Moody's Expects Pakistan's New Mini Budget to Foster Exports and Import Substitution
Pakistan's new government led by Prime Minster Imran Khan has inherited large twin deficits. The new "mini budget" announced by Finance Minister Asad Umar "will support Pakistan’s manufacturing sector, fostering exports and import substitution, and help narrow the current-account deficit", says a January 31, 2019 report by Moody's investor service. The report adds that the tax incentives given to manufacturing and exports-oriented industries "will keep Pakistan’s budget deficits wider for longer, potentially eroding the credibility of government efforts to achieve fiscal consolidation."
Here's an excerpt of Moody's report on the immediate downsides of the measures announced by Umar on January 23, 2019: “We expect the deficit to widen to 6% of GDP in fiscal 2019 because revenue growth is likely to be below government projections, given slower economic growth and the new revenue-based incentives, before gradually narrowing to 5% of GDP by fiscal 2021 as the economy picks up. While we believe the government remains committed to fiscal consolidation, a wider for longer deficit could raise questions over the credibility of its fiscal policy."
Remittances from Pakistan diaspora rose by 10% year on year to $10.71 billion in the first half of fiscal 2019, while goods imports slowed sharply to around 3% year on year as non-energy imports contracted.
Moody's expects "the current-account deficit to narrow to 4.7% of GDP in fiscal 2019 and to 4.2% in fiscal 2020 from 6.1% in fiscal 2018, it will remain sizable and wider than in 2013-16, driving Pakistan’s external financing needs. The government has secured $12 billion in financing from Saudi Arabia and the United Arab Emirates – in each case amounting to $6 billion and divided equally between deposits and deferred oil payments – which is likely to largely cover the country’s net financing needs for fiscal 2019".
Beyond fiscal 2019, however, a net financing gap remains large because of the still sizable current-account deficit. Pakistan remains in negotiations with the International Monetary Fund over a new program that would provide a stable additional source of external financing, as well as technical support and assistance on macroeconomic rebalancing and structural reform policies.
On fiscal deficit front, the report warns that “there is a greater risk of fiscal slippage and slower fiscal consolidation in the absence of further revenue-raising measures. Pakistan’s revenue base was a narrow 15.4% of GDP in fiscal 2018, which ended June 2018.”
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| Pakistan Mini Budget Announced January 23, 2019. Source: Shajar Capital |
Here's an excerpt of Moody's report on the immediate downsides of the measures announced by Umar on January 23, 2019: “We expect the deficit to widen to 6% of GDP in fiscal 2019 because revenue growth is likely to be below government projections, given slower economic growth and the new revenue-based incentives, before gradually narrowing to 5% of GDP by fiscal 2021 as the economy picks up. While we believe the government remains committed to fiscal consolidation, a wider for longer deficit could raise questions over the credibility of its fiscal policy."
Remittances from Pakistan diaspora rose by 10% year on year to $10.71 billion in the first half of fiscal 2019, while goods imports slowed sharply to around 3% year on year as non-energy imports contracted.
Moody's expects "the current-account deficit to narrow to 4.7% of GDP in fiscal 2019 and to 4.2% in fiscal 2020 from 6.1% in fiscal 2018, it will remain sizable and wider than in 2013-16, driving Pakistan’s external financing needs. The government has secured $12 billion in financing from Saudi Arabia and the United Arab Emirates – in each case amounting to $6 billion and divided equally between deposits and deferred oil payments – which is likely to largely cover the country’s net financing needs for fiscal 2019".
Beyond fiscal 2019, however, a net financing gap remains large because of the still sizable current-account deficit. Pakistan remains in negotiations with the International Monetary Fund over a new program that would provide a stable additional source of external financing, as well as technical support and assistance on macroeconomic rebalancing and structural reform policies.
On fiscal deficit front, the report warns that “there is a greater risk of fiscal slippage and slower fiscal consolidation in the absence of further revenue-raising measures. Pakistan’s revenue base was a narrow 15.4% of GDP in fiscal 2018, which ended June 2018.”
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https://www.thefridaytimes.com/tft/boom-or-bust/
Now the US has appointed Mr Khalilzad to oversee a peaceful reconciliation with the “terrorist” Taliban under the stewardship of none other than the “double-dealing” Pakistanis. Is this about turn a manifestation of the failure of US strategy, and by corollary a success of Pakistan, in Afghanistan?
Interestingly, both the US and Pakistan are playing it cool. The US has not offered any mea culpa for two decades of misplaced concreteness and the Pakistanis are not crowing about being center stage again. Instead, both are working hand in hand to protect their respective national security interests. For its help in bringing the Taliban to the table and leaning on them to facilitate a respectable and orderly exit from Afghanistan in the next 18 months, the US has now channeled $12b to Pakistan via its strategic partners in Riyadh and Abu Dhabi. Indeed, the main reason for Pakistan’s new government’s delay in clutching at an IMF program was to clinch such a strategic “deal” with the US first so that the IMF would eventually soften its conditions for a bail out.
https://fp.brecorder.com/2019/01/20190129442991/
Fitch in its latest report "Industry Trend Analysis - CPEC to Remain a Primary Driver of Pakistan's Construction Industry" states: "We expect debt concerns surrounding CPEC projects to ease after financial details are released. In addition, we believe political risks associated with CPEC projects have diminished since the 2018 Pakistani general election. These factors will reduce overall risk profile of CPEC projects."
The report further states that the CPEC will continue to support growth of Pakistan's construction industry in the coming years, aided by China's sustained push on project implementation, as well as warming bilateral relationship between the two countries.
Since the implementation of CPEC, a centrepiece of China's Belt and Road Initiative (BRI), in 2013, the mega project has faced numerous challenges resulting in large downside risks to many projects. Despite these challenges, 11 CPEC projects, labelled as early harvest projects, have been completed thus far.
Despite significant media and political scrutiny of CPEC, this progress on projects underscores Beijing's improving track record in project implementation and its commitment to infrastructure development in Pakistan.
Since the inception of CPEC, projects have shown good progress in terms of execution; a total of 3,240MW of capacity had been added to the Pakistan's national grid, accounting for more than 11% of the total installed capacity in the country.
Also, the 392KM Multan to Sukkur section of the Peshawar-Karachi Motorway, a key CPEC project which broke ground in August 2016, is currently more than 80% complete and is slated for completion by August 2019. As such, Fitch believes that continued Chinese involvement in the Pakistani construction market will provide a positive upside in terms of timeliness and execution, and will continue to boost growth of the construction industry in the near future.
The report further states that debt concerns relating to CPEC projects will begin to recede on the back of improving transparency. In December 2018, reports relating to the Pakistani government's debt to China had been circulating in the media, with this amount purportedly to be in the region of $40 billion.
Pakistan's Ministry of Planning, Development and Reform and the Embassy of China in Pakistan have since released statements clarifying the total value of the aforementioned 22 early harvest CPEC projects completed and under construction to be around $18.9 billion, of which around $6 billion of loans, representing 32% of total value, were provided by the Chinese government and will be repaid over 20-25 years from 2021 at an interest rate of around 2%.
From these statements, it has been noted an improvement in terms of transparency of CPEC projects, with China also providing a breakdown of the type of financing and the estimated investment for each CPEC project.
https://fp.brecorder.com/2019/01/20190129442991/
Fitch believes such a move is a welcoming sign for Pakistan's construction industry as calls for a greater level of transparency over CPEC projects are now being addressed by authorities. This would in turn provide more comfort for potential investors to Pakistan's construction industry.
Furthermore, it has been believed this improved transparency will aid Pakistan's efforts in renegotiation for an IMF bailout deal which, if secured, could provide its ailing economy with much needed economic relief.
In the meantime, it has maintained the real growth rate of Pakistan's construction industry to average at 8.9% over the next 5 years. "We will adjust our forecasts to account possible positive ripple effects across the economy, including the construction industry, in the event an IMF bailout is secured."
Fitch believes political risks associated with CPEC projects have diminished. "Previously, we note that the transition in power from Pakistan Muslim League (Nawaz) to Pakistan Tehreek-e-Insaf (PTI) posed a downside risk to the Pakistani construction industry as new Prime Minister Imran Khan pledged to review Chinese-backed projects, which could potentially have led to project delays and cancellations. However, the political situation in Pakistan has since stabilised and Prime Minister Imran Khan has demonstrated willingness to cooperate with China on multiple issues including CPEC.
"As such, we are in the view that downside risks stemming from political uncertainty are diminishing, and bilateral projects spearheaded by CPEC, will receive a boost in terms of policy implementation and project continuity," maintained the report.
The plan is failing. More bombs and boots haven’t brought victory any closer. Tens of thousands of Afghan civilians have been killed, maimed and traumatized. Millions of people are internally displaced or are refugees in Iran and Pakistan.
Poppy cultivation is up four times over 2002. Despite years of economic and military aid, Afghanistan remains one of the least developed countries in the world. Afghan security forces, which were supposed to take over from NATO troops, have lost a staggering 45,000 soldiers in battle since 2014 and can’t fill their recruitment targets.
Mr. Trump’s administration — which announced it would withdraw 7,000 troops but has yet to do so — is now negotiating with the Taliban, talks that are scheduled to continue this month. That’s a promising sign of a much-needed acknowledgment of reality.
It is time to face the cruel truth that at best, the war is deadlocked, and at worst, it is hopeless. The initial American objective — bringing Bin Laden to justice — has been achieved. And subsequent objectives, to build an Afghan government that can stand on its own, protect the population and fight off its enemies, may not be achievable, and certainly aren’t achievable without resources the United States is unwilling to invest.
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That retrenchment needs to start where it all began: Afghanistan, which has remained for more than 17 years an open-ended war without an exit strategy or a focused target.
At the peak of NATO involvement in 2011, around the time Bin Laden was killed in Pakistan, there were more than 130,000 soldiers from 50 nations fighting the Taliban and building up the Afghan national army, so it could stand on its own.
There are now 16,000 soldiers from 39 countries in the NATO force. More than 14,000 of them are American. Their mission now includes less combat and more training. But the result remains the same: The intelligence community’s 42-page “Worldwide Threat Assessment,” released last week, devotes only a single paragraph to the war in Afghanistan, labeling it a “stalemate.”
This page has been supportive of the war in Afghanistan since it began. We criticized NATO countries in Europe for not sending enough soldiers. And we were critical of the Bush administration for its lack of postwar planning and for diverting resources to the war in Iraq.
Events have shown us to have been overly optimistic regarding the elected Afghan government, though we were rightly critical of its deep dysfunction. We have raised concerns about military tactics that cost civilians their lives and been skeptical of the Pentagon’s relentlessly rosy assessments of the progress made and the likelihood of success.
https://www.samaa.tv/news/2019/02/pakistans-trade-gap-reduces-by-more-than-2b/
Pakistan’s trade deficit was recorded at $ 19.26 billion with a 9.66 % reduction during the first seven months of the ongoing fiscal year 2018-19.
Pakistan’s exports remained $13.23 billion, while imports recorded at $ 32.49 billion during July to January 2018-19.
Trade deficit witnessed more than $2 billion reduction during the said period, according to the Pakistan Bureau of Statistics.
Related: Dollar on the rise, reaches Rs139.2
Government is expecting $5 billion to 6 billion reduction in the trade gap at the close of the year, said Commerce Secretary Younis Dhaga.
The imposition of ban on import of furnace oil and increased in regulatory duties on luxury items is yielding positive results as imports witnessed 5.17 % in first seven months, says Abdul Razaq Daud, the adviser to the prime minister on commerce.
The impact of recent rupee depreciation will be witnessed more positive results in exports, he said talking to media in Islamabad.
Overseas Pakistani workers remitted US$ 12774.02 million in the first seven months of FY19
as compared with US$11383.47 million received during the same period in the preceding
year.
During January 2019, the inflow of workers’ remittances amounted to US$ 1743.25 million,
which is 0.3% lower than December 2018 and 6.4% higher than January 2018. The country
wise details for the month of January 2019 show that inflows from Saudi Arabia, UAE, USA,
UK, GCC countries (including Bahrain, Kuwait, Qatar and Oman) and EU countries amounted
to US$ 403.92 million, US$ 352.12 million, US$ 272.32 million, US$ 295.13 million, US$ 166.50
million and US$ 42.89 million respectively compared with the inflow of US$ 383.91 million,
US$ 351.58 million, US$ 223.94 million, US$ 235.10 million, US$ 186.33 million and US$ 56.4
million respectively in January 2018. Remittances received from Malaysia, Norway,
Switzerland, Australia, Canada, Japan and other countries during January 2019 amounted to
US$ 210.36 million together as against US$ 201.46 million received in January 2018.
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https://twitter.com/StateBank_Pak/status/1095276692208267264
In addition, the economy is under less pressure today thanks to the decline in oil prices, which has slowed the pace at which Pakistan was running out of foreign exchange reserves. Pakistan’s currency has also dropped by about 30 per cent against the US dollar since late 2017, making the country’s exports more competitive.
“Today, Pakistan is in a much better place economically than six months ago,” said Taimur Baig, chief economist for DBS in Singapore. “It will be pragmatic and end up taking a little from everyone.”
“Today, everyone is talking to everyone,” added one Pakistani banker. “Pakistan is returning to the diplomatic fold.”
Still, not everyone shares this more optimistic view of Pakistani prospects. Earlier this month, for example, Standard & Poor’s downgraded Pakistan’s long-term sovereign rating to “B-”, citing diminished growth prospects. “While Pakistan has secured financial aid from bilateral partners to address its immediate external financing needs, we believe that fiscal and external imbalances will remain elevated,” the rating agency said.
Some analysts believe it is precisely financial aid from countries such as Saudi Arabia that has kept Islamabad from adopting reform measures that may prove painful in the short run but are necessary for longer-term stability.
“Mideast funds only offer temporary liquidity support. While these could eventually generate both exporting capacity or reduced imports, the short-run impact will not be positive for Pakistan’s external position,” noted Johanna Chua, head of regional economics for Citigroup in Hong Kong in a report entitled “Kicking the Can Down the Road to the IMF”. “Mideast support is allowing the government to take more time to negotiate an IMF programme.”
Pakistan plans reforms in move for IMF aid
Saudi Arabia, however, remains a longtime ally of Pakistan. Pakistan’s army provides 15,000 soldiers to protect its royal family in exchange for $5bn annually, according to Mr Nasr. Moreover, there are about 1m Pakistanis working in the kingdom and hundreds of thousands more scattered throughout the United Arab Emirates and Qatar, whose remittances have helped to narrow Pakistan’s current account deficit in recent years.
Pakistan has only about $8bn in foreign exchange reserves, enough to last it for about two months. The $14bn Saudi Arabia plans to commit includes $6bn in a loan to beef up liquid foreign reserves and in deferred payments for Saudi oil shipments to Pakistan. The remaining $8bn will go towards financing a multibillion-dollar refinery at Gwadar, a coastal city with a deep seaport near the Iranian border, according to senior government officials responsible for monitoring foreign investments in Pakistan.
“They [Saudis] need friends now more than at any other time and Pakistan needs investments,” said retired Major General Mahmud Durrani, a former national security adviser.
Officials say the Chinese government has also promised a grant of $1 billion for education, health, vocational training, drinking water and poverty alleviation projects over the next three years.
Minister for Planning, Development and Reform Makhdum Khusro Bakhtyar said Chinese experts are due to arrive in Islamabad later this month to coordinate socio-economic development under the promised grant.
Pakistan's foreign currency exchange remains under severe pressure, despite receiving around $2 billion from China and $4 billion from Saudi Arabia and the United Arab Emirates in commercial loan deposits.
SBP reserves stood at $8.2 billion last week, barely enough to cover two months' worth of imports.
China's CPEC
In the last six years, China has made significant financial contributions to direct investment, soft loans and commercial deposits to help its close ally, Pakistan, overcome severe economic challenges.
Under its Belt and Road Initiative, Beijing has invested $19 billion in Pakistan to build and improve road infrastructure and power plants and opened the strategic Arabian Sea port of Gwadar. Beijing has also given Islamabad concessional loans for some projects under what is known as the China-Pakistan Economic Corridor (CPEC).
The cooperation deal has created more than 70,000 jobs for Pakistanis and quickly resolved the country's chronic energy crisis. But investments from China had stopped because all major projects under CPEC will be complete by the end of this year.
Chinese and Pakistani officials say preparations are under way to launch the next phase of CPEC in coming weeks to construct nine special economic zones across Pakistan.
Beijing plans to relocate some of its industries by transferring technology to the new industrial zones to help Islamabad increase its exports to overcome its massive trade deficit and shore up cash reserves.
CPEC has "changed the image of Pakistan" and encouraged other countries to invest in the country, notes veteran opposition Senator Mushahid Hussain, who chairs the foreign affairs committee of the upper house of parliament. He praised China for being the only country to bring unprecedented, massive investments to Pakistan five years ago when other nations were reluctant to do so due to terrorism-related security concerns and political considerations.
https://www.washingtonpost.com/world/asia_pacific/pakistan-welcomes-saudi-crown-prince-with-hoopla-and-high-security/2019/02/17/c346b6a6-31f4-11e9-8781-763619f12cb4_story.html?utm_term=.2134852bc792
Saudi Arabia is the one powerful ally on which Pakistan has always been able to rely. The two countries signed a friendship treaty in 1951, just four years after Pakistan was founded as a Muslim homeland. Ever since then, the Saudi monarchy has come to its aid. During earthquakes and refugee influxes, periods of financial distress and diplomatic isolation, the Saudis have stepped up with loans, political support and free supplies of oil.
Millions of Pakistanis work in Saudi Arabia, sending home close to $5 billion in remittances each year. The monarchy has also built a majestic mosque in Islamabad, named after the late Saudi King Faisal, and has long supported seminaries and groups that abetted the rise of ultraconservative Sunni Islam here.
In the past several years, the relationship cooled over the issue of Yemen. Saudi Arabia intervened militarily in 2015 when Yemen’s president was toppled by the Houthi minority movement, and Pakistan remained neutral instead of contributing troops. But this week, Pakistani officials said Mohammed’s visit sent an important sign of revived amity between the two Islamic republics.
By Ismail Dilawar and Kamran Haider
https://www.bloomberg.com/news/articles/2019-02-17/saudi-crown-prince-arrives-in-pakistan-to-sign-investment-deals
Saudi Arabia’s Crown Prince Mohammed bin Salman said his country signed so-called memorandums of understanding worth $20 billion of investment in Pakistan.
“We are creating a great future for Saudi Arabia and Pakistan,” Prince Mohammed said at a reception by Prime Minister Imran Khan after the kingdom’s de facto ruler reached Islamabad on Sunday on a two-day trip. The two nations signed investments deals in energy and agriculture sector including setting up a $10 billion oil refinery in southwestern city of Gwadar.
Prince Mohammed’s investment plans may help premier Khan’s efforts to revive an economy hurt by widening current account and fiscal deficits. Saudi Arabia has already given a $3 billion loan to Pakistan, while the United Arab Emirates provided $1 billion as part of its $3 billion balance of payment support that helped south Asia’s second biggest economy avert a financial crisis.
The Saudi support comes as Pakistan has stalled in its negotiations with the International Monetary Fund over proposed reforms, though Finance Minister Asad Umar said this month the nation is close to signing a bailout package to help ease its balance-of-payments crisis and boost dwindling foreign reserves.
The Saudi “investment and infrastructure projects should provide a welcome supply-side boost” to the economy, said Bilal Khan, a senior economist at Standard Chartered Plc in Dubai. However, “addressing the country’s twin deficits will require fiscal and monetary policy action, likely under an IMF program.”
The visit comes as Khan was one of the few prominent foreign dignitaries who attended the Future Investment Initiative in Riyadh last year after it emerged that Jamal Khashoggi, a Saudi critic, was killed inside the kingdom’s consulate in Istanbul. Pakistan publicly supported Saudi Arabia in the wake of global outrage following Khashoggi’s murder.
While both nations have been long-time staunch allies, relations took a hit four years ago after Pakistan refused a Saudi request for support in the Yemen conflict. Saudi Arabia has also long been accused of funding and spreading extremist Islamic ideology across Pakistan.
Governor of the State Bank of Pakistan Tariq Bajwa has said the country has come out of the financial crisis with the help of friendly countries and the economy has been set on the right path.
Speaking at a private university in Lahore on Monday, he said uncertainty in the economy had ended. The government, he said, was on the right path and it was capable of meeting all economic challenges.
Take a look: ‘Tough measures are necessary to rescue the economy,’ says Hammad Azhar
The governor spoke about the current account deficit, which had hit the economy badly during the current financial year.
The current account deficit was the real cause of concern for the new government headed by Prime Minister Imran Khan. Mr Khan visited friendly countries like China, Saudi Arabia, the UAE, Malaysia and Turkey to seek investment and managed to get financial help to bridge the external deficit.
Mr Bajwa said a plan had been prepared to eliminate the current account deficit and the work in this regard was in progress. He said the deficit was the biggest hurdle for the country and the government was still negotiating with the International Monetary Fund for a package to minimise it.
He said the government had not crossed the limit for borrowing from the SBP. It had borrowed Rs3 trillion from the central bank and returned Rs2tr, he added.
Since the beginning of the new financial year, the government has been borrowing from the SBP for budgetary support, while it has retired loans taken from the scheduled banks. It has so far retired about $2.9tr to the scheduled banks.
The policy shows the government wants to keep the scheduled banks liquid so the private sector could borrow more from the banking system.
According to a latest SBP report, the private sector borrowing has more than doubled from July 1 to Feb 8 to Rs571 billion from Rs264bn in the same period of the last financial year.
The SBP governor said the cases involving Rs600bn were pending in banking courts. He said capacity building was being developed to deal with the huge number of pending cases and for their quick decisions.
He said the cases must be decided quickly so that the banks could use the money involved in litigation.
Mr Bajwa said the SBP had offered to bear expenses of training of judges to help the courts decide the pending cases urgently.
He said the policy to depreciate the rupee had been adopted to reduce the trade deficit, which was the main reason for high current account deficit.
https://seekingalpha.com/article/4313892-afc-asia-frontier-fund-2019-review-and-outlook-for-2020
https://storage.ning.com/topology/rest/1.0/file/get/4046529776?profile=original
Importantly, Asian frontier markets remain under-researched and this trend is continuing given the soft sentiment towards frontier markets. The table below shows the number of sell side analysts covering well-established blue-chip companies within our universe relative to larger emerging markets. In the current environment, many of these companies besides being under-researched are also now being ignored by a large set of investors due to the current sentiment towards frontier markets. The result is that there are a number of bargains available. Furthermore, in line with our policy of being on the ground for research, our team conducted visits in 2019 to Bangladesh, Cambodia, Iraq, Jordan, Kazakhstan, Mongolia, Myanmar, Oman, Pakistan, Sri Lanka, Uzbekistan, and Vietnam. Through this, our team carried out close to 200 one-to-one meetings with company management teams.
Sentiment towards Pakistan remained negative for most of 2019 and the fund rightly had a low weight to the country for most of the year. The Pakistan KSE100 Index had lost −29.5% in USD terms until the end of August 2019. However, this drawdown had factored in most of the negatives such as the currency depreciation, higher interest rates and slower economic growth. With the International Monetary Fund (IMF) deal coming through in the summer, sentiment began to change as it gave investors more confidence on anticipated reforms while the weakened currency and high interest rates brought down imports significantly, helping to lead to a large reduction in the current account deficit. In addition to this, on the fiscal side as well the government was able to reduce its primary deficit and the State Bank of Pakistan kept interest rates unchanged in its policy meetings in September and November 2019 after raising rates aggressively since the beginning of 2018.
With an improving macro environment, the fund began increasing its weight to Pakistan from October 2019 onward as we believe that earnings for most sectors are close to bottoming, if they haven’t already, and the State Bank of Pakistan could begin cutting interest rates from the second quarter of 2020. We therefore believe that cyclical stocks in the auto and cement sectors can do well over the next year as their valuations have corrected significantly over the past two years while their profit margins are also bottoming. The fund has increased its exposure to Pakistani auto and cement companies and this has already helped with performance as the KSE100 Index has rallied by 29% since the end of September 2019 making Pakistan one of the best performing markets globally in the past three months. The fund’s Pakistani holdings have returned 31% in the same time period.
The important point to remember is Pakistan has a population of 200 mln people with very favorable demographics while the stock exchange offers a number of well-established consumption focused names in the auto, consumer staples and pharmaceutical space and more importantly valuations remain very attractive despite the recent run-up in the market.
https://st5.ning.com/topology/rest/1.0/file/get/4046532410?profile=original