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• SBP again surprises by holding interest rates in March, against IMF and ADB advice;
• Banks have stopped lending to the govt and are not using OMOs.  Govt borrowing from SBP has increased very sharply in the past month, which will not be appreciated by the IMF;
• An interest rate increase and PKR devaluation is expected by the caretaker government in June;
• We have increased our projected current account deficit to $ 15.4 bln in FY18, due to government inaction to reduce the dollar drain.  But exports could exceed $ 25 bln after many years, even if SBP’s FX reserves at end-FY18 dip below $ 10 bln;
• With inadequate plans to narrow the external deficit, budgeting for FY19 is baseless.  Federal Budget FY19 lacks credibility;
• The Amnesty Scheme is an attractive carrot but its fate is uncertain.  Enforcement (stick) is unlikely under a caretaker set-up.  Must wait for the next elected government;
• Trump tariffs could unleash a trade war against China;
• A new world order may emerge with bilateral trade negotiations trumping “rule based” laws;
• North Korean leader appears to have gotten the upper-hand over US, China, Japan and South Korea.

• IMF’s post-program monitoring (PPM) report, brings back a sense of reality to the state of Pakistan’s economy;
• Familiar themes return (fiscal slippages, circular debt, loss making SOEs, easy monetary policy, over-valued PKR), and some new ones (CPEC, FRDL being ineffective, external debt burden, PKR adjustment increasing inflation, devolution possibly impeding reforms & documentation of real estate);
• SBP surprises market by depreciating the PKR again soon after PPM (IMF pressure?);
• Money supply continues to fall (FX depletion), & lower govt. borrowing from scheduled banks (who don’t avail OMOs).  Banks expect a rate hike;
• We expect two 50bps increases in the next two MPSs (sharp hike will complicate the next stabilization program).  Also, expect another PKR adjustment in May;
• Desperation borrowing shows up in the BoP’s Financial A/C;
• $ drain & BOP pressure continues.  But IMF’s projected current account deficit is too high, which signals GoP inaction in the remaining part of FY18;
• IMF is the answer to BoP problem because of market conditioning.  Spring Meetings in Washington DC should be very insightful;
• FATF has triggered the need to amend FX regulation for foreign currency accounts (FCAs), which could dovetail into a credible Amnesty Scheme;
• President Trump imposes tariffs on steel/aluminum and specifically Chinese exports.  This is a blow to “rule-based” trade and capital flows;
• Trump will take a hard line against N Korea and Iran;
• Mueller’s removal is a distinct possibility, and silencing of Stormy Daniels could be damaging;
• China will use an interventionist strategy to shift to a consumption driven Chinese economy.

This presentation was specifically prepared for a discussion at HBL, with its senior management and stakeholders.  It builds on recent papers and presentations that have been shared with our clients. 

• Supreme Court decision to disqualify Nawaz Sharif as party head creates uncertainty;
• SBP seeks to amend FX manual to better regulate Dollar flows in and out of Foreign Currency Accounts;
• FATF decision has been delayed for 3 months, but could return with a bigger bang;
• BoP pressure continues to build;
• Despite being an election year, there is no election cheer;
• School shooting in Florida could taint pro-gun Republican politicians;
• Trump’s expansionist fiscal policy contradicts the Fed’s monetary tightening.  Could this trigger a Twitter exchange between President Trump and the US Federal Reserve? ;
• Trump’s pivot towards India will keep Pakistan-US relations tense.

• New finance team, but no policy action;
• SBP optimistic about 6% growth in FY18;
• Growing uncertainty about political calendar in 2018;
• We see an IMF program in 2H-2018, so Spring Meetings in DC should be interesting;
• First line of business for the new government would be an IMF stabilization program;
• Trump outmaneuvered by Kim Jong Il (Koreas cozy up in Winter Olympics);
• US stock market shows signs of being a bubble;
• Merkel era ending, and alternative political ideologies are gaining traction in Europe;
• Could a trade war between China and the US precede the mid-term US elections in November 2018?

• Dar finally departs, creating the possibility of more proactive policies;
• PKR parity allowed to adjust during Post Program Monitoring discussions with the IMF;
• As of end-November 2017, SBP’s unencumbered FX reserves are negative 2.5 bln;
• SBP Governor finally acknowledges external sector stress;
• Economics more worrying than the politics;
• 2018 election cycle in some doubt;
• Middle East developments could adversely impact Pakistan’s economy via remittances;
• Next IMF program could be critical, and focus on politically difficult reforms.

• Dar’s resignation imminent;
• Case against Nawaz Sharif is heading towards a conviction;
• Nawaz Sharif is lashing out against Judiciary;
• Islamabad blockade on Ahmedi issue shows how powerless the authorities are;
• Steps taken by Saudi crown prince (MbS) are very significant, and will change domestic policies and Saudi foreign policy.  Could negatively impact Pakistan’s economy in the short-term, but could be positive in the medium and long-term;
• Trump’s blanket support for MbS is creating a strong anti-Iran bias in US foreign policy;
• Glaring contradiction in US policy to defuse tensions between America and North Korea- what President Trump tweets and what key cabinet members state;
• Updated SBP data on FX swaps, shows that authorities are desperate to give the market false comfort;
• Next IMF program could be impacted by changing geo-political landscape.

• Dar holds on (but barely);
• Economy in limbo – uncertainty is debilitating;
• Premier Xi (of China) being compared to Mao Zedong and Deng Xiopeng.
  • Mao made China;
  • Deng made China prosperous;
  • Xi makes China powerful;
• President Trump, on the other hand, continues to be President Trump;
• Political uncertainty in Pakistan increases;
• Sharjeel Memon’s arrest has created expectations that the PPP is also going to be investigated;
• COAS’s stated concern about the economy is unprecedented (and telling).  Rumors swirling about a 3-year technocratic government to rebuild key institutions (SBP, MoF, SECP, FBR, PC, Nepra, etc.);
• Premier Xi flexes military/economic muscle and challenges Western democracies (19th National People’s Congress, Oct 18th-24th, 2017);
• Stand-off between the US and North Korea continues;
• Trump’s rhetoric against Iran, will deepen the divide between the US and China, and force regional countries to take sides.

• Dar’s departure imminent;
• Hudaibiya Paper Mill case could sink the entire Sharif family;
  • China and Russia support Pakistan’s role in the UN General Assembly;
• Political uncertainty eases somewhat (rumors that Dar has turned informer);
• External sector challenge will not go away (Pakistan’s Balance of Payments, the IMF and China, September 14, 2017).
• Growing talk about technocratic government to rebuild key institutions;
• Trump excludes Russia and China from his proposed solution to North Korea;
• In response, we expect a North Korean missile test to show defiance;
• Trump likely to scuttle the Iran nuclear deal.

• PKR/$ parity is Dar’s political trophy;
• Politics not helping market sentiments;
• PM Abbasi takes over more economic decision making;
• Trump stands by his racist base (perhaps his most defiant stance so far);
• On Afghanistan, Trump puts Pakistan on notice and seeks India’s help;
• Nawaz Sharif increasingly isolated within his party;
• External sector concern will gain traction with time (drip-drip);
• When will China reveal the real CPEC?
• Policymaking and regulatory institutions weakened to the stage of dysfunction.