The following are excerpts from SBP's first quarterly report for 2015-16 - The State of Economy:
Overview: The on-going slump in global commodity prices continued to support Pakistan's external sector. Oil prices posted a fresh decline of 25 percent during July-September 2015, and averaged 51 percent lower than the same period last year. This not only helped reduce the country's import bill, but also contributed to a much smaller deficit in the services account (Table 5.1). As a result, the current account posted a lower deficit than last year, which was comfortably financed via Eurobond issuance; FDI inflows; and commercial borrowings by the government. The release of 8th tranche of the IMF program further strengthened external position. As a result, the country's total FX reserves increased by US $1.4 billion during the quarter, to surpass US $20 billion - first time ever, at end-September 2015.
===================================================
Table 5.1: Summary of Pakistan's External Sector
===================================================
million US$
===================================================
Q1-FY15 Q1-FY16 Abs
change
===================================================
Current account balance -1,631 -351 1,280
Trade balance -6,054 -4,700 1,354
Exports 5,959 5,321 -638
Imports 12,013 10,021 -1,992
Oil imports 4,476 2,582 -1,894
Services balance -658 -177 481
CSF 735 713 -22
Freight deficit -766 -395 370
Worker remittances 4,775 4,967 192
FDI in Pakistan 201 248 47
Portfolio inv. in Pakistan 133 390 257
Euro bond 0 500 500
FX reserves (end-period) 13,511 20,074 6,563
===================================================
The PKR depreciated by 2.6 percent against the US Dollar during Q1-FY16. This depreciation mainly represents turmoil in Asian stocks and currency markets during August: Yuan's reference rate was reduced by 2.7 percent (Figure 5.1). In relative terms, the PKR depreciated marginally as currencies of our major trading partners like the EU, Japan and the UK, weakened vis-à-vis the US Dollar during the quarter. More importantly, most Asian currencies have plummeted in real terms that may pose concern for Pakistan's trade competitiveness (Figure 5.2).
(i) Non-oil trade deficit has reached 7-year high of over $3 billion in the first quarter (Figure 5.3). Last time this deficit touched $3 billion a quarter, was early 2008 when global prices were booming and our importers hurried purchases in an anticipation of further increase in prices. This time, however, the reason is different: it is the decline in non-oil exports (6th quarter in a row) that has caused non-oil deficit to touch this level.
Non-oil imports have posted a YoY decline of 1.7 percent over last year;
(ii) FDI inflows, though remained higher than last year, are still low in volume (Table 5.2).
==============================================
Table 5.2: FDI Inflows
==============================================
million US$
==============================================
Q1-FY15 Q1-FY16
==============================================
Total FDI inflows 201 248
FDI from China 2 186
FDI excl. China 199 62
==============================================
The current account benefited from the fact that price of commodities which Pakistan imports (like oil, metals, fertilisers and palm oil) fell much steeply than the price of commodities which Pakistan exports (like rice and cotton) (Figure 5.4). Therefore, the decline in imports was much stronger than the decline in exports during Q1-FY16. What concerns us is the fact that while the decline in imports is explained almost entirely by price effect, the decline in exports was caused by both lower prices and quantum (Section 5.4). -- Average share in total exports during FY14 and FY15 Source: Eurostat: In the US market, the overall import demand for textile and apparel increased during July-September 2015; however, Pakistan has not been able to firm up its exports (Table 5.6 and 5.7). Source: OTEXA As far as cement is concerned, some decline in exports was expected. South Africa - the 2nd largest buyer of Pakistani cement, had imposed anti-dumping duty on different Pakistani cement companies (ranging from 14.3 percent to 77.1 percent) in May 2015. This decision was taken at a time when Afghanistan, our largest buyer, had already lowered the overall demand for cement because of political instability and deteriorating law and order condition. Imports from Pakistan in this market suffered also because of influx of cheaper imports from Iran (especially in Kandahar region near the Iranian border). Iran enjoys a much lower production cost than Pakistan, and also benefits from proximity to many western and southern parts of Afghanistan.
Going forward, we expect remittances to comfortably surpass the target set in the Annual Plan for FY16. However, the pace of increase is likely to be much modest compared to last year. Besides seasonal factor, we believe that some slowdown may be driven by the government's decision to cut effective rebate on remittances with effect from July 1, 2015.
Another factor that might weaken remittance inflow is the possible decline in public spending in the GCC that constituted the bulk of increase in remittances last year. In the oil and gas sector, some impact of oil slump is already visible in layoffs and salary cuts. Up till now, Pakistanis are largely unaffected, since most of them work in construction and services sectors; number of Pakistani migrants into this region is still following an upward trend. This is because GCC governments have been able to sustain their fiscal spending with the help of FX reserves and funds mobilized via bond issuances. However, a persistent weakness in oil prices would necessitate heavy fiscal adjustments, especially in those countries where breakeven oil price is much high (like Bahrain, Saudi Arabia, Oman and Yemen).
The decline in FDI was attributed to divestment from Pakistan's petro-chemical sector. This divestment mainly represents the decision of California-based Chevron Corporation, to dispose-off its downstream petroleum assets (like lubricants, fuel stations, etc.) from Pakistan, Egypt and Australia. With 538 retail fuel outlets across Pakistan, and a market size of 5 percent, Chevron Pakistan (Caltex) will now be operated by Total Parco.
For the remaining year, more FDI is expected from China under the CPEC: the government has estimated disbursements of Rs 207 billion (around US $2.1 billion) from China in 2015-16 budget; power and construction would be the prime recipients. Other than CPEC, no major activity is in pipeline: uncertainty in the international oil market, and the squeeze in institutional liquidity, has stalled growth in global FDI. Only if the government expedites its privatisation process - and offer its stakes to foreign investors, we should expect more FDI inflows before June.
The situation in global equity market was not helpful either. Many emerging economies struggled with turbulent capital markets during the period, as investors turned wary of a slowdown in China and a possible hike in Federal funds rate (Figure 5.5). August was particularly painful, when Chinese stocks tumbled by 13 percent; Hong Kong by 12 percent; and Singapore and Vietnam by 9 percent each.
Although Pakistan's largest bourse had, for long, been insulated from developments in global markets, this time it could not resist the shock: KSE lost nearly 3 percent during the month of August. Both local and foreign investors cut their positions in response to a near-crash in Chinese stocks (Figure 5.6). In dollar terms, there was a net outflow of US $85 million in SCRA during the month of August.
September turned out to be a better month for most Asian markets, but in case of Pakistan, it was no good. In fact, KSE was the worst-performing market in Asia during the month with nearly 9 percent decline in valuations. This was an outcome of rumours prevailing in the market regarding anti-corruption crackdown on major stock brokers. Investors were particularly flustered with regulatory action against certain brokers for not maintaining a clear segregation of own and clients' accounts. Foreign investors pulled away nearly US $46.7 million (or Rs 4.9 billion) from KSE during the month. It was only after the clarification from SECP in the last week of September (strongly dismissing reference of certain cases to NAB) that bulls returned to KSE: the market gained 6.1 percent in the subsequent month.
Going forward, inflows under the portfolio investment would be influenced primarily by developments in the global bond and stocks markets. For instance, we expect the government to wait for better spreads, before it could mobilize another US $500 million via sovereign issuance to meet budgetary targets. On a positive note, Morgan Stanley Capital International (MSCI) has put Pakistan in its review list for reclassification under 'Emerging Markets'. However, this process will not be completed before June 2016, which means gains from this reclassification would be realised from FY17 onwards.
==============================================================================
Table 5.3: Changein Export Values-Quantum and Price Impact
==============================================================================
million US$
==============================================================================
Percent Q1-FY15 Q1-FY16
Share in-----------------------------------------------------
Exports * Quantity Price Value Quantity Price Value
==============================================================================
Basmati rice 2.8 -21.2 20.6 -0.6 -23.0 -12.0 -35.1
------------------------------------------------------------------------------
Non-basmati
------------------------------------------------------------------------------
rice 5.8 -31.3 -10.0 -41.3 59.0 -49.7 9.3
Fish 1.5 -12.6 6.1 -6.5 -8.2 -5.4 -13.6
Fruits 1.8 -22.1 4.5 -17.6 -21.3 8.0 -13.3
Sugar 1.3 41.8 -1.1 40.8 -60.5 -0.4 -60.9
Meat 1.0 -15.4 0.8 -14.6 13.1 8.7 21.7
Raw cotton 0.7 -14.2 -1.5 -15.7 17.2 -11.7 5.5
Cotton yarn 7.9 -98.2 -26.2 -124.4 -71.9 -13.2 -85.2
Cotton fabric 10.7 -177.3 80.5 -96.7 -45.1 -24.6 -69.7
Knitwear 9.7 -9.1 70.0 60.9 23.5 -21.7 1.8
Bed-wear 8.7 -4.4 -13.2 -17.7 -44.2 1.4 -42.8
Towels 3.2 0.4 7.6 8.0 28.6 -4.8 23.8
Garments 8.2 22.4 -15.6 6.9 -27.5 55.0 27.4
------------------------------------------------------------------------------
Synthetic
------------------------------------------------------------------------------
textiles 1.5 -19.8 25.2 5.3 -10.8 -6.9 -17.7
POL 2.7 -7.7 0.4 -7.2 -0.6 -8.7 -9.3
Footballs 0.7 1.3 3.5 4.9 4.5 -5.2 -0.7
Leather 2.1 -20.4 14.8 -5.6 -39.5 13.0 -26.5
------------------------------------------------------------------------------
Leather
------------------------------------------------------------------------------
garments 1.6 -21.3 14.6 -6.8 -16.3 -4.0 -20.2
Plastic 1.3 -18.9 -3.7 -22.7 -9.1 0.3 -8.9
Cement 1.9 -6.4 1.6 -4.8 -52.4 -2.6 -55.0
==============================================================================
Most of the decline was seen in case of textiles, where exports fell by 5.6 percent YoY during Q1-FY16. As mentioned before, shrinking global demand has hurt exports. More specifically, EU's overall import of textile and clothing declined sharply during July-September FY16. In case of clothing, all major countries faced export declines in the EU market, except Pakistan and Bangladesh (Table 5.4 and 5.5).
==========================================================
Table 5.4: EU Import of Clothing from Major Countries (July-Sep)
value in billion US$; growth and share in percent
==========================================================
Value Growth Share
----------------------------------------------------------
FY15 FY16 FY15 FY16 FY15 FY16
==========================================================
China 13.42 11.47 6.3 -14.5 45.3 43.0
Bangladesh 3.99 4.10 5.5 2.6 13.5 15.3
Indonesia 0.47 0.39 3.3 -15.7 1.6 1.5
India 1.55 1.39 11.7 -10.7 5.2 5.2
Pakistan 0.66 0.69 30.2 4.1 2.2 2.6
Vietnam 0.99 0.98 28.9 -0.7 3.3 3.7
Turkey 3.23 2.86 6.2 -11.5 10.9 10.7
Total 29.60 26.71 8.5 -9.8 82.1 81.9
==========================================================
===============================================================
Table 5.5: EU Import of Home Textile from Major Countries (Jul-Sep)
value in billion US$; growth and share in percent
===============================================================
Value Growth Share
FY15 FY16 FY15 FY16 FY15 FY16
===============================================================
China 1,228.0 1,137.4 15.5 -7.4 41.5 42.5
Bangladesh 107.2 84.1 -10.3 -21.5 3.6 3.1
Indonesia 16.0 10.4 4.8 -34.8 0.5 0.4
India 345.1 304.4 6.9 -11.8 11.7 11.4
Pakistan 431.4 409.4 25.2 -5.1 14.6 15.3
Vietnam 62.9 56.3 16.6 -10.5 2.1 2.1
Turkey 369.7 316.9 2.2 -14.3 12.5 11.8
Total 2,957.0 2,674.8 11.9 -9.5 86.6 86.7
===============================================================
================================================================
Table 5.6: US import of Non-Apparel from Major Countries (Jul-Sep)
value in billion US$; growth and share in percent
================================================================
Value Growth Share
FY15 FY16 FY15 FY16 FY15 FY16
================================================================
China 3,271.4 3,568.8 -2.5 9.1 48.5 49.7
Bangladesh 35.1 43.1 -0.2 22.7 0.5 0.6
India 857.2 951.6 12.0 11.0 12.7 13.3
Indonesia 52.2 57.1 -14.9 9.4 0.8 0.8
Pakistan 379.6 396.6 -2.1 4.5 5.6 5.5
Vietnam 173.5 185.0 12.8 6.7 2.6 2.6
Cambodia 7.1 17.0 -17.0 140.8 0.1 0.2
Total 6,740.9 7,178.3 1.5 6.5 70.8 72.7
================================================================
===============================================================
Table 5.7: US Import of Apparel from Major Countries (Jul-Sep)
value in billion US$; growth and share in percent
===============================================================
Value Growth Share
FY15 FY16 FY15 FY16 FY15 FY16
===============================================================
China 10.0 10.7 -0.1 6.3 41.0 41.3
Bangladesh 1.3 1.5 -3.4 10.0 5.4 5.7
India 0.8 0.9 5.1 5.6 3.4 3.4
Indonesia 1.3 1.3 -0.7 1.3 5.1 4.9
Pakistan 0.4 0.4 -4.2 -3.8 1.7 1.5
Vietnam 2.7 3.1 15.9 14.3 11.1 12.0
Cambodia 0.7 0.7 -6.1 7.6 2.7 2.8
Total 24.4 25.8 2.7 5.6 70.4 71.6
===============================================================
===============================================================
Table 5.8: US Import of Cotton Apparel from Major Countries (Jul-Sep)
value in billion US$; growth and share in percent
===============================================================
Value Growth Share
===============================================================
FY15 FY16 FY15 FY16 FY15 FY16
===============================================================
China 3.9 3.8 -10.0 -0.7 33.2 33.1
Bangladesh 1.0 1.1 -5.0 7.5 8.7 9.4
India 0.6 0.6 2.3 6.0 4.9 5.2
Indonesia 0.6 0.6 -6.1 -6.4 5.5 5.2
Pakistan 0.4 0.4 -6.4 -4.4 3.2 3.1
Vietnam 1.2 1.2 10.1 2.7 10.3 10.7
Cambodia 0.4 0.4 -5.8 -6.2 3.6 3.4
Total 11.6 11.6 -3.5 -0.3 69.4 70.1
===============================================================
==============================================================
Table 5.9: Import Performance during Jul-Sep
value in million US$; growth in percent
==============================================================
Value YoY Growth
FY14 FY15 FY16 FY15 FY16
==============================================================
Food 1,042.0 1,430.1 1,198.9 37.2 -16.2
Machinery 1,434.5 1,765.0 1,707.0 23.0 -3.3
Transport 625.4 619.3 637.7 -1.0 3.0
Petroleum 3,984.5 3,927.8 2,251.1 -1.4 -42.7
Textile 524.2 635.5 628.3 21.2 -1.1
Chemical 1,556.6 1,860.4 1,781.2 19.5 -4.3
Metal 742.3 905.9 896.3 22.0 -1.1
Rubber 92.7 118.1 127.3 27.5 7.7
Paper 86.9 126.5 121.3 45.6 -4.2
Other items 1,088.3 1,085.2 1,285.1 -0.3 18.4
Totals 11,177.4 12,473.8 10,634.4 11.6 -14.7
==============================================================
The demand for petroleum remained strong in the first quarter, as evident in higher sales of POL products in July-September 2015 (up 2.7 percent YoY). Within petroleum products, the demand for petrol was the strongest: according to Oil Companies Advisory Council (OCAC), petrol sales showed a 13-year high YoY growth of 38.7 percent in July-September 2015. This increase can be traced to two factors: first, average petrol prices in July-September 2015 were nearly 30 percent lower than the average petrol prices during July-September 2014 (anecdotal evidence suggests that some CNG consumers have also shifted to using petrol due to low prices). And second, car sales were phenomenally higher in July-September 2015, compared to last year (posting a growth of 61 percent YoY).
Within the metal group, the demand for steel increased further on the back of on-going development projects related to power and infrastructure: PSDP outlay has posted a sharp increase of 57.4 percent YoY during Q1-FY16. Private construction activity has also remained vibrant. However, local steel producers claim that a large chunk of imports is unwarranted, as they have the capacity to meet most of the country's steel demand. They particularly blame dumping from China for pricing them out of the market.
Recall here that Pakistan's steel industry is not the only complainant: over the past few months, steel producers all across India, UK, Brazil, Indonesia and Malaysia have been grumbling against dumping from China, which is sitting on massive inventory of raw-material and finished products. Large steel makers in Pakistan have filed petitions with National Tariff Commission (NTC), to impose anti-dumping duty on selected products (eg, cold rolled coils and galvanised steel sheets). Meanwhile, some firms have also claimed that large quantities of flat steel are being imported into the country under the HS code of alloy, which enjoys duty-free status from China under the Free Trade Agreement. The NTC and Customs department are looking into these matters, to ensure a level-playing field to local producers, and curb imports.
Within food, quantum import of palm oil increased during July-September 2015. Taking benefit of 80-month low global prices, local traders are importing mostly ready-to-sell edible oil into the country. Local producers also edged up their production levels with the help of inventories built over the past few months. Analysts are divided over the path of palm oil prices in coming months: while some believe softer trend would prevail, others give much weight to possible damage to yields as a result of drought-like conditions in East Asia, and forest fires in Indonesia that have caused massive haze across the region.
Transport sector imports posted a growth of 3.0 percent over last year. Highest growth was seen in car segment (both CKD and CBUs), as domestic sales firmed up. This trend has puzzled many who believed that continuous fall in agriculture commodity prices and incomes would suppress car purchases. Auto assemblers attribute higher sales to low inflation and interest rates, relative improvement in law and order condition, and a pick-up in auto financing by commercial banks. Continuation of Apna Rozgar scheme of Punjab government was another contributing factor in strengthening demand for certain brands.
Import of fertiliser posted an increase of 27.2 percent in Q1-FY16, compared with the 33 percent rise in the same period last year. Despite lower off-take and buffer stocks availability, ECC approved the import of 150,000 tons of urea by TCP. This decision was taken to overcome any expected shortage during the rabi 2015-16: the domestic industry might be unable to produce sufficient quantities due to possible gas curtailments in winters (for detail see chapter 2).
All other items, which are not classified elsewhere, posted an increase of 18.4 percent YoY (or US $199.8 million) in July-September 2015. This increase was driven by import of LNG worth US $121.6 million during the period.
For the remaining quarters of the year, we do not expect a major shift in trend in trade values, from what we have seen in the first quarter. Price of oil and other commodities have declined afresh post September 2015, and presently no stability is in sight. Imports have fallen by another 7.4 YoY in October 2015, whereas exports have posted a drop of 11.4 percent. The government has imposed additional regulatory duty on a large number of consumer goods, cotton and cotton yarn, which may further squeeze our import bill. Meanwhile, certain measures have been announced to boost exports, like an increase in credit subsidy for textile sector. Nonetheless, the dominating factor would be how the US economy embraces the increase in federal funds rate (which is due by end-December), and its impact on the global currency market: the demand from EU hinges much on the Dollar-Euro parity. At present, we expect full-year trade values for FY16 to remain less than both the last year, as well as target set for the year.