Morning Call about Balance of Payment – Arif Habib Limited
Karachi: Family Ties – Current Account and Oil prices
Runaway oil prices continue to cast a shadow on country’s current account (C/A) figures. The 7MFY12 ended with a C/A deficit of USD ~3bn, substantially larger than USD 96mn recorded in corresponding period last year. Widening of C/A deficit is a direct result of appreciation in international oil prices and greater demand for import goods in the economy. Although the inward earnings both from exports and remittances has remain relatively stable, with 12M-trailing sum of USD ~26bn and USD ~12bn (close to Arif Habib Limited’s initial targets), respectively but specific risks – namely the sustained increase in oil prices, a weaker-than-expected European economy, and a downturn in global risk sentiment – remain present.
External account performance
As for the month of Jan-12, the C/A posted in a deficit of USD 305mn higher than that of Dec-12 USD 14mn (revised). This was favoured partially by 17%YoY rise in import as oppose to 6MFY12 average rise of 19%YoY. While export witnessed the thickest fall of 3%YoY during the month compared to an average of +10%YoY rise in 6MFY12. On the flip the total remitted amount during the month jumped by almost +34%YoY to USD ~1bn, bring the total FY12YTD remittances at USD ~7bn (+22%YoY).
Increasing macro-economic stability
Rising oil prices have substantially augmented macro-stability risks in the form higher C/A deficits, increased fuel subsidy and inflation expectations. As per Arif Habib Limited’s estimates a USD 10/bbl rise in Arab light pushes the C/A deficit by USD 0.5bn on a full-year average basis. With Arif Habib Limited’s base case assumption of oil at USD 110/bbl for FY12, Arif Habib Limited expects C/A deficit will likely be contained at USD 3.3bn or 1.4% of the GDP, which in Arif Habib Limited’s view is sustainable in the medium-term.
Downside risks to GDP growth
The increased prices of Arab light hovering at around USD 123/bbl, as of Feb 22nd, 12 (or USD 110/bbl FY12YTD average has increased the downside risks to overall GDP growth – high subsidy, inflation and cost of debt financing. In FY08 higher oil prices averaging USD ~93/bbl brought down the 4YR average growth rate of 7% to 3.7%. If oil prices remain considerably higher for longer the downside risks to GDP growth are inevitable. Currently the oil imports directly accounts of almost 7% of the GDP (USD 136bn, 7MFY12), hence further push of USD 10/bbl from Arif Habib Limited’s base case price of USD 110/bbl will likely trim the GDP growth by 0.06% for the current FY12, as per Arif Habib Limited’s calculations.
Risk of price contamination
A USD 10/bbl rise in Arab light prices directly upticks the headline CPI inflation by 0.7% based on Arif Habib Limited’s calculations. Hence the recent proposal to increase POL prices in the range of PKR 1.8 to PKR 7.3 per litre on account of rising international oil prices is deem to raise inflationary expectations. Although current inflation levels provides just enough legroom to squeeze in further hikes in oil prices, but will also raise the prospects of hikes in policy rates. Nevertheless a cascading effect of similar amount will be felt albeit with a lag even if the government decides not to pass the rising oil prices on domestic consumer, total subsidy in terms of electricity prices and oil companies will likely shoot-up, causing a considerable drag on fiscal side.
Outlook: Keep those flows coming in
The government ability to counter the downside risks of oil prices especially those emanating on the external side lies in attracting capital inflows. The proceeds of 3G licence auction and other uni/bilateral funding will be crucial in altering the trend cycle and hence stimulating the growth pattern. Although, the fetching another USD 600mn from Islamic Development Bank (IDB) – in order to partially repay upcoming IMF debt obligations – may not seem a popularist decision, but in current time this is certainly what’s needed in Arif Habib Limited’s view.