AKD Quotidian about — CA surplus in Dec’11 may lead to DR cut
Karachi: Pakistan’s current account balance has become positive for the first time during this fiscal year with a surplus of US$160mn in Dec’11 as compared to a revised deficit of US$688mn in Nov’11.
According to AKD Securities, as a result, the 1HFY12 CA deficit has registered at US$2.15bn vs. a surplus of US$8mn in 1HFY11. MoM improvement in CA is due to 1) a 17% contraction in trade deficit (goods) to US$1.025bn, 2) a 17% increase in remittances in Dec’11 to US$1.085bn, 3) higher services proceeds and 4) lower interest payments of US$113mn, down 64%MoM.
Considering that Dec’11 CPI came in single digits (9.75%), tax collection is on target (1HFY12: PkR812bn, up 27%Y0Y) and T-bill bid pattern has shifted away from the 3m maturity in the last monetary auction, AKD Securities believes expectations are building up for a 50bps cut in the DR in the upcoming monetary policy.
While recent CA data is a positive, the PKR exchange rate remains the key risk to monetary easing. Mitigates include release of CSF funds, release of US$800mn payment from Etisalat and 3) 3G auction proceeds (auction date: Mar 29’12) but AKD Securities believes these remain low-probability events where non-materialization of the same will likely rule out monetary easing beyond the near-term.
Improved trade balance: Trade deficit of goods contracted by 17%MoM to US$1.025bn is Dec’11 from a deficit of US$1 .This is Nov’11. This improvement was due to a 7.2%MoM increase is exports and a 2.4%MoM decline in the import bill.
However, the cumulative trade deficit for 1HFY12 registered at UD$6.594bn, up 42%YoY against the deficit of UD$4.654bn in 1HFY11. Concerns emanate from lower cotton prices currently at US9.547cents/lb (vs. Average of US$1.56/bbl in FY11) and demand concerns in the EU where the TDAP has recently indicated that Pakistan’s full year FY12 exports could reduce by 6%YoY.
Regarding imports, while the import bill has come off in Dec’11, concerns remain on a potential spike in oil price if the US-Iran standoff further escalates. For now, AKD Securities maintains AKD Securities’ FY12 trade deficit estimate of US$15bn.
CA projection and external flows: With a surplus of US$16Omn in Dec’11, the country’s 1HFY12 CA deficit has registered at US$2.15bn vs. a surplus of US$8mn in the corresponding period last year. While AKD Securities maintains AKD Securities’ full-year CA deficit projection above US$3bn, the GoP is targeting to receive ~US$2.5bn from 1) CSF funds from US, 2) release of Etisalat payment and 3) 3G auction proceeds. While concerns remain, the first monthly CA surplus of FY12 coupled with single-digit CPI n Dec’11 could pave the way for a 50bps cut in DR in the end-Jan’12 MPS.
Implications for KSE: AKD Securities believes a build-up in monetary easing expectations coupled with upcoming results season could lead to near-term rally in the KSE. Taking today’s intraday gains into accounts, the KSE-100 is up 5% this week. Based on the Justified P/E method, ceteris paribus AKD Securities estimates that a 50bps cut in the DR could lead to a 5% P/E multiple rerating. This could take the KSE-100 to 11,800 points if the current rally sustains. AKD Securities flags relatively leveraged scrips as potential outperformers (Cements, Textiles, selected fertilizers e.g. ENGRO). Alternatively, margin compression concerns may lead to profit-taking opportunities in Banks.