July 23, 2020

  • The rate of daily infections has fallen consistently since mid-June, and Pakistan appears to have peaked much earlier than projected;
  • As of 22nd July, there were only 50, 307 active cases, which indicates the falling number of daily infections and the fact that most infected people make a full recovery;
  • There are concerns of a resurgence during Eid and Moharram in August, but we think the authorities should be able to manage social gathering for public safety reasons;
  • All this good news, however, does not translate into a better outlook for the economy.  Although markets have been open since late May, retail volumes are down and demand is cautious.  Unfortunately, the fact that most commercial entities in the country are undocumented, creates two disadvantages for the recovery: (1) many SMEs are out of policy reach; and (2) the adverse impact on the economy is hard to gauge as accurate information is not available;
  • Covid-19 has changed human behavior across the world, and a return to economic normality is not likely until a universal vaccination program has been successfully implemented;
  • The macro economy has held out well with stable FX reserves, a small external deficit and falling inflation (SBP’s reserves are above $12 bln; the current account deficit is $3 bln against a target of $ 6.6 bln; and inflation closed the year on target at 11%);
  • However, the recent pressure on the rupee is surprising and there are concerns that record high remittances in FY20 ($ 23 bln) may experience a sharp fall because of the global pandemic;
  • Secondary market rates have softened after the surprise 100 bps rate cut on 25th June, but we do not think SBP will cut interest rates next month.  With the country re-entering the EFF soon and BoP conditions still uncertain in FY21, the authorities may want to be cautious to protect the gains on the external sector;
  • Globally, the war against Covid-19 is not going very well with the US failing spectacularly to contain the spread of the virus.  Europe is opening up very cautiously and East Asia is experiencing a second wave.  Without a complete victory, the global economy cannot recover, which means Pakistan’s economy will also remain in limbo;
  • We argue that if the “undocumented majority” is ignored by policymakers, the resulting frustration could trigger social unrest;
  • The pandemic should force policymakers to push for greater documentation, not just to help those in need but also to better understand how Pakistan’s retail sector operates.  That this has not happened, is disappointing. 
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June 26, 2020

  • The pace of infections and deaths has accelerated since Eid (24th May), which coincided with the opening up of the economy;
  • In response, the government has imposed smart lockdowns, which have targeted specific areas where infections are rising rapidly;
  • We argue that containing the pandemic should have greater priority over restarting the economy.  This is not to understate the importance of restarting the economy, but the logic that if the pandemic continues to spread, people will stop interacting and the economy will not be able to sustain livelihoods;
  • The demand destruction is concentrated in non-essentials and luxury goods/services.  We argue that demand revival will be slow and also uneven – again luxury goods will be the last to recover; 
  • Hence, many firms are facing insolvency that could result in structural unemployment.  This will not be a one-off event, but a gradual process;
  • SBP has launched several schemes to help struggling firms.  They all focus on refinancing, which means liquidity support.  This may allow firms to better manage their cashflows, but if the underlying demand does not pick up, refinancing will not help businesses survive;
  • Credit guarantees are needed to ensure that banks keep lending, and equity injections should be considered to improve the solvency of firms;
  • The federal budget for FY21 is not credible, but it signals that the IMF’s stabilization program should restart in July.  In our view, Pakistan’s macro economy has held out quite well against the pandemic and is now better placed to handle external shocks.  The EFF should be viewed as an insurance policy against the pandemic;
  • Pakistan’s BoP continues to surprise, and posted a $ 13 mln surplus in May 2020.  At its current trajectory, the external deficit could be as low as $ 4 bln for the full year compared to the target of $ 6.6 bln.  While this reflects the acute slowdown in the economy, as a time of global uncertainty, this is a positive;
  • Inflation continues to fall and should be at the lower end of the projected level at the start of FY20.  SBP surprised the market by cutting rates by 100 bps (25th May), which suggests that this is the baseline for FY21 – however, it will do little to increase credit disbursement or revive the economy;
  • At the global level, we are troubled by the lack of credible information about the pandemic, which will only increase uncertainty;
  • Our main concern is the limited scope of the bailout packages in Pakistan.  This is because SMEs are the main source of urban employment, and most of these firms are undocumented and therefore outside the reach of the government.  Since the demand destruction has hit all commercial entities (documented and undocumented), Pakistan will struggle to recover compared to other countries with more documented economies. 
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May 23, 2020

  • Till May 22nd, Pakistan’s Covid-19 numbers are contained, but the recent trend is worrying;
  • GoP has stepped up with material support for the unemployed, but hospital capacity does not appear to be given priority.  We argue that if people feel hospital care is insufficient (or substandard), they will not engage in commercial activity if they can avoid it;
  • Rising trend of daily infections and deaths is linear so far, but even this trend could overwhelm Pakistan’s healthcare capacity;
  • If social distancing and mask-wearing are not self-imposed, Pakistan may not experience a peak as seen in the West;
  • IMF’s rapid financing and commitments from other IFIs should allow SBP to manage the FX market;
  • However, the 160-161/$ range is not likely to last as it reflects subdued commercial activity during the month of Ramzan.  Having said this, Pakistan’s BoP in April has been surprisingly supportive despite a full month lockdown in the country and overseas;
  • The bulk of carry trades have exited Pakistan without stressing the FX market (we see this as a positive development of the pandemic);
  • The 100-bps cut in interest rates should not result in further $ outflows, but will not attract fresh dollars;
  • With mutual consent, the Extended Fund Facility appears to be suspended.  We argue that the IMF is working with GoP on the FY21 budget, which suggests that the EFF will commence in July 2020;
  • The current account deficit in April was $ 572 mln, which is good news given the global disruption created by the pandemic.  The fact that remittances in the month were 1.8 bln, is surprising given the acute economic slowdown in the GCC and US/UK.  We argue that the danger of a structural fall in remittances is still a very real threat;
  • The fiscal deficit in the first 3 quarters of FY20 was Rs 1.7 trn, which is less than the Rs 2 trn posted last year.  This is largely because of high SBP profits and lower spending by provinces.  Despite this narrowing, analysts think the full year deficit could exceed 9% of GDP; with the Coronavirus spreading in Pakistan, we do not expect much austerity in the remaining months of FY20;
  • With a stable rupee and a sharp cut in retail fuel prices, inflation will continue to trend down and end the year at below the range stated by both the IMF and SBP;
  • Since Pakistan has not been as adversely impacted as many other countries, some complacency has set in.  The post-Eid period will be critical to see how the authorities open the market and whether there is a spike in infections as a result;
  • We reiterate our view that Pakistan is likely to experience a lockdown-relax-lockdown cycle, which is perhaps the only way forward.  We also feel the pandemic will be in play for more than a year;
  • We conclude by urging greater focus on healthcare facilities and more clarity about how the authorities intend to open the markets.  We also warn that demand conditions may not return to pre-pandemic levels till a global vaccination is implemented.  Till then, if Pakistan can contain the number of infections, develop adequate ICU units, and keep the economy moving, it will have done very well for itself. 


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April 23, 2020

  • With the pandemic still playing out, economic projections are, at best, only guesses.  Also, comparing Pakistan’s current trajectory to the pre-pandemic scenario is pointless;
  • This is a waiting game.  The objective is to minimize the social, mental and economic dislocation until a global vaccine is discovered, manufactured and administered;
  • Community & religious leaders have forced the federal government to ease the nationwide lockdown for the holy month.  They have agreed to self-regulate according to a 20-point safety protocol;
  • This is like a community decision to adopt herd immunity.  This is risky as infections/deaths will surely increase in the weeks ahead, which means selective lockdowns could follow.  This lockdown-relax-lockdown cycle has been discussed as perhaps the most effective way to find a balance between lives and livelihoods;
  • The EFF will move to the back-burner, as $ 1.4 bln emergency IMF funding should help calm the FX market.  However, the IMF will continue to focus on the circular debt and SBP’s autonomy;
  • The pandemic’s impact has been particularly hard on the GCC.  Oil prices have collapsed, and the region’s non-oil economic model has suddenly failed; we also think travel/tourism and oil demand may never recover to pre-pandemic levels;
  • The authorities need to account for a structural fall in remittances, which means the next few months will be challenging 
  • Pakistan’s BoP is still comfortable.  The pandemic has not impacted March’s trade flows (the initial period of the global lockdown, which suggests that past momentum carried things forward), but it has resulted in a $ 1.8 bln outflow of portfolio investment.  This means that April’s BoP would be more indicative of the impact of the pandemic;
  • Currency in circulation has increased sharply in the past month.  We also think the three interest rate cuts (cumulative 425 bps fall) will not have much impact on monetary dynamics and underlying economic activity;
  • Inflation will continue to edge down, but could settle at a higher level than we initially projected.  This is driven by our assumption that the rupee will weaken in the months ahead;
  • Pakistan faces four immediate challenges: (1) how the spike in infections is managed during Ramzan; (2) the quantum of demand destruction; (3) managing the rupee with disrupted dollar flows; and (4) absorbing the vast number of blue-collar workers from the GCC who are being repatriated to the country;
  • But the pandemic also creates opportunities: (1) renegotiate the IPP contracts to secure a structural solution to the circular debt problem; (2) the federal government should work closely with local governments and Bazaar Traders to look out for the welfare of local communities; (3) use the food distribution and cash awards to improve the country’s database; and (4) with the likely fall in monthly remittances, the government should move aggressively towards import substitution. 
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March 20, 2020

  • In two weeks, the world has changed.  In our February presentation, we had not mentioned coronavirus, the pandemic now dominates the narrative;
  • This is bigger than the Great Recession of 2008, and since it impacts everyone, the social and mental anxiety is perhaps unprecedented;
  • PSX is down 25% in a month, but global markets have been impacted more.  The G-7 will certainly go into a severe recession, as will Asia and global supply chains;
  • The economic impact (in Pakistan and globally) is most severe on the middle class and daily wagers.  Also, there is a direct impact on service sector jobs, which means social isolation (whether self-imposed or a policy of lockdown) is exacerbated by economic anxieties;
  • Pakistan will be hard hit, but the turnaround because of the pandemic has not been as severe.  The number of cases so far is manageable (given the size of the country), but will rise and eventually overwhelm the country’s health infrastructure (as everywhere in the world);
  • With the virus-driven price war between Russia and Saudi Arabia, oil prices have collapsed and are likely to stay soft in 2020.  This means PoL prices will be cut, which will accelerate the fall in inflation.  This will put more pressure on SBP to cut interest rates in May 2020;
  • Carry trades and SBP’s reserves have been impacted, but till March 13th the impact has been low.  We expect this to worsen in the weeks ahead.  The rupee is also under pressure as foreigners pull out their money;
  • In this global pandemic, the IMF stabilization program should become easier.  We will wait for the Staff Paper, expected in early April, to get a better handle on what happens next;
  • The 75 bps cut in interest rates on March 18th was deemed to be insufficient.  We expect a 100-150 bps cut in May 2020;
  • BoP continues to improves driven primarily by imports – this will be supported by the fall in oil prices.  However, we list concerns about exports, and more specifically, remittances from the GCC.  The latter will be hard hit by the outlook for oil prices and the sharp fall in tourism;
  • We expect pressure on the rupee as portfolio outflows continue.  However, with rate cuts and the global uncertainty, we expect SBP to manage the rupee to ensure that it doesn’t become too volatile (or lose too much value);
  • The incessant media coverage of coronavirus is necessary, as social behavior is a key factor in the spread of this pandemic.  The OECD will be economically devastated, as will Asia and global supply chains;
  • Pakistan will be hit hard, but the economic impact is likely to be worse than the social/mental stress created by the pandemic – the latter should not be understated.  Pakistani society is family and community based, and while the state’s social safety net leaves a lot to be desired, the former is a strong asset at times like this. 
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February 25, 2020

  • Inconclusive IMF discussions deflate market sentiments, but the EFF is not under threat.  Contentious issues are the revenue shortfall and the persisting growth of the circular debt;
  • The IMF wanted a mini-budget to generate additional taxes and to increase utility rates to curb the circular debt.  However, GoP argued that with food inflation at near record highs, such steps could destabilize the PTI government;
  • In the past month, expectations of a growth phase have swiftly ended.  With the government struggling to manage food costs, it is on the defensive and the IMF mission has added to the sense of gravity;
  • Steps to bring down food prices and the fact that YoY food inflation touched 20% last month, suggests a sharp fall in food inflation in the coming months.  This will pull down headline inflation, and add further pressure on SBP to cut the policy rate;
  • While we acknowledge that the inflation angle could justify SBP holding rates at current levels, we think the political pressure could tip SBP’s hand in March 2020;
  • Carry trades continue to grow and have reached $ 3.2 bln as of Feb 19th.  Media and the Senate have taken a strong interest in these dollar inflows (mostly negative), which means SBP will remain under pressure to ensure that these funds are carefully monitored, especially in terms of how the authorities use the carry trades;
  • In our view, FBR revenues could get a boost if imports increase in the remaining part of FY20.  With FX reserves above the IMF’s end-June 2020 target, it may be tempting for SBP/MoF to allow for an increase in imports.  However, this is an unwise use of hot money;
  • The IMF Staff Paper is expected in the next 2 or 3 weeks, and will be critical to better understand Pakistan’s economic outlook.  In our view, the IMF should revise its BoP projections for FY20 and increase SBP’s FX reserve target to cover at least 3 months of imports.  This means the net international reserve (NIR) target for end-March and end-June will increase;
  • Our book review of McCartney and Zaidi’s 2019 book on Pakistan’s political economy, argues that a fresh assessment is necessary if one wants to understand why Pakistan has failed to reform its economy in the past three decades.  We think the narrative on Pakistan’s economy must change to achieve real economic reforms. 
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January 22, 2020

  • The IMF Staff Report released in December 2019, conveys a more somber outlook than what the market expected.  While the IMF is impressed (and surprised) by the narrowing current account deficit, it raises concerns about the fiscal side;
  • Although Pakistan fell short of the Q1-FY20 revenue target (albeit an indicative target) by Rs 107 bln, the impressive performance was driven by non-tax revenues.  The report also highlights how the bulk of taxes collected in Pakistan happens at the import stage;
  • This reveals the lack of documentation of Pakistan’s economy.  While all custom revenues are collected at the import stage, the report shows that 15% of direct taxes and 58% of sales tax were also collected at the ports in Q1-FY20;
  • With the EFF projecting FBR to collect over Rs 3 trn in 2H-FY20, we question whether GoP has a plan to generate this amount, or whether a revenue focused mini-budget is likely;
  • In reading the Staff Report, structural reforms appear to have been side-lined as the authorities are compelled to tackle the hemorrhaging by increasing utility rates, instead of fixing the underlying problem;
  • Despite the sharp narrowing of the external deficit (from $ 8.6 bln in 1H-FY19 to only $ 2.2 bln this year), we question why the IMF has not changed its BoP projection for the full fiscal year.  From the IMF report, SBP’s FX reserves are projected at $ 11.2 bln by end-June 2020, which has already been exceeded by end-December 2019.  This means the external sector targets for FY20 are not binding;
  • We observe that carry trades have exceeded $ 2.4 bln so far in FY20, which explains why the rupee has been appreciating in FY20.  Having said this, the Staff Report claims the rupee has “stabilized” at 155/$, which means further appreciation is not likely.  The report warns that if program objectives are not met, this could threaten this quantum of external financing;
  • We are disappointed that documentation is not given much importance in the report, and the likely imposition of a fixed-tax regime on traders, is a climb down.  We argue that the authorities have shied away from taking difficult decisions, which means the underlying dysfunctions will remain;
  • We also flag that growing unemployment and job insecurity is beginning to hurt the PTI government, and if economic growth is not prioritized, pressure on the government will continue to increase;
  • Finally, we question why CPEC is not center-stage.  We suggest that from a geopolitical perspective, the on-going EFF will not allow CPEC to anchor Pakistan’s economy. 
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December 23, 2019

  • Appreciating Rupee and growing FX reserves, support the claim that Pakistan’s economy has stabilized; 
  • The sharp contraction of the current account coupled with rising carry trades, has pushed SBP’s reserves past $ 10 bln.  SBP is now buying dollars from the interbank market to manage the Rupee parity;
  • The stock market rally in the past month, shows a significant improvement in market sentiments;
  • Fiscal revenues collected in 1Q is impressive despite the recessionary conditions.  Driven primarily by GST, direct taxes still lag behind as traders refuse to document their operations – February deadline still looms;
  • Carry trades continue to grow but the pace has eased in recent weeks.  Currency comfort will ensure that 3-month T-bills (held by foreign fund managers) are rolled-over.  However, we are concerned the IMF may not approve of the appreciating Rupee;
  • Interest rate cuts also being delayed for fund managers to roll-over dollar placements;
  • M2 growth is subdued because of slow private sector credit off-take.  Currency in circulation hits 42.9% of total bank deposits, a clear reflection of the resistance to documentation and using banks;
  • Sharp fall in current account deficit in first five months of FY20, is driven by imports (more specifically because of the economic slowdown and soft oil prices).  Exports post a modest increase;
  • Foreign portfolio inflows in November help SBP build its FX reserves, and will make NIR targets easier to meet;
  • YoY inflation is likely to fall in the remaining part of FY20.  Gas price increase and high food inflation are one-offs;
  • With the sharp containment of the external deficit, our Rupee-Dollar projections have changed significantly for FY20 - we see the parity at 160/$ by June 2020;
  • As GoP gears up for post-stabilization growth, it should adopt pro-market policies instead of the easier pro-business policies that suit the status quo;
  • CJP’s decision to invalidate the extension of COAS term, and the incendiary language used in General Musharraf’s death sentence, reveals an unprecedented showdown between two key institutions in the country.  Executive appears aligned with the Pakistan Army;
  • Prime Minister’s last-minute withdrawal from Malaysian summit of Islamic leaders, allegedly because of Saudi pressure, shows how Pakistan’s economic weakness is compromising the country’s policy independence.  This may incentivize the executive to take hard steps to address Pakistan’s economic vulnerability. 
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November 22, 2019

  • IMF review mission is pleased with progress on the EFF, and Pakistan posts a CA surplus in October after many years of deficits;
  • Market sentiments have improved, not just in the PSX but also amongst businessmen & corporates;
  • There has been an exponential increase in foreign investment in T-bills (hot money).  Of the $ 1.08 bln realized in T-bills so far in FY20, $ 630.8 mln has come during the period November 1-19.  With no change in domestic interest rates, we expect this momentum to continue;
  • This is a source of much comfort for SBP: (1) it keeps the PKR stable and builds SBP’s NIR; (2) it provides deficit financing, which means less crowding out; (3) it generates Rupee liquidity, which could allow SBP to ease its OMOs; and (4) it does not increase Pakistan’s external debt;
  • But hot money is a double-edged sword: this money can leave Pakistan as quickly as it is coming in.  This adds a new player in the FX market, and questions are being asked whether SBP is prioritizing this player over domestic constituents;
  • Could this keep the PKR stable till end-December?  And if so, could this trigger an import-led growth phase?  Issue is: can Pakistan afford a growth phase so early in the EFF? 
  • So far, the improvement in the external sector is driven entirely by a fall in imports (soft oil prices have clearly helped).  Export growth has been anemic, while textiles are stagnant.  Non-oil imports have increase in October, after trending down for most of 2019.  If this continues, then we know that the import recovery is real (and could become problematic);
  • With the stable Rupee and stagnant retail fuel prices, inflation has peaked. We revise down our average inflation projection to 10½ - 11½% for the year.  We also reduce our PKR projection to end the year at 162-163/$
  • Asad Umar is brought back into the cabinet as Development Minister, and strongly defends CPEC against US criticism that OBOR is part of China’s debt diplomacy;
  • Could this be a signal that Pakistan will prioritize real reforms and ramp up CPEC 2.0? 
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October 23, 2019

  • Pakistan gets an extension from FATF till February 2020.  While the language in the FATF report is stern, we expect a drawn out process but no surprises;
  • Expectations of a softening monetary policy are misplaced – a token 25-50 bps cut is possible.  This is because Pakistan’s BoP cannot afford a growth phase that will increase imports;
  • The current account deficit (CAD) in 1Q-FY20 BoP shows a significant contraction (a gap of $ 1.5 bln compared to a deficit of $ 4.3 bln last year), because of a sharp fall in imports.  This can be traced to the economic slowdown; the depreciated Rupee and soft oil prices;
  • If these conditions reverse and the CAD begins to rise – and this undermines SBP’s ability to build its FX reserves – the Rupee could come under pressure in 2H-FY20;
  • FX reserves only increased by $ 470 mln in 1Q-FY20, but is targeted to rise by $ 2.2 and $ 3.5 bln in 2Q and 3Q, respectively.  It is important to realize that Pakistan has just started the IMF program, and it is too early to declare victory on the economic side;
  • SBP data shows that foreign investment in T-bills/PIBs (what we call hot money), brought in about $ 366 mln so far in FY20.  This will not be enough to meet the IMF’s net international reserve (NIR) targets;
  • Inflationary pressures may have peaked at 12.5% YoY in September 2019.  This is because of the economic slowdown; the appreciating Rupee; and stable fuel prices.  While this may allow YoY inflation to fall in the months ahead, average inflation will continue to rise for the next 5-6 months.  This will confuse the market unless SBP manages expectations more proactively;
  • The fiscal side still remains challenging.  With an unchanged FBR revenue target for the year (which is ambitious), slippages will create borrowing pressure on banks and make the crowding-out of the private sector more acute.  The fiscal side will not support a meaningful cut in interest rates;
  • Going forward, our outlook is as follows:
  •             Revival of growth is difficult in FY20 (2½-3% growth this year is realistic);
  •             Stabilization measures could become tougher in the remaining part of FY20;
  •             The Kashmir annexation could flare up and dominate proceedings; and
  •             Pakistan and China must come to a clear understanding on the timing and scope of the second phase of CPEC.  This is the best path to economic growth in FY21, with a focus on creating manufacturing jobs, import substitution and labor up-gradation.  CPEC needs to be more transparent. 
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September 27, 2019

  • The IMF review mission was earlier than scheduled to discuss the shock 8.9% (of GDP) fiscal deficit in FY19.  Market expected fiscal targets in the EFF to be changed (relaxed somewhat), but this didn’t happen;
  • First 2 months of FY20 have been good for Pakistan’s BoP.  Import compression is not just because of softer oil prices, but reveals an across-the-board economic slowdown;
  • Pakistan needs to maintain this narrowing for the remaining past of FY20 to stay on track with the EFF’s projections;
  • SBP’s FX reserves have only increased by $ 1.3 bln since the start of the EFF.  Analysts must realize that SBP’s net international reserves (NIR) must increase by $ 2.2 and $ 3.5 bln in Q2 and Q3-FY20, respectively.  This is likely to put pressure on the Rupee;
  • SBP’s decision to hold interest rates has calmed the market.  With the shift of government borrowing away from SBP financing, and likely fiscal pressures in 1H-FY20, an interest rates cut is unlikely till Q3 or Q4-FY20;

The following external developments are significant:

  1. India’s annexation of Kashmir (August 5) has not generated global outrage.  If this issue is ignored, it increases the likelihood of an armed conflict across the Line of Control;
  2. The attack on Aramco’s largest oil processing facility (September 14) was very effective.  The US-Saudis have blamed Iran, and the EU has followed this lead.  Iran still denies responsibility and has challenged countries to prove their allegations.  Aramco was incredibly quick to overcome the impact of the strike, and global oil markets have remained calm.  However, Iran is likely to stay on the offensive unless US sanctions are eased; &
  3. President Trump and the Saudi crown prince (MBS) have asked Imran Khan to intermediate between the Saudis and Iran.  This is a significant opportunity for Imran Khan (whose global stature is growing), not just to ease tension in the Middle East, but also to ensure global intervention in Kashmir, and nudge President Trump to restart US-Taliban talks;

As opposed to a sobering economic outlook, Pakistan’s geopolitical standing is a source of strength. 

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August 26, 2019

  • MoF inverts the yield curve in record PIB auction on 21 August;
  • Market interprets inversion as a signal that interest rates will be reduced by 100 bps in 2020.  LT yields soften further as banks scramble to buy longer-term PIBs in the secondary market;
  • This change in market sentiments is driven by the “re-profiling” of SBP’s holdings of 6-m T-bills.  Over Rs 7 trn is converted, primarily into 10-year PIBs;
  • We are skeptical that this change in sentiments will remain, as BoP pressures in Q2-FY20 could weaken the PKR, which would stoke inflation and increase interest rates;
  • Banning GoP borrowing from SBP is a positive step and should force GoP to better manage its public finances.  We are also hopeful this will improve the operations of the Debt Management Cell, and compel GoP to accept SBP advice on how to interact in the primary market;
  • July’s Balance of Payments is good news, but does not necessarily mean the external problem has been solved.  Imports are down because of low oil prices, and exports show across-the-board increases.  Pakistan needs an average monthly current account deficit of $ 560 million (or less) to stay on track with the full year EFF target;
  • LSM contracts by 3.6% in FY19 compared to an increase of 6.4% in FY18.  This is a clear indication that Pakistan’s economy was in recession last year, and is likely to remain in a recession this year.  Processed foods, autos, iron/steel & consumer durables post sharp downturn as purchasing power is squeezed;
  • Softer oil prices have reduced our inflation projections for FY20, more so if GoP decides to reduce retail fuel prices in September.  This could be reversed if BoP pressures build later this year;
  • Pakistan’s debt dynamics are increasingly alarming.  The stock and debt servicing of dollar debt has been increasing exponentially in the last two years, while domestic debt servicing shows a similar increase last year.  In FY19 alone, Pakistan’s total debt increased by 35%, which means Pakistan is in a debt trap;
  • Risks ahead: (1) tax collection to achieve the ambitious revenue target for FY20; (2) reversal of interest rate outlook, which will hurt PSX; and (3) the proposed $-denominated NSS instrument.  The latter is a reversal of capital market reforms of 2000, and could hit term deposits at commercial banks;
  • We remain concerned about FATF, but acknowledge that the recent blacklist scare is politically motivated.  Since the on-going IMF program is contingent on avoiding the blacklist, we are confident that Pakistan will avert global isolation;
  • We end by saying that stabilization alone will not solve Pakistan’s stubborn economic problems.  Hard steps are needed, but have not been forthcoming. 
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July 23, 2019

  • The Extended Fund Facility (EFF) focuses on known structural weaknesses, but is different from previous programs in three ways: (1) it relies heavily on funding from friendly countries; (2) it highlights the resistance to reforms that undermined previous programs; and (3) it talks about the complications created by a vibrant informal economy;
  • Despite a long list of targets that are to be met, the program is surprisingly light on details to jumpstart tax revenues.  The IMF report has nothing to say about the fiscal cadaster, which is disappointing;
  • The successful meeting between Imran Khan and President Trump, creates a one year window during which the US will be positively inclined to help Pakistan;
  • Unlike previous programs, this EFF will only allow for a modest increase in SBP’s FX reserves;
  • Using back calculations, we project the average PKR/$ parity in FY20 to be 171.3/$, which means most of the currency adjustment required in the EFF have already happened;
  • The projected BoP has some interesting insights: (1) the services balance falls throughout the period FY20-FY24; (2) the primary income balance continues to increase; (3) DFI becomes the main source of financing future current account deficits; and (4) from FY21 on, Pakistan will have to rely increasingly on $s from private sources (not official creditors);
  • Despite the sharp currency adjustments last year, Pakistan’s trade flows have not changed much.  This is problematic, as Pakistan has agreed not to impose any regulations to discourage imports during the EFF;
  • This means only the Rupee can be used to narrow the trade deficit;
  • The growing focus on non-debt inflows is required to exit the $ debt trap, but we still think the projections on financing the external deficit are wishful;
  • YoY inflation is projected to increase throughout Jul-Dec 2019, but will fall afterwards.  We project average inflation above 13% this year, which is higher than SBP’s 11-12%;
  • The revenue targets in the EFF are ambitions, with few details about how they will be achieved.  This allows for generous expenditures;
  • The fiscal deficit this year will be larger than last year, both in nominal terms and as a percentage of GDP;
  • The main risks in the EFF are: (1) relying only on Rupee adjustments to meet ambitious FX reserve targets; (2) whether SBP will be able to control inflation that is generated by the weaker currency; (3) there are very few details about how the authorities can generate higher taxes during an economic slowdown; and (4) the monetary policy tightening cycle will crowd out the private sector and could destabilize the banking system. 
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June 20, 2019

  • Federal budget hits the right note by being realistic (lower growth and rising inflation in FY20) and focusing on revenue measures.  There is a good balance between direct taxes (the increase in income tax slabs) and indirect taxes (GST on most household items), even though these measures will hurt;
  • However, in a recessionary environment, the 33.7% increase in the revenue target is too ambitious, unless collection of direct/indirect taxes gears up like never before;
  • The biggest disappointment is the lack of any effort to consolidate Pakistan’s total debt.  By admitting that Pakistan’s fiscal deficit could be as high as Rs 3.6 trln in FY20 (without provincial cash balances), this implies that GoP will continue borrowing at a rapid rate;
  • New SBP Governor gives a professional/competent press conference.  He states that Pakistan will maintain a “managed currency” regime and that interest rates will be used to combat inflation.  We have misgivings about both issues, as we feel these will not be effective in stabilizing the economy;
  • Chasing inflation (i.e. hiking interest rates to contain future inflation) will exacerbate the debt problem, and could weaken the banking system.  While the GoP projects inflation at 13%, our projection of average inflation in FY20 is higher at 14.7%;  
  • FATF continues to be an understated risk.  The amended AML legislation is being resisted by parliament, while FATF has complained that Pakistan hasn’t done enough to counter terrorist financing.  The latter entails targeting specific groups and strictly monitoring cash couriers;
  • While the projected current account deficit ($ 7 bln) is almost half the gap this year, we feel this is too large.  One must realize that the external deficits in FY17-FY19 were too large, which is why the country is now in a debt trap.  The external financing expected in FY20 (Rs 1.8 trln) is also too ambitious;
  • The projected 78% increase in total debt servicing in FY20 (over this year) is a clear indication that the debt trap also characterizes Pakistan’s domestic debt;
  • IMF program details will give a better handle on: (1) how will the PKR/$ parity fare; (2) how much further will interest rates increase; and (3) what is the target for SBP’s FX reserve build up;
  • 1H-FY20 will be very challenging, as Pakistan’s economic vulnerability is unprecedented. 
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May 22, 2019

  • The past month has seen important changes in Pakistan’s economy:
  • 1.      New SBP Governor is experienced with IMF programs, but can he handle the public/political backlash? 
  • 2.      IMF agreement has been signed and will be put to the IMF’s board for approval.  It’s underfunded, which means debts repayments have been rescheduled (especially to friendly countries);
  • 3.      Prior actions have been taken on the PKR/$ parity and interest rates; these could complicate Pakistan’s already worrying debt dynamics;
  • 4.      The Asset Declaration Ordinance 2019 is a much sweeter that what Asad Umar was going to propose, and even easier than the PML-N version;
  • 5.      Opposition parties are gearing up to use these developments to undermine the PTI government; &
  • 6.      The current account deficit for April is $ 1.24 bln, which is higher than expected. 
  • The currency & interest rate adjustments have not narrowed the trade deficit much, and little attention has been paid to Pakistan’s stagnant exports;
  • The slowdown in LSM (July-March 2019) is driven by food, autos, metals, electronics and cement.  This shows a sharp slowdown in aggregate demand and consumer spending;
  • Fiscal gap of 5% in 9 months implies the full year gap could be above 7% of GDP.  A large part of this is being funded by SBP, which will have to be reversed in the stabilization program;
  • While the CA deficit (Jul-Apr) is $ 4.3 bln lower than in FY18, further narrowing is required.  We project the external gap to be $ 12.8 bln this fiscal year, which may have to be slashed to $ 4 bln in FY20.  The trade deficit has only narrowed by $ 1.9 bln, which is disappointing;
  • If further devaluation of the Rupee and higher retail fuel prices are required to narrow the external deficit, this could boost inflation to 17-18% in FY20.  The current economic challenge is perhaps unprecedented;
  • Given the CA contraction that is required, policies alone may be insufficient.  Pakistan needs an anti-import campaign, to move towards import substitution and to change CPEC to become more export-oriented;
  • Interest rate increases should be capped as this could dig the country deeper into the debt trap;
  • We are concerned about the sidelining of Y. Dagha (Finance Secretary) and FATF’s assessment of the generous amnesty scheme;
  • We expect tough policy measures before the forthcoming budget, and are concerned that the finance team may have over-committed in the next IMF program.  A stalled program would put Pakistan on a perilous path.
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April 24, 2019

  • Asad Umar’s resignation is poorly timed and could delay the IMF program;
  • In our view, his ouster was engineered from within PTI, which reveals a possible shift in policymaking away from PTI’s ideology.  We think the amnesty scheme may have been the pretext to remove the FM;
  • IMF mission to visit Pakistan in end-April, which should finalize the next program;
  • FX reserves have increased because of the $ 3.2 bln borrowed in March 2019;
  • World Bank’s projections show a somber outlook for FY19 and FY20, with low growth and high inflation;
  • IMF projections, on the other hand, are absurd: they reflect no stabilization program for the next five years, and yet also show that Pakistan is able to finance growing twin deficits without losing macro stability;
  • Autos and construction continue to slow industrial growth;
  • Single Treasury Account will be resisted by weak banks, but is required to sharply reduce GoP borrowing from the central bank;
  • Banks are rightly concerned about the repercussions of a further interest rate shock;
  • Pakistan’s BoP narrows compared to FY18, but the real reason is that import numbers for FY18 have been revised upwards.  Now the current account deficit in FY18 is $ 19.9 bln compared to $ 19.0 bln;
  • No perceptible change in Pakistan’s trade flows this year, which means policy efforts to narrow the trade deficit have not yet worked;
  • We think the current account deficit this year could be contained at $ 11-12 bln (compared to $ 20 bln in FY18), but this will have to be brought down further to $ 7 bln in FY20.  The required import compression will keep growth around 3% for the next two years;
  • The amnesty scheme that was to be announced by Asad Umar has been rejected as “too complicated” by the new Finance Adviser.  We think this means it was too harsh/punitive to tax evaders.  We also sense the IMF will have serious objections to the moral hazard problem this creates for tax-abiding citizens;
  • We see Asad Umar’s departure as symptomatic of the vested interests regaining the upper hand in policymaking.  This does not bode well for the forthcoming IMF program. 
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March 18, 2019

Updated: 25 March 2019.  

  • IMF mission head to visit on March 26.  Change in GoP’s narrative reveals that programs details will be discussed & could be finalized.  As we have discussed earlier, this should change how the PKR is managed;
  • World Bank document Pakistan@100 discusses how Pakistan could become a $ 2 trillion economy by 2047;
  • But this requires a change in the policy making process, which WB thinks has been “captured” by self-serving elite interests.  This is uncharacteristically blunt for an IFI;
  • Report identifies and lists these groups as: (1) civil servants; (2) landowners; (3) industrialists; and (4) the military.  It also talks about how these groups have become an established part of Pakistan’s political system;
  • Small current account gap in February 2019 is heartening news (and bring some relief to the FX market), but additional steps are required to further narrow the external deficit.  In the 8 months so far, the trade deficit has only narrowed by 2.8% (compared to FY18) despite large PKR adjustments and the increase in interest rates;
  • Most of the CA narrowing is because of lower services net payments & higher remittances;
  • IMF program details should be published before it begins, and we expect the current account deficit to be around $ 12 bln for FY19, and even lower in FY20;
  • Trade flows (quantum and composition) are very similar to last year, which could explain why policymakers are talking about further steps to address the BoP problem;
  • With a lagged impact, Pakistan’s oil import bill should be low in the next several months, which is an ideal time to allow the PKR to adjust according to market forces;
  • SBP has downgraded its growth projection to 3½ - 4% in FY19; we stay with our earlier estimate of 3%;
  • A flexible exchange rate may require supportive interest rates.  We suggest a short-term interest rates hike when the PKR is floated, but rates should be reduced once the PKR has stabilized;
  • While BoP actions seem clear enough, little has been done to increase fiscal revenues.  We think this is strange, and expect greater policy focus on the fiscal side as part of the IMF program;
  • We also do not see a serious game-plan to fix loss-making PSEs.  We intend to get into this area of research as it will become increasingly relevant; &
  • PM has stated that reducing Pakistan’s debt stock will become the PTI government’s key KPI.  This could signal the change in narrative, which is required.
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March 07, 2019

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. 

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March 04, 2019

This partial equilibrium assessment is anchored on supply-push factors that determine inflation in the country.  More specifically, we argue that the urgent need to narrow the trade deficit (given the ineffectiveness of past policies) implies that the currency would have to be further adjusted (and less strictly managed) and retail fuel prices would have to be increased. 

These price adjustments would directly impact the food, utility and transportation sub-indices, which account for over 70% of the CPI basket.  We project YoY inflation could be 12.4% by end-June 2019, while average inflation for the full year (FY19) could settle at 8.0%.  This inflationary momentum would remain in play till mid-2020.  We argue that the IMF program (and prior actions) would stoke the inflationary trend, but this is the lesser of two evils.  The real concern is what happens to interest rates. 

We argue that an orthodox approach to stabilization (i.e. increasing interest rates to keep pace with rising inflation) would: (1) create more debt servicing pressure; (2) keep the country’s market debt primarily in 3-month T-bills; (3) force GoP to continue borrowing from SBP; and (4) threaten commercial banks’ balance sheets.  None of these would help stabilize the economy. 

This creates an awkward trade-off: policy orthodox vs. actual stabilization. 

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February 20, 2019

  • Visit by the Saudi Crown Prince (MBS) is a lavish affair with MoUs worth $ 21 bln, but this doesn’t change market sentiments;
  • Repayments in 2019 are $ 21.3 bln compared to $ 13.5 bln in 2018, which reflects the spate of borrowings in 2018;
  • We expect a change in PKR/$ management – before IMF program announcement – as past efforts to rehabilitate the external sector have not delivered results;
  • Current Account target of $ 14-15 bln is an improvement over FY18 (at $ 19 bln), but this gap is still too large to calm the FX market;
  • January 2019 external deficit ($ 809 mln) brings some relief, but this growth-and-stabilization strategy will not rehabilitate the external sector;
  • January’s external gap narrowed primarily because of an increase in remittances.  Despite frequent devaluations and interest rate hikes, the trade deficit in the 7 months of FY19 is actually larger than the same period in FY18;
  • Aggregate growth will slump in FY19 on the back of negative growth in LSM (in 1H-FY19), and a greater emphasis on stabilization in 2H-FY19;
  • Intra-year data shows that debt dynamics in FY19 will post exponential growth (in both domestic and external debt) over FY18;
  • Soft oil prices will not be enough to manage the external deficit.  There is an urgent need to reduce non-oil imports, which means a further squeeze on economic activity and growth;
  • In Scenario 1 (managed PKR adjustments), inflation could rise to double-digits, but this may not change sentiments in the FX market;
  • Scenarios 2 & 3 (less intervention by SBP) will create currency volatility, which is perhaps required to change business sentiments.  There is a need to sideline importers;
  • The government’s narrative on the economy must now focus on stabilization, which means sharply narrowing the twin deficits;
  • We see the need for a degree of currency volatility but do not see much of an increase in interest rates.  Even if the IMF program starts in the next few months, the hard stabilization targets will be left for FY20. 
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January 30, 2019

This presentation was given to familiarize a visiting delegation from Mitsubishi Corporation about Pakistan’s economy. 

  • Pakistan’s growth has been on an upward trajectory since FY10, but the last two years were unsustainable;
  • There are four major weaknesses in Pakistan’s economy: (1) lack of documentation, which means low taxes; (2) failure to increase and diversify Pakistan’s exports, which means BoP problems; (3) weak institutions and pervasive corruption; and (4) extractive governments and short-term policies;
  • Stubborn twin deficits have created a significant debt overhang, which will entail painful policies to resolve.  Pakistan is now firmly in an external debt trap;
  • Fiscal deficit in FY19 will remain high, it may even exceed the 6.6% of GDP realized in FY18;
  • Industry has been stagnant at 20% of GDP for over 2 decades.  For a country of Pakistan’s size, sustainable growth requires a vibrant industrial base (reveals a lack of policy vision);
  • Previous government ignored and exacerbated the structural problems in Pakistan’s tradable sector.  More specifically, the stagnation in exports;
  • Hard steps have been taken on the PKR/$ and interest rates, but GoP is still giving mixed signals about the IMF;
  • Recent fall in SBP’s FX reserves is not just because of the size of the current account deficit, but the inability to secure sufficient financing;
  • CPEC could become a blueprint for Pakistan’s industrial policy, which will give this country an economic vision that has been missing for over three decades;
  • As things stand, there is a need to take action on the following fronts: (1) documentation of all financial/economic transactions; (2) make real estate valuations more accurate; (3) strengthen state institutions; and (4) restructure PSEs by severing the links with line Ministries.
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January 24, 2019

  • The FM’s second mini-budget announced on 23 January is populist, strategic but ultimately not serious;
  • Despite the revenue shortfall in FY19, there was no focus on revenue measures;
  • Also, there was nothing about how Pakistan’s current account deficit would be brought under control;
  • Instead, the GoP announced concessions for non-filers to buy cars and property, while the stock market was given tax relief;
  • The market may experience a short-term uplift, but without addressing the fundamentals (twin deficits), the economic uncertainty will remain;
  • 1H-FY19 external deficit was $ 8 bln, which makes the full year $ 13 bln target a policy challenge.  However, with a perceptible slowdown in economic activity and soft oil prices, we expect 2H-FY19 to post a much smaller deficit;
  • Export stagnation despite policy support is disappointing – in 1H-FY19, Pakistan’s oil import bill was 68% of total exports;
  • The rapid depletion of SBP’s FX reserves is not because of the size of the current account deficit, but reduced financing on a month-to-month basis;
  • Lop-sided GoP borrowing from the banking system, shows that banks still anticipate a further increase in interest rates;
  • We argue that the GoP’s communication strategy must be upgraded to better manage the market’s expectations;
  • We conclude by saying that GoP must come clean on stabilization measures and the forthcoming IMF program.  Only this will calm the market and instill some confidence in the economy;
  • Global conditions will remain challenging with China’s slowdown, Brexit, intra-EU tensions & US political stalemate and possible market correction. 
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December 21, 2018

  • 30 November changes in the PKR and interest rates surprised all, with FM and PM on the defensive;
  • Confusing signals about IMF despite these significant policy changes;
  • January mini-budget could focus on documentation; real estate valuation; plan for overseas assets; and full year projections for BoP and fiscal accounts;
  • PKR and interest rate changes have been significant: do not expect much more – could see token changes before program begins;
  • Oil prices and strong remittances should help contain CA deficit in 2H-FY19 ($ 13 bln full-year doable);
  • Should not see disruptive stabilization like Egypt’s in 2016;
  • Need to strengthen Debt Management Cell to shift market debt to longer-term instruments;
  • Unmistakable & unprecedented steps to regularize the undocumented sector.  This may slow growth to 3-4% (or even lower), because this will spillover to formal sector;
  • This slowdown is necessary to document economy.  GoP should take additional hard steps on power, FCAs, real estate valuations and retain penalties on non-filers.  PTI government should stay the course despite economic pain;
  • US, UK and EU are likely to experience an unsettled 2019 (economically and politically);
  • China’s economic slowdown is very real, and Saudi Arabia could see a change in leadership in 2019. 
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December 13, 2018

This presentation was prepared for Engro Corporation, to assist with its planning for 2019. 

  • Uncertainty about IMF program is being stoked by a misleading distinction between “good” and “bad” IMF programs.  Markets need to be carefully managed, especially after an eventful November 30;
  • On this day, interest rates were increased by 150 bps, which exceeded market expectations.  However, after the currency turmoil in the first few hours of November 30, this increase made sense;
  • But this does not signal the end of the tightening cycle;
  • We hope that Pakistan’s stabilization is not as disruptive as what Egypt experienced in late 2016.  With unhinged market expectations, a free-floating PKR could be too destabilizing;
  • Quarterly targets on net international reserves (NIR) and Pakistan’s primary deficit, are likely to be the more binding targets in the next IMF program;
  • PKR adjustments and consecutive interest rate hikes should help reduce imports, while soft oil prices and strong remittances should further narrow the current account deficit.  A $13 bln external deficit in FY19 is possible without disruptive policy measures;
  • We expect average inflation in the range of 8-9%, and interest rates around 11-12% by June 2019.  Import compression and a subdued informal economy could push down growth to 3-4%;
  • Forthcoming policies could dampen the undocumented economy via: the accountability drive; the anti-encroachment efforts; the distinction between filers & non-filers; the effort to expose overseas Pakistani assets and the policy to push for more accurate real estate valuations.  This may bring short-term pain, but should pave the way for medium-to-long term prosperity;
  • Despite the geopolitical flux, Pakistan is not as vulnerable as many think. 
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November 20, 2018

  • US$ 6 bln pledge by Saudi shores up the PSX, but help from China and the UAE still awaited; 
  • Saudi Oil Facility will not reduce CA deficit – just the depletion of FX reserves; 
  • Impossible Trinity likely to dominate negotiations with the IMF, which includes the current account deficit; the exchange rate & domestic interest rates; 
  • Cannot control all three at the same time – IMF wants PKR to strike the balance.  This will be politically difficult and will complicate the fiscal side; 
  • We expect a 100 bps interest rate hike in November 2018; 
  • We hope IMF program will focus on unorthodox challenges like: the undocumented economy; undervalued real estate; price-setting driven by supply factors more than demand pressures; and increasing interest rates will not attract foreign capital inflows; 
  • Do not think IMF will take a hardline with Pakistan, and will be willing to work with China; 
  • China’s offer to discuss assistance and provide guidance should make this reform program different.  We hope this tackles the circular debt, pushes for documentation and accurate valuation of wealth, clamps down on capital flight, tweaks the FTA, formulates an Industrial Policy and strengthens state institutions;
  • TLP shakes the government and the Establishment – needs to be handled.  
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November 16, 2018

This presentation was prepared for HBL’s client events in Lahore, Islamabad and Karachi in mid-November 2018.  The main points are:

  • The strong economic growth since FY10 is not sustainable, as Pakistan’s twin deficits have risen sharply in the past two years.  Financing the deficits is not the solution;
  • At doctored papers, we have been watching the external sector since May 2017.  The current focus on financing sources (e.g. Saudi, UAE and China) is understandable, but Pakistan needs to narrow the twin deficits below 10% of GDP.  China’s approach to help is promising;
  • PKR/$ and interest rates changes since December 2017 are significant, and driven by external sector concerns – not inflation.  Issue remains how much more demand management the IMF will insist on;
  • Debt dynamics (both external and domestic) are frightening.  Policy efforts to narrow the external deficit will stoke the fiscal side via debt servicing, which complicates on-going negotiations;
  • Using the circular debt in the power sector, we show how politically difficult structural reforms are.  Despite the heavy political price of implementing real reforms, we argue that GoP has no choice now but to push ahead;
  • Monthly current account deficit in Nov and Dec 2018 are critical.  If the external gap is sufficiently narrowed, this will ease pressure on the PKR and interest rates in 2H-FY19;
  • With China’s guidance, we expect the next IMF program to tackle stubborn issues like documentation; external sector viability; the need for an Industrial Policy, and strengthening the bureaucracy and state institutions;
  • We conclude with three thoughts: (1) whether the PKR/$ is at 137-140 by end-June 2019 or at 145-150+, will have a material impact on the economy; (2) the bilateral relationship with China can be used to set a policy direction that will make Pakistan’s economy more sustainable; and (3) structural reforms will disrupt the economy and require a great deal of political will.  Any government intent on reforms must prepare for this political battle. 
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October 23, 2018

  • Finance Minister finally states that Pakistan will seek IMF support;
  • FATF visit was poorly managed by regulators/authorities;
  • Two months of good news regarding BoP, but FY18 CA deficit increases to $ 19 bln.  With global oil prices up, next 2-3 months are critical;
  • Increase in remittances not driven by fundamentals, but accountability;
  • External deficit; need to build FX reserves; and insufficient FDI, means heavy external borrowing ahead;
  • Heavy GoP reliance on SBP financing in FY19, will have to be reversed.  This will put upward pressure on interest rates, increase debt servicing, and keep fiscal accounts under pressure;
  • Do not expect a quantified IMF package till end-Nov;
  • GoP must solve the circular debt problem; push documentation and revenue generation; move towards external sector sustainability; create an Industrial Policy; and strengthen state institutions.  This cannot be done in a business-as-usual manner;
  • Khashoggi issue could change the Middle East; and undermine Trump’s strategy for the region;
  • Oil prices unlikely to spike after sanctions on Iran;
  • China will want CPEC to be transparent and succeed.
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September 24, 2018

  • Slow start by the PTI government, with some false steps that could have been avoided;
  • Recent gas tariff increase is the first right step, which seeks to reduce domestic demand;
  • PTI is seeking a middle-of-the-road approach: it has shifted the tax burden on the affluent; provided relief for the poor and concessions for exporters, but has conceded to the demands of tax non-filers (disappointing);
  • Sharp reduction in August imports (and current account deficit) is likely one-off, because it has been driven by a fall in the oil import bill.  With the current trajectory of global oil prices, Pakistan’s import bill is likely to increase unless retail fuel prices are increased;
  • Portfolio outflows are challenging: lack of policy direction; uncertainty about the IMF; & EM jitters are the main reasons;
  • Conflicting policy goals: import duties are being resisted as this would reduce tax revenues. GoP must prioritize external sector over fiscal revenues;
  • Unlikely that IMF will reverse Mini-Budget – its focus will be on chronic weaknesses (e.g. circular debt, PSEs, number of filers, fiscal cadaster, etc.).  With twin deficits at 12.4% of GDP in FY18, urgent steps are required;
  • US-China trade war gains momentum, but the impact is not widespread enough to swing the mid-term US elections;
  • Turkey and Argentina are calm, but the underlying problems have not been resolved;
  • US economy is booming but many are talking about an asset bubble.  An increase in US interest rates will hurt EM and slow global growth;
  • A global slowdown should not impede Pakistan’s export potential.
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August 24, 2018

  • Election results show unexpected stability.  PTI’s inaugural address is uplifting, but not a roadmap;
  • Bringing back Musharraf-era people may water down PTI’s clean-up agenda;
  • FM (Asad Umar) statement that Pakistan has overcome economic crisis before, does not set the right tone.  Hard steps are required to narrow the external deficit, which PTI appears unwilling to take to avoid an inflationary spike;
  • Surprise appreciation of PKR (to 124.5/$) shows that the kerb market is now driving the interbank (SBP) rate – not a good precedent;
  • Rising inflation will reinforce expectations for an interest rate hike;
  • External deficit in July hits $ 2.2 bln despite PKR devaluations and growth in exports and remittances.  Needs urgent action and out-of-the-box solutions (revisit China-Pakistan FTA and focus CPEC on exports);
  • IMF/CPEC politicized by Trump administration, but this should not stop Pakistan from securing an IMF program if GoP approaches the Fund; &
  • Turkey’s currency crisis reveals the risk of stubbornly large external deficits.  Loss of appetite for EM risk, means Pakistan’s Eurobond in FY19 will be more challenging.
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July 20, 2018

  • PKR adjustment and interest rate hike in July will have macro consequences – there appears to be no game plan.  Market expects further interest rate hike in September;
  • Inflation is heading up and could double compared to FY18;
  • PKR adjustment has also spilled over to the fiscal side;
  • Import compression and lower consumer spending will hit Large Scale Manufacturing (LSM);
  • External deficit in FY18 was $ 18 bln.  We estimate that even if external deficit is brought down to $ 12 bln in FY19, and FX reserves are at 2-month cover, Pakistan needs gross inflows of $ 27 bln this fiscal year;
  • Skeptical IFIs, iffy US relations, $ payment overhang, and rising inflation mean Pakistan needs out-of-the-box solutions for BoP and fiscal side;
  • Expect PTI economic team to give a sobering first address & negotiate an IMF bailout.  Will not be as large as requested, and will not be frontloaded;
  • Stabilization program should focus on strengthening key institutions, reforming the power sector and public sector enterprises, developing a “fiscal cadaster” and ensuring provincial support for structural reforms;
  • Trump insults Germany, the EU and British PM Theresa May and is determined to dismantle NATO;
  • Trump-Putin Summit disaster does not phase the US President.  Anti-Trump anger could help Republicans in the mid-terms and his re-election in 2020.  That will surely change the world.
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June 21, 2018

  • Caretaker government takes charge, does not want to talk to the IMF but admits to the dire situation;
  • Politics is somewhat subdued given 5 weeks to general elections – IK is not looking good and PML-N witnessing senior level disagreements;
  • With sharp PKR adjustment, inflation and interest rates could spike;
  • Current Account deficit hits $16 bln, and could maintain this trajectory despite PKR adjustment as market expectations are not being managed;
  • SBP FX reserves continue to slide, and we are not convinced the amnesty scheme will help;
  • GoP borrowing from banking system same as last year, but strong shift towards SBP financing;
  • Next stabilization program will have hard targets for Current Account and FX reserve build-up;
  • Terrible timing for the next government – it will have to reformulate the budget, the Amnesty Scheme, CPEC, strengthen key institutions, and clean up the tax collection and power distribution machinery;
  • Trump is gearing up for the mid-terms, and could pull off another upset as his divisive policies feed tribal sentiments;
  • Kim Jong-un’s diplomatic coup suggests that China is orchestrating;
  • Mueller investigation appears to be speeding up;
  • Oil price stays below $80/b, and both Russia and Saudi have agreed to increase supply;
  • Threat of Pakistan being placed on FATF’s black-list, is exaggerated.
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May 21, 2018

  • Nawaz Sharif’s interview on Mumbai’s terror incident in 2008 triggers broad-based backlash.  PTI becomes a serious contender in the next elections;
  • Growing dependence on SBP financing (and falling maturity of market debt) is worrying;
  • $14 bln CA deficit (10 months) is larger than we projected, and SBP is increasingly concerned about releasing FX as its reserves are being depleted;
  • Caretaker government is likely to adjust the PKR, increase interest rates and initiate talks with the IMF in June 2018;
  • Our upwards inflation trajectory is playing out, and will continue due to PKR adjustments and likely increase in PoL prices in June and July;
  • Interest rate increases will be modest because of Pakistan’s debt overhang (will create fiscal stress in FY19);
  • Scuttling of Iran nuclear deal is a point of no return for the Middle East.  Pakistan’s neutrality in Iran-Saudi standoff could be negative for remittances from the GCC;
  • Kim Jong-un’s hesitation about meeting President Trump is not erratic behavior;
  • Mueller investigation is not going away and may lead to a more divided USA;
  • Oil price stays above $70/b with Middle East uncertainty – a good excuse for our policymakers to increase retail prices;
  • China-US trade differences will flare up.  This is uncharted territory, and a form of 21st century warfare.
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April 23, 2018

  • 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.
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March 26, 2018

  • 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.
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March 07, 2018

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. 

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February 22, 2018

  • 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.
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January 25, 2018

  • 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?
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December 29, 2017

  • 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.
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November 22, 2017

  • 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.
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October 30, 2017

  • 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.
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September 26, 2017

  • 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.
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August 24, 2017

  • 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.
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July 31, 2017

  • PKR volatility reveals a compromised central bank (Dar’s public outburst against SBP on July 5th-6th);
  • Despite assurances from GoP/SBP, a BoP crisis appears likely;
  • Supreme Court’s unanimous verdict to disqualify Nawaz Sharif, is in keeping with Justices’ written judgment and blunt JIT assessment;
    • Reaction of Western government?
    • Will MoF/SBP start talking with the IMF?
    • Will new SBP Governor retain his position?
  • BoP problem is structural.  Exports are key and CPEC needs to become export-based to succeed;
  • Expect mini-Budget to resolve external sector problem;
  • Qatar blockage has not helped the Saudi alliance or the US (Qatar will remain defiant);
  • White House descending into the unknown (Priebus leaves, trump Tweets against his Attorney General, health reform is rejected, Trump criticizes Hezbollah during a
    press conference with Lebanese PM, where Hezbollah is a coalition partner in the Lebanese government);
  • North Korea tests ballistic missile that can reach the continental US.  Trump refuses to engage the UN and seeks to find a unilateral solution.  Americans increasingly concerned about a nuclear exchange.
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June 22, 2017

  • Stock market very erratic, and JIT is being blamed;
  • JIT is serious, and the manner in which the PML-N is hitting back reveals that it is scared of the possible outcome.  Predict a negative verdict against Nawaz Sharif;
  • Qatar blockade is likely to be green-lighted by Trump, and now cannot be solved within the GCC.  Turkey’s Erdogan is very vocal, showing regional ambitions that are new;
  • Iran has struck Syria with missiles.  This is unprecedented and shows that Iran also has regional ambitions;
  • Policymaking and regulatory institutions in Pakistan are now unable to manage political/financial /economic shocks;
  • Export outlook will not be rectified by ‘policy packages’ – more is now required;
  • Suggest that high end consumer items (luxury cars) may be disallowed;
  • Real estate values in Karachi are soft because of regulatory issues;
  • Qatar blockade will not be resolved soon, while Syria has become a proxy war between the US and Russia;
  • Macron’s victory is a relief for the liberal order;
  • Trump’s involvement with Russian meddling in the 2016 election will not go away.
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May 26, 2017

  • External sector remains top concern, and export revival is unlikely;
  • Stock market is jittery despite MSCI;
  • PM relaxes fiscal deficit cap for the next three years, gearing up for forthcoming elections;
  • Trump fires FBI Director, which looks like the initial stages of the Watergate Scandal of 1974;
  • Iran’s elections may bring in a hardliner;
  • Macron wins, but will face a hostile work environment;
  • Notes from a very revealing trip to Lahore and Faisalabad to meet large textile exporters:
    • Exports down because of structural and behavioral reasons.  Incentives are such, that Pakistan’s largest exporters have started making more money in real estate development in Pakistan than in developing their export markets.
  • Unless we get serious about increasing exports, we will have to slash imports;
  • Trump may have obstructed FBI’s investigation (which is an impeachable offence);
  • Things are falling in place for a bi-polar world;
  • Macron’s victory does not mean the populist wave in Europe has been extinguished.
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April 28, 2017

  • Stock market sees a massive rally when the written judgment of the Justices is released;
    • Godfather analogy is a strong signal, and local/global media is generally negative on the Sharifs;
  • Pre-election momentum via new NBP President, and instruction to banks to “do more”;
  • Turkey’s Erdogan adopts a presidential system and gains further power;
  • Macron likely to win, but rightwing France First is gaining traction;
  • Trump strikes Syria with missiles and drops the mother-of-all-bombs (MOAB) on Afghanistan;
  • Saudi King reverses austerity, and shuffles cabinet to favor his sons;
  • Pre-election boost to domestic demand could create more uncertainty about the FX market in Pakistan;
  • CPEC funding and FX repayments will continue to be a dark cloud over the project.
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March 31, 2017

  • External sector is top priority, and SBP/MoF have imposed import margins, halted forward booking (of $) & increased PoL prices;
  • Issue: can SBP hold the PKR parity till the 2018 elections?
  • Panama-Gate is keeping the stock market volatile;
  • Dismal economic outlook in the GCC and hate crimes in the US/Europe, could incentivize reverse capital flight;
  • Trump’s cabinet is fundamentally divided on deregulating Wall Street (globalists vs. nationalists);
  • Wilders (Netherlands) poor showing in the elections does not mean Europe is safe.  Differing views on immigration reveal a divided European society;
  • We formulated a scenario that shows how confusing 2018 could be:
    • PML-N calls for early elections in Dec/Jan 2018, as it cannot hold the PKR-parity;
    • Interim government does a big adjustment of the PKR;
    • Inflation spikes followed by interest rates; fiscal pressures build; Interim govt begins talks with the IMF to pacify the market, but does not have the mandate
      to commit the country to a stabilization program;
    • Inflation spikes followed by interest rates; fiscal pressures build; Interim govt begins talks with the IMF to pacify the market, but does not have the mandate
      to commit the country to a stabilization program;
    • PML-N wins the elections, and straight away goes to the IMF.
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February 27, 2017

  • External sector is now top concern, and it appears that SBP/MoF are only looking at financing the gap- not reducing the gap (short-sighted);
  • Current account deficit in 7-months of FY17 is larger than full year deficits since FY10;
  • Significant change in business sentiments compared to a month ago (driven by BoP and fixed PKR-parity);
  • PSX struggles to break 50,000;
  • Ex-pat Pakistanis are not in a good place (GCC and the West);
  • Trump’s first months has been eventful:
    • Muslim ban and court stay;
    • Deportation of illegal aliens;
    • US National Security Adviser has resigned;
    • Trump was rude to the Australian PM;
    • Trump lies about immigration unrest in Sweden;
    • Strained relations with Mexico.
  • US bull-run is not sustainable.  Also, do not think tax cuts and financial deregulation will go through;
  • Pakistan’s BoP management and the elections in 2018, will not play out well.
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January 30, 2017

  • Half year external deficit in FY17, is larger than full year deficits since FY14 (we have a problem);
  • GoP has categorically stated that it will not demonetize the 5,000 Rupee note (after India’s decision to demonetize large denomination notes on 8th November 2016);
  • Stock market continues to boom, and real estate transactions have picked up (market sentiments are bullish as the wealth effect is in full bloom);
  • Trump’s first week in the White House has:
    • killed the Trans Pacific partnership (TPP);
    • threatened Mexico;
    • emboldened rightwing European political parties;
    • witnessed mass resignations from the US State Department;
  • Public protests against President Trump’s victory are global;
  • Fiscal spending and low taxes will increase US fiscal gap and inflation (and force up US rates more than market expects);
  • Trump and Steve Bannon have already changed the US political landscape.
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December 28, 2016

  • India’s shock demonetization, though chaotic, has popular support for what it seeks to achieve;
  • Indian authorities are pushing documentation drive (raided some moneychangers; caught gold smugglers;
  • Pakistan’s senate has asked the GoP to demonetize the 5,000 Rupee note;
  • UAE move to investigate bank account holders, has scared ex-pat Pakistanis;
  • US markets are booming on promised tax cuts and deregulation.  But this will increase global imbalances (trade and currency);
  • US boom against European gloom, could create global currency uncertainty;
  • Trump’s hostility towards Iran, could trigger seismic activity in Asia (Iran, Turkey, China, Russia and Pakistan could team up).
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November 28, 2016

  • Macro conditions still stable, but BoP concerns are beginning to manifest;
  • SBP Annual Report FY16, flags concerns with stagnant exports and falling remittances;
  • Pakistan increased its external debt by $ 12 bln, but the bulk was from IFIs:
    • $ 6.6 bln from the IMF;
    • $ 2.0 bln from the World Bank;
    • $ 1.5 bln from the Asian Development Bank;
  • $ 2.0 bln from the global market (Eurobond and Sukuk).
  • FY17 growth target is 5-6%, and current account deficit at 1.5% of GDP;
  • Tangible optimism in the country with the first shipment out of Gwadar Port;
  • Although Trump will favor India, do not expect much action as this will provoke a sharp reaction by China (because of CPEC);
  • Could Trump champion a global move towards xenophobia, racism and hardline law & order?
  • Trump’s cabinet reveals that he will remain anti-immigrant and anti-Muslim;
  • European fragmentation now more likely after Trump’s win.
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October 20, 2016

  • FX reserves have plateaued & exports remain a concern;
  • PKR/$ still too stable;
  • If inflation remains subdued as projected, there is no reason for SBP to increase interest rates till FY19;
  • Optimism about the economy recently boosted by China’s strong support for Pakistan at the BRICS summit in Goa;
  • China has encouraged Iran to join CPEC;
  • US presidential race is still a circus. Even if Trump loses, he will have changed the political landscape in the US.
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September 27, 2016

  • Macro conditions remain stable, but BoP concerns have started;
  • Real estate market has dried up and lobbyists are pushing the government to back off from promised valuation changes;
  • Since real estate is the main source of parking undocumented money, informal economy is not getting sufficient financing;
  • BoP gap is twice as large as in FY16. Pressure is building on SBP to have a more proactive PKR policy;
  • GoP is retiring its borrowing from commercial banks.  This means bank margins are narrowing, which could reduce profitability;
  • Sense of optimism about economy has given way to concerns about the external sector;
  • US presidential elections could still surprise;
  • Fears of European fragmentation are very real.
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August 30, 2016

  • Successful completion of 3-year IMF program;
  • Do not foresee an unexpected change in SBP’s monetary policy, and a passive monetary stance in FY17;
  • Policy to move towards proper valuation of real estate could be a significant step forward;
  • ADB funding for energy sector reforms look promising;
  • Strong consumption spending reflected in automobiles, electronics and construction;
  • Official macro projections not yet announced for FY17;
  • Brexit should not impact Pakistan, but forthcoming US elections are frightening.
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July 29, 2016

  • Macro conditions are positive, PKR is stable and FX reserves are at record highs;
  • Political differences between the US and Pakistan should not adversely impact the closure of the IMF program;
  • GoP negotiating with real estate association about making property valuations more accurate.  We think this is a very positive step, which will enhance documentation, create white money and create some balance in real estate values;
  • GoP is now pushing towards divestiture, not privatization.  This effectively means that legislative constraints, labor strikes and political opposition are deemed insurmountable by the encumbent government;
  • Economic sentiments remain optimistic (FX reserves; stable PKR; low/soft inflation & successful IMF program);
  • Full year macro projections (for FY17) will be announced after the IMF’s post-program monitoring
  • Frexit would be much more disruptive than Brexit, as this would be the end of the Euro;
  • UK after Brexit will be saved by the English language and English Law.
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June 20, 2016

  • Macro conditions remain positive;
  • Imposition of withholding tax on cash withdrawals has resulted in a sharp increase in currency in circulation in FY16 compared to FY15;
  • Budget FY17 is selective, self-serving & a non-event:
    • No meaningful debate about the Federal Budget in Parliament;
    • Focus on poor and rural sectors (increase minimum wage), hard on salaries of the middle-class;
    • Rewards 5 key exports and low/mid-level bureaucracy;
    • No fiscal, energy or PSE reforms;
    • GoP plans to borrow $ 2 bln from global banks are not wise, as it simply seeks to replace IFI flows with commercial flows.  This will reverse the downward trajectory of external debt servicing projected for FY17-FY21;
    • Using withholding taxes as a revenue source (regressive and shows a lack of political will);
  • Brexit decision will be interesting, and it will not end on June 23rd.
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May 16, 2016

  • Macro conditions remain stable, and M2 growth has been almost the same in FY16 as it was in FY15 (6.5%).  Budgetary support also the same as in FY15, but private sector credit growth is higher this year;
  • Market remains optimistic about the economy:
    • PKR is stable and external sector is comfortable;
    • Low inflation and improvement in security conditions (esp. in Karachi);
    • Rising real estate values wealth effect consumer spending.
  • Some disappointed we will not have another IMF program (a sad reflection of the level of confidence the market has on our policymakers);
  • Little media attention on Budget Strategy Paper FY17.  More interested in Panama Papers.
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