pbic econ issues prospects sept2010
TRANSCRIPT
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Pakistans Economy
Issues and Prospects
September 2010
Haider Hussain(+92-21) [email protected]
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Pakistan: A middle-tier developing economy
Population 166.5 million, (Rural 64% , Urban 36%)
Total Labor Force 55.8 million
Unemployment Rate 5.5%
Poverty Rate Official 22%, Unofficial 23% - 32%Literacy Rate Official 57%, Unofficial 35% - 41%
GDP PKR 14,414 billion (USD 167.5 million)Per Capita Income USD 1,013
Composition of GDP Services (53%), Agriculture (22%), Small Scale & Other Industries (13%),Large Scale Manufacturing (12%),
Major Industries Textile (33%), Food (19%), Petroleum (7%), Pharma (7%), Chemicals (6%),Automobile (5%), Metals (5%), Fertilizer (5%)
Major Crops Wheat, Rice, Sugarcane, Cotton
Exchange Rate PKR 85.50 per USD
Major Exports Textile (52%), Food (17%), Petroleum Products (5%), Chemicals & Pharma(4%), Cement (3%)
Major ExportDestinations
USA (23%), UAE (9%), Afghanistan (6%), UK (6%), Germany (4%)
Major Imports Petroleum Crude & Products (34%), Machinery (13%), Food (10%)
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Key Issues in the economy
Consumption-led growth model
High vulnerability to exogenous shocks (e.g. international prices) & domesticmarket inefficiencies
Expansionary fiscal policy but weak revenue mobilization
Narrow export base
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Economy is predominantly consumption-based
Relatively few of the resources go into the formation of fixed capital
Source: Ministry of Finance
0%10%
20%
30%
40%
50%
60%
70%
80%
90%
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Share of Consumption & Investment in GDP
Private consumption Gross fixed capital formation
Econom
icGrowt
h
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Easy credit availability sent everyone on a spending spree, demand rose more than domestic supply,rising inflation was the ultimate outcome
Overheating still high despite stabilization efforts, so is inflation
Source: Ministry of Finance
0%
5%
10%
15%
20%
25%
-500
0
500
1,000
1,500
2,000
2,500
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
An Overheating EconomyExcess Demand, PKR bn (LHS) Headline Inflation (RHS)
Econom
icGrowt
h
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Besides overheating, international commodity prices also rose sharply in FY08 and FY09
SBP responded by increasing Discount Rate in FY09 (250bps), but reduced it in FY10 after nascentrecovery
Despite fall in global inflation in FY09, domestic inflation eased only slightly owing to marketinefficiencies
Source: SBP
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
FY07
FY08
FY09
FY10
Discount Rate Headline Inflation Core Inflation
Rising Inflation and Central Bank's response
Econom
icGrowt
h
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Low investment growth, cost-push inflation and higher interest rates resulted in a fall of LSMgrowth in FY09. Poor law & order also contributed in production slump
In FY10, aggregate demand recovered a bit, resulting in considerable manufacturing growth
Source: Ministry of Finance
Services53%
Sectoral Share in GDPAgriculture 22%
Large ScaleManufacturing12%
Small Scale Manufacturing & Energy 13%-10%
-5%
0%
5%
10%
15%
20%
25%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Agriculture Large Scale Manufacturing Services
Growth in GDP Components
Econom
icGrow
th
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As a result, Economy seemed to have completed a boom-bust-recovery cycle in FY10
Source: Ministry of Finance
2.0%
3.1%
4.7%
7.5%
9.0%
5.8%
6.8%
3.7%
1.2%
4.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%7.0%
8.0%
9.0%
10.0%
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Boom, Bust, Recovery!
Real GDP Growth
Econom
icGrow
th
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Weak revenue mobilization, marked by low tax-to-GDP ratio
More Importantly, tax revenues have failed to reflect episodes of high GDP growth
Fisca
lDeve
lopmen
ts
9%
10%
11%
12%
13%
14%
15%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
FY91
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Real GDP Growth (LHS) Tax-to-GDP (RHS)
Revenue Mobilization
Source: Ministry of Finance, PBIC Research
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Expansionary fiscal policy especially after FY05, despite weak revenue mobilization
Government has resorted to borrowings and grants in order to fuel fiscal expansion
Fisca
lDeve
lopmen
ts
Source: Ministry of Finance, PBIC Research
0%
10%
20%
30%
40%
50%60%
70%
80%
90%
100%
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
Borrowings Grants & Privatization Revenue
Financing of Government ExpenditureAs % of Expenditure
12%
14%
16%
18%
20%
22%
24%
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
Revenue to GDP Expenditure to GDP
Expenditure Revenue Gap
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Excess demand satiated through imports, result was high trade and CA deficits in FY08
After fall in international commodity prices and curb on imports, both deficits came down
Exports remained flat due to their low elasticity of consumption demand
Continuous rise in remittances also helped
Source: SBP, PBIC Research
Exte
rna
lSec
tor
Dynam
ic
s
0.01.0
2.0
3.0
4.0
5.0
6.07.0
8.0
9.0
10.0
-6.0%-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Current Account Deficit - Rise & FallRemittances (USD billion, RHS) Trade Def icit, % of GDP (LHS)
Current A/C Deficit, % of GDP (LHS)
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Higher import bill caused FX reserves to decline and exchange rate to depreciate
IMF loan and global price softening halted the pace of depreciation after Nov-08
Nonetheless, mild depreciation continues afterwards
Source: SBP, PBIC Research
Exte
rna
lSec
tor
Dynam
ic
s
0
2
4
6
8
10
12
14
16
18
60
65
70
75
80
85
90
Apr-08
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
FX Reserves, USD bn (RHS) PKR/USD (LHS)
FX Reserves and Exchange Rate
Current PKR/USD parity @ PKR 85.7 per USD
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Why currency is depreciating even after buildup in FX reserves?
Decline in Core FX inflow to FX reserve ratio, implying diminishing external competitiveness
Buildup in reserves due to foreign loans, implying future debt servicing pressure
Also because of power production needs leading to higher future oil demand
Source: SBP, PBIC Research
Exte
rna
lSec
tor
Dynam
ic
s
15%
20%
25%
30%
35%
40%
45%
50%
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Core FX Inflow to FX Reserve RatioCore FX inflow = export of goods & services + interest & dividend earned on foreign investment +remittances + f oreign investment in Pakistan
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Exchange rate volatility fell sharply after Nov-08
Though pressure re-emerged after non-materialization of foreign budgetary funding and
confusion over IMFs tranche disbursement during late FY10
Source: SBP, PBIC Research
Exte
rna
lSec
tor
Dynam
ic
s
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
23-Jul-07
23-Aug-07
23-Sep-07
23-Oct-07
23-Nov-07
23-Dec-07
23-Jan-08
23-Feb-08
23-Mar-08
23-Apr-08
23-May-08
23-Jun-08
23-Jul-08
23-Aug-08
23-Sep-08
23-Oct-08
23-Nov-08
23-Dec-08
23-Jan-09
23-Feb-09
23-Mar-09
23-Apr-09
23-May-09
23-Jun-09
23-Jul-09
23-Aug-09
23-Sep-09
23-Oct-09
23-Nov-09
23-Dec-09
23-Jan-10
23-Feb-10
23-Mar-10
23-Apr-10
23-May-10
23-Jun-10
Exchange Rate Volatility
Inter-day Standard Deviation
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International debt markets response was positive after increase in FX reserves and fall in current
account deficit
Source: SBP, PBIC Research
Exte
rna
lSec
tor
Dynamic
s
0
500
1000
1500
2000
2500
3000
3500
4000
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Credit Default Swap on Pakistan's 5-Year Eurobond
Peak @ 3,144 bps in Dec-08, Current @ 540 bps
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FDI surged between FY04-FY08. FPI followed with FY07 being the most fertile year
However, macroeconomic imbalances caused FDI to decline sharply
Narrow-based foreign investments: remained concentrated in banks, telecom and oil (both FDIand FPI)
Source: SBP, PBIC Research
Exte
rna
lSec
tor
Dynamic
s
-
1,000
2,000
3,000
4,000
5,000
6,000
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Foreign Direct Investment
USD million
(1,000)
(500)
-
500
1,000
1,500
2,000
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
USD million
Foreign Portfolio Investment
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Money supply grew faster than GDP, another reason behind contractionary monetary policy postFY05
After FY07, money supply grew less than nominal GDP thus system became relativelyless liquid
Source: SBP, PBIC Research
De
btMar
ke
tan
dInteres
tRate
s
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
19.0%
21.0%
23.0%
25.0%
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Growth in Money Supply Nominal GDP Growth
Monetary Liquidity
Excess Liquidity post9-11 inflows
Monetary tightening andfall in liquidity
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Interest rates rose sharply not only because of contractionary monetary policy
but also because of increase in transaction demand for money (people opted to hold higher
cash balances)
Source: SBP, PBIC Research
De
btMar
ke
tan
dInteres
tRate
s
8%
9%
10%
11%
12%
13%
14%
15%
16%
Jul-05
Dec-05
May-06
Oct-06
Mar-07
Aug-07
Jan-08
Jun-08
Nov-08
Apr-09
Sep-09
Feb-10
6-month Tbill Yield SBP Discount Rate
Policy Tightening & Secondary MarketYields
9%
10%
10%
11%
11%
12%
12%
13%
13%
14%
14%
20%
21%
22%
23%
24%
25%
26%
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Currency in Circulation as % of M2 (LHS)6M Tbill (RHS)
Transaction Demand for Money & InterestRates
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Exogenous
Shoc
kan
dc
hang
ingprospec
ts
August 2010 FloodsInitial Assessment
Economic stabilization efforts took a serious blow after worst floods in the history
Catastrophic damages severely affected medium term economic outlook
These figures are only provisional. ADB and World Bank are working on damage assessmentreport (will be available in November 2010)
Flood Damages
Population affected 20 million
Land affected 17 million Acres
Agriculture Produce 4.3 million acres (PKR 245 billion)
Cotton 700,000 acres (2 million bales)
Wheat 500,000 tonnes
Rice 1.5 million acres (1.5 million Tonnes)
Sugarcane 200,000 acres
Livestock 150,000
Animal Fodder 300,000 acres
Infrastructure, properties PKR 600 billionPower Shortfall 3.135 gigawatts
Source: Various news reports
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Exogenous
Shoc
kan
dc
hang
ingprospec
ts
August 2010 FloodsAftermath
Aggravating inflationary pressure in first as well as in second round
Higher domestic borrowing, thus higher interest rates
Affected credit portfolios of the banking system, thereby increasing NPLs
Silver lining
Complete and timely disbursement of foreign aid (so far, close to USD 2.5 billion has been announcedby multilateral and bilateral sources)
Restructuring of existing IMF loan (not very significant likelihood)
FY11 - Government
Targets
FY11 - Post flood
scenario
Real GDP growth 4.50% 2.0%-2.5%
Inflation 9.50% 16%-17%
Budget Deficit PKR 685 billion PKR 800-850 billion
Trade Deficit USD 11.7 billion USD 13.7-14.5 billionSource: News reports, PBIC Research
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Treasury Group
Fixed Income Investments and Marketing Unit Team
Ahmed Ateeq
Head, MM, Fixed Income and TMU
(+92-21) 5361370-3
Haider Hussain
Unit Head, Research
(+92-21) 32059014
Zain Ali Shams
Analyst
(+92-21) 35361215-9 Ext. 141
Contact Details
Pak Brunei Investment Company
Khadija Towers, Plot No. 11/5, Block No. 2, Scheme No. 5, Clifton, Karachi
Tel: (+92-21) 35361215-9, Fax: (+92-21) 35370873
http://www.pakbrunei.com.pk
mailto:[email protected]:[email protected]:[email protected]://www.pakbrunei.com.pk/http://www.pakbrunei.com.pk/mailto:[email protected]:[email protected]:[email protected]