pbic econ insight may2011 presentation)

8/6/2019 PBIC Econ Insight May2011 Presentation)

1/15

TREASURY GROUP

May 10, 2011

Economic InsightMacro Trends ahead of Budget FY12

Haider Hussain

(92-21) 35361215-9, Ext.141

[email protected]

Our Research is also available here.

So far, FY11 is proving to be a redemption year for Corporate sector

with robust earnings growth. But, macro realities are contrasting.Interest rates are high, fiscal deficit is soaring and inflation isshowing no signs of cooling down. The only blessing is a robustexternal account; but that too is overly dependant on remittances.

Under these circumstances, we expect the government toannounce a Budget focusing more on corrective measures, aslimited resources and a tough outlook hardly allow a growth-

oriented budget.
mailto:[email protected]://www.pakbrunei.com.pk/report_n_presentation.htmlhttp://www.pakbrunei.com.pk/report_n_presentation.htmlmailto:[email protected]


2/15

Inflationary pressures stand strong. Even if inflation stays at April-11 level (13.04%), movingaverage doesnt seem to be coming down before Sept-11

2

Inflation

Source: Federal Bureau of Statistics, PBIC Research

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

YoY Headline Inflation

YoY Headline Inflation (12-Month Moving Average)

Trend in Inflation


3/15

International food and oil prices are touching new highs and will also fuel domestic inflationgoing forward

3

Inflation

Source: Food and Agriculture Organization, PBIC Research Source: Bloomberg

-40%

-20%

0%

20%

40%

60%

80%

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Global Food Inflation (YoY Change)

30

40

50

60

70

80

90

100

110

120

130

01-Jan-09

01-Mar-09

01-May-09

01-Jul-09

01-Sep-09

01-Nov-09

01-Jan-10

01-Mar-10

01-May-10

01-Jul-10

01-Sep-10

01-Nov-10

01-Jan-11

01-Mar-11

International Oil Price (Arab Light: USD/bbl)


4/15

Why not buy today what is going to be expensive in future!

Increasing transaction demand for money shows general public have strong inflationexpectations

4

Inflation

Source: SBP, PBIC Research

9%

11%

13%

15%

17%

19%

1-Jul-10

15-Jul-10

29-Jul-10

12-Au

-10

26-Au

-10

9-Sep-10

23-Sep-10

7-Oct-10

21-Oct-10

4-Nov-10

18-Nov-10

2-Dec-10

16-Dec-10

30-Dec-10

13-Jan-11

27-Jan-11

10-Feb-11

24-Feb-11

10-Mar-11

24-Mar-11

7-A

r-11

21-Apr-11

Currency in Circulation (YoY Growth)

Currency in Circulation shows money hoarding and/or money held with public for daily transactions. It is the part of moneysupply that is outside the banking system


5/15

SBP sticks to a hawkish monetary policy stance. Trend in inflation increases the likelihoodof a DR hike in the first half of next fiscal year

5

Monetary Policy Response

Source: SBP, Financial Market Association

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

SBP Discount Rate

Headline Inflation (12-Month Moving Avg.)

Inflation and Monetary Policy Response


6/15

thus we are bullish on market interest rates in the medium term

6

Interest Rates

Source: SBP, Financial Market Association

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

1-Jun-09

1-Jul-09

1-Aug-09

1-Sep-09

1-Oct-09

1-Nov-09

1-Dec-09

1-Jan-10

1-Feb-10

1-Mar-10

1-Apr-10

1-May-10

1-Jun-10

1-Jul-10

1-Aug-10

1-Sep-10

1-Oct-10

1-Nov-10

1-Dec-10

1-Jan-11

1-Feb-11

1-Mar-11

1-Apr-11

1-May-11

6-Month TBill

6-Month KIBOR

SBP Discount Rate

Interest Rates Trend


7/15

Investors are preferring liquidity and are not ready to bet on long term securities. Riskpremium is quite high between short and long (12-Month and above) tenors

7

Interest Rates

Source: Financial Market Association

12.5%

13.0%

13.5%

14.0%

14.5%

1m 3m 6m 12m 2Yr 3Yr 4Yr 5Yr 6Yr 7Yr 8Yr 9Yr 10Yr

Yield Curve as on May 4, 2011


8/15

Deficit has been increasing big time. 9MFY11 deficit is 25% higher YoY

8

Fiscal Deficit

Source: Ministry of Finance, PBIC Research

138

112

156

275

224

180

223

303

276

214

293

0

50

100

150

200

250

300

350

1Q-09 2Q-09 3Q-09 4Q-09 1Q-10 2Q-10 3Q-10 4Q-10 1Q-11 2Q-11 3Q-11

Quarterly Fiscal Defict (PKR Billion)

FY099-Month deficit PKR 406 billion

Cumulative deficit PKR 680 billion (5.2%of GDP)

FY109-Month deficit PKR 627 billion

Cumulative deficit PKR 929 billion (6.3%of GDP)

9MFY119-Month deficit PKR 783

billion (4.5% of GDP)


9/15

Commercial banks have been financing a higher portion of deficit, which is one of the IMFs

key requirements. Also because banks have limited alternate risk-free investment avenues

9

Fiscal Deficit Financing

Source: SBP, PBIC Research Source: SBP, PBIC Research

-10%

0%

10%

20%

30%

40%

50%

60%

70%

1-Jul-10

22-Jul-10

12-Aug-10

2-Sep-10

23-Sep-10

14-Oct-10

4-Nov-10

25-Nov-10

16-Dec-10

6-Jan-11

27-Jan-11

17-Feb-11

10-Mar-11

31-Mar-11

21-Apr-11

From SBP

From Scheduled Banks

Breakup of GoP Budgetary Borrowing (YoY Growth)

12%

14%

16%

18%

20%

22%24%

26%

28%

30%

32%

1-Jul-10

15-Jul-10

29-Jul-10

12-Aug-10

26-Aug-10

9-Sep-10

23-Sep-10

7-Oct-10

21-Oct-10

4-Nov-10

18-Nov-10

2-Dec-10

16-Dec-10

30-Dec-10

13-Jan-11

27-Jan-11

10-Feb-11

24-Feb-11

10-Mar-11

24-Mar-11

7-Apr-11

21-Apr-11

Government Budgetary Borrowing (YoY Growth)


10/15

And this shift in borrowing has compelled the government to offer higher returns onTreasury Bills

10

Fiscal Deficit Financing

Source: SBP

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

15-Jul-09

09-Sep-09

07-Oct-09

04-Nov-09

02-Dec-09

30-Dec-09

27-Jan-10

24-Feb-10

24-Mar-10

21-A

r-10

19-May-10

16-Jun-10

28-Jul-10

26-Aug-10

23-Se

-10

20-Oct-10

15-Nov-10

15-Dec-10

12-Jan-11

09-Feb-11

09-Mar-11

06-A

r-11

TBill Auctions: 6-Month T-Bill Weighted Average Yield


11/15

A robust current account is mostly depending on remittances, which is a hard-to-predictquasi-exogenous factor

11

External Account


0

5

10

15

20

25

Jan-08

Mar-08

May-08

Jul-08

Se

-08

Nov-08

Jan-09

Mar-09

Ma

-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Se

-10

Nov-10

Jan-11

Mar-11

Ex. Remittances Actual

Current Account Deficit (12-month mov. avg.) USD Bill ion


12/15

Exchange rate has stabilized around PKR 85/USD following a rejuvenated external account,while foreign exchange reserves position is also strong

12

Exchange Rate


78

79

80

81

82

83

84

85

86

87

0

2

4

6

8

10

12

14

16

18

20

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

FX Reseves, PKR Billion (LHS)

PKR/USD (RHS)

Reserves Position and Exchange Rate


13/15

However, both reserves and exchange rate would face headwinds after Dec-11 whenrepayments to IMF will start escalating

13

IMF Repayments

Source: IMF, PBIC Research

-

128 103 131

521

647

514

784

918 909

1,0461,103

680 649

560

375

218 217

611

1Q-CY11

2Q-CY11

3Q-CY11

4Q-CY11

1Q-CY12

2Q-CY12

3Q-CY12

4Q-CY12

1Q-CY13

2Q-CY13

3Q-CY13

4Q-CY13

1Q-CY14

2Q-CY14

3Q-CY14

4Q-CY14

1Q-CY15

2Q-CY15

3Q-CY15

4Q-CY15

Repayments to the IMF (USD Million) including principle & interest payements and other service charges

CY11 USD 362Million

CY12 USD 2,467Million



CY15 USD 497Million


14/15

What would be on the cards?

14

Federal Budget FY12

We expect Budget FY12 to be a replica of Budget FY09 when economy was experiencing afiscal crisis, despite the fact that macro indicators are in a relativelybetter position now

Similar to FY09, upcoming Budget will also focus more on stabilizing the economy throughcorrective measures. Despite the commitment of economic managers, limited resourcesand a tough outlook hardly allow a growth-oriented budget

Budget FY12 will primarily focus on fulfilling IMF requirements RGST reforms and a modest focus on Agriculture income tax is on the cards, though they are likely

to face political resistance

Possibility of the imposition of one-off Gross Asset Tax on corporate sector assets

Likelihood of upward revision in the rates of existing direct taxes

GoP cant afford to announce a large PSDP in current circumstances, especially when a fat chunkof resources will be transferred to provinces through NFC award

Subsidies will be restrained further

We cannot dream of significant pro-poor measures in this budget. But, some additional resourcesfor Benazir Income Support Program (BISP) can be set aside


15/15

Disclaimers: This report is published solely for information purposes. It is not to be construed as a solicitation or an offer to buy or sell any securities orrelated financial instruments nor should it be regarded by recipients as a substitute for the exercise of their own judgment. The information and opinionscontained in this report have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is madeas to their accuracy, completeness or correctness and are subject to change without notice. PBIC does not accept any loss or liability whatsoever arisingfrom the use of the material or information contained herein. PBIC may from time to time hold positions in, and may effect transactions in, the companies,sectors and/or securities mentioned herein.

Copyright 2011, Pak Brunei Investment Company (PBIC). All rights are reserved. PBIC prohibits the redistribution of this material in whole or in part withoutthe consent of PBIC and PBIC accepts no liability whatsoever for the actions of third parties in this respect.

Pak Brunei Investment Company Limited,Khadija Towers, Plot No. 11/5, Block No. 2, Scheme No. 5, Clifton, Karachi, Pakistan

Tel Off :- (+92-21) 35361215-19 | Fax: (+92-21) 35361213http://www.pakbrunei.com.pk
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