Research Source: PBS, SBP, Insight Research Source: PBS, Insight Research

Pakistan Historical Monthly Price Index Pakistan CPI Outlook (May 2018 onwards) Sensitive Price Index (YoY)
25% 12% 6%
20% 10% 4%
15% 8% 2%
10% 6% 0%
4% -2%
5%
2% -4%
0%

Jul-18
Nov-17

Jan-18
Sep-17

Mar-18

Sep-18
May-18
Jan-18

Apr-18

Jan-19

Apr-19
Jul-17

Jul-18
Oct-17

Oct-18
2015
1995

2000

2005

2010

Source: PBS, Insight Research Source: PBS, Insight Research Source: PBS, Insight Research

Estimated after May 2018

29
Pakistan Economy

Austerity to trim budget deficit to 5.2%

Pakistan consolidated fiscal deficit has shot to 6.6% in FY2018. Expenditure Breakup FY2019

Debt Servicing
In FY2019, we expect fiscal deficit to narrow down to more
Civil Services
sustainable 5.2%, where cut in Development spending would be a
major help. Similarly, there are high chances of surplus from the Defense
provinces side also. Others

Subsidies

Development
As % of GDP FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019F Source: Pakistan Budget Documents, Insight Research
Total Revenue 12.1% 13.1% 13.4% 13.8% 14.3% 13.7% 13.7%
Tax Revenues 8.9% 9.1% 10.3% 11.4% 11.4% 11.8% 12.0%
FBR Revenues 8.5% 8.7% 9.5% 10.5% 10.5% 11.2% 11.3%
Total Expenditure 13.3% 13.8% 13.5% 13.2% 13.6% 13.4% 15.2%
Current Expenditure 11.5% 11.1% 11.2% 10.7% 11.0% 11.1% 13.8%
Debt Servicing 5.3% 5.2% 5.8% 5.4% 5.9% 5.7% 6.9%
Defense 2.4% 2.4% 2.5% 2.6% 2.8% 3.0% 3.0%
Subsidies (current) 1.6% 1.2% 0.9% 0.7% 0.5% 0.0% 0.6%
Development Expenditure 1.8% 2.7% 2.2% 2.4% 2.6% 2.0% 1.2%
Federal Deficit -8.2% -6.7% -6.0% -5.8% -5.6% -6.5% -5.2%
Consolidated Deficit -8.0% -5.3% -5.3% -4.6% -5.8% -6.6% -5.2%
GDP (PKR Billion) 22,909 26,001 27,384 29,598 31,862 34,396 38,654
Source: MoF, Insight Research 30
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