The May'12 Current Account deficit has come in at US$414mn, widening by 50.5%MoM. As a result, the 11MFY12 CA deficit has registered at US$3.77bn vs. a deficit of just US$79mn in 11MFY11.The expansion in CA deficit is primarily due to wider trade deficit (goods and services), which reached US$16.4bn in 11MFY12 vs. US$11.18bn in 11MFY11, up 47%YoY following a rising import bill (up 13%YoY) and flat exports (down 0.3%YoY). As such, the robust trend in remittances, up 20%YoY to US$12.06bn in 11MFY12, while supporting the current account on one hand, has failed to contain pressure on the currency (PkR-US$ depreciation of 9% FYTD). On the Balance of Payments front, FDI continued on a lackluster trend, declining by 48%YoY in 11MFY12 leading risk to fx reserves from upcoming loan repayments to IMF (~US$115mn in Jun'12 and US$417mn in Aug'12) underpinning latent concerns on the PkR. While BoP risks remain, positives include 1) uptick in Pak-US relations with likely reopening of Nato supply routes and potential unlocking of foreign flows (US$2.9bn in CSF payments outstanding), 2) falling global commodity prices (TRJ-CRB index down 10% FYTD), particularly oil could ease pressure on the trade account going forward. In this regard the SBP in its recent MPS (DR unchanged at 12%) reiterated, that one third of Pakistan's total import bill is oil payments, and considering falling oil prices (Arab light down 24% from peak FY12TD levels ) is a significant positive and should ease concerns on near term reserve erosion with scheduled US$2.8bn IMF repayment in FY13.
Trade Deficit: The 11MFY12 trade deficit (goods) has been recorded at US$13.9bn up 44%YoY against the deficit of US$9.6bn in 11MFY11. Exports were recorded flat at US$22.6bn in 11MFY12. Going forward, concerns emanate from lower cotton prices (down 20% since peak) and concerns regarding the global economy with falling demand from the EU. Regarding imports, 11MFY12 imports registered at US$36.5bn, up 12%YoY due to a sticky import bill in 1HFY12. Recent fall in global commodity prices (TRJ-CRB Index is down by 16% from CTYD peak) is a positive particularly if oil prices continue to come off. In our view the recent trend in commodity prices (Arab light down 24% from peak) should ease BoP concerns going forward considering one third of Pakistan's import bill is oil. We expect Trade deficit to clock in at US$17bn in FY13.
Current Transfers: 11MFY12 current transfer balance recorded at US$ 15.7bn, up 12%YoY vs US$14bn in 11MFY11. Current Transfers have been supporting the current account balance lead by remittances. Remittances growth continued at a robust trend and logged in at US$12.06bn in 11MFY12, up 20%YoY. According to World Bank estimates the remittances flows to developing countries in 2011 increased by 8% and are forecast to grow at 7%- 8% per annum till 2014. Pakistan's outperformance underscores government efforts to divert remittances from the informal to the formal channel with the launch of the Pakistan Remittances Initiative (PRI) the share of worker's remittances coming through the banking channel has increased sharply, from 75% in FY10 and an estimated 91% in FY12. We expect remittance growth of 14% YoY in FY13F to US$15bn.
CA Outlook: The CA has posted a deficit of US$414mn in May'12, bringing the country's 11MFY12 CA deficit to US$3.8bn vs. a marginal deficit of US$79mn in the corresponding period last year. Within this backdrop, the macroeconomic environment appears challenging and risks remain in view of FX reserves depletion due to 1) upcoming IMF repayments (~US$115mn in Jun'12 and US$417mn in Aug'12), 2) continued decline in FDI (down 48%YoY in 11MFY12) and 3) non materialization of ~US$2.5bn from CSF/Etisalat/3G proceeds. This opens up the possibility of Pakistan entering into a fresh IMF program by 2013. That said, current trend in global commodity prices could potentially result in CA numbers delivering +ve surprises in 1QFY13 while improving Pak-US relationship could be a key swing factor.
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