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.
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.
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;
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.
