Presentations

• 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.

• 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.

• 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.

• 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.