KTrade Annual Investor Summit Investing in 2022: Economy has come under pressure due to fiscal imbalances

KARACHI: The country’s economy was under pressure from the external account and fiscal imbalances, the consequent weakening of currency and soaring inflation, according to the KASB KTrade Securities Investment Outlook presented at the “KTrade Annual Investor Summit Investing in 2022”, on Thursday.

The outlook said that after a considerable signs of economic overheating, the government and the central bank were compelled to cut short the prevalent accommodative policies and make a structural shift towards stabilisation.

Pakistan’s external accounts have been under a considerable pressure since May 21 amid the onset of the commodity up-cycle, it said.

Elevated commodity prices in tandem with rising economic activity pushed Pakistan’s import bill to record-high levels.

Citing PBS, Pakistan’s trade deficit has more than doubled to $20.6bn (+112 percent YoY). While remittances continue to remain high, Pakistan’s CAD is projected to surge to 5.0 percent of GDP in the current fiscal year, it added.

The external account leakages, coupled with debt servicing obligations, have caused SBP’s foreign reserves balance to fall by over 20 percent in a span of three months. The import cover, in turn, has declined to 2.5 months. This pressure resulted in the Pak rupee losing over 10 percent of its value FYTD.

Inflationary pressures have rapidly picked up in the past few months in Pakistan with CPI inflation touching double-digits in Nov 21. The global commodity up-cycle has trickled into Pakistan’s economy as the prices of several constituents in the inflation basket have surged fast.

The situation was further exacerbated by domestic supply constraints and revised fuel and energy tariffs. At current pace, CPI inflation is projected to average 11 percent in FY 22, comfortably crossing SBP’s target of 7 percent to 9 percent.

Fiscal consolidation is a priority of the federal government with steps highlighted to ensure compliance with the IMF program. These steps also ensure policy harmonization with the shift in the monetary stance. The finance ministry has already earmarked Rs600 billion in fiscal adjustments, of which Rs400 billion are withdrawal of tax exemptions and Rs200 billion are PSDP spending reductions, the outlook said.

The projected hike in interest rates and the recent spell of inflationary pressures are expected to reduce the purchasing power of individuals. Moreover, the planned fiscal consolidation, which aims to increase taxation and reduce development spending, has the potential to materially impact demand growth of various cyclical sectors.

The coronavirus pandemic is relatively under control in Pakistan with infection rates falling below 1 percent. Nearly half of the adult population are fully vaccinated while over 135 million doses have been administered.

Consequently, the central bank believes that there are limited risks to COVID-led disruptions in the economy. As such, the SBP felt confident in implementing stabilization measures without the risks of significant disruptions to the economy.

Circular debt control is the top priority of the federal government and the IMF-backed economic program. Significant steps have been taken to ensure the debt balance remains under control, including hiking of the energy tariffs, clearance of overdue receivables, revising down the IPPs tariffs, and earmarking over Rs100 billion to enhance the transmission network.

With recoveries improving, we believe stocks under the cash-starved energy chain have the potential to perform. The KSE-100 index is trading at multiples of (5.3x) a 50 percent discount to its 10 year historical mean of 8.0x.

Moreover, when compared to past stabilization cycles, the KSE-100 index is trading at a 42 percent discount to mean multiples witnessed between FY 9 and FY 13 and a 35 percent discount to multiples witnessed during the recent stabilization cycle between FY 19 and FY 20, it said.

Copyright Business Recorder, 2021s