Thursday, January 31, 2019

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."

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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nayyer ali said...

The devaluation of PKR is the main driver of the reduction in the current account deficit. It is already having an impact on slowing the growth of imports. Pakistani exports should hopefully become more competitive and export growth restarted. At 140 to USD, the PKR is around fair value, but East Asia developed its export industries on the back of undervalued currencies, a strategy Pakistan should copy. Keeping the currency weak suppresses imports while boosting exports and promotes investment over consumption.
Another factor in estimates of the budget and current account deficits is that they are based on an outdated GDP measurement. GDP has not been rebased since 2006, and is likely 15-20% underestimated, a more accurate GDP would reduce t he budget deficit and current account account deficits as percent of GDP to more manageable numbers. Back in 2017 the government claimed they were in the process of rebasing, with the target to complete by end of 2018. Don't know where that stands now.

Riaz Haq said...

"#PMImranKhan will be best ruler for #Pakistan Since #QuaideAzam MA Jinnah" Says #UK-Based analyst Adam Garrie At Eurasia Future. #PTI

Anonymous said...

Yes a late bloomer :)

Maybe he will dismantle the feudal system too like Nehru did in the 1950s..der aye durust aye

Ahmad said...

Najam Sethi says $12 billion from Gulf Arabs is payment directed by US for Pakistan's help in arranging deal with the Taliban:

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.

Rizwan said...

@Ahmed. It is well known Najam Sethi is not a fan of Imran Khan. He would hate to give Imran Khan any credit for any accomplishment. He is giving this accomplishment of Imran Khan a spin in order to minimize his achievement. In other words, he would much rather give the credit to US influence than to Imran Khan's influence. In addition, Mr. Sethi's timeline is way off. Saudi Arabia promised help way before Trump asked Pakistan's help in December. Qatar is not on good terms with the US and is unlikely to listen to the US at this time. This leaves only Abu Dhabi, which is as likely to listen to Saudi Arabia as to the US, if they can't make their own decision.. As far as "---- 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." I haven't heard a more stupid statement regarding Pakistan's dealings with the IMF. The actual situation is the complete opposite. The US made it quite clear it was against IMF helping Pakistan and was instrumental in imposing the harsh conditions IMF wanted to impose. That is why Pakistan sought alternate sources of funding, and was successful. If IMF softens its conditions for the bailout, it will be because it, ie, the UDS, failed in preventing Pakistan from obtaining alternate sources of funding.

Rashid A. said...

Now it is clear that Lindsay Graham was not on a solo flight. He was speaking of Free Trade Agreement with Pakistan to ensure Pakistan’s cooperation and help Zalmay Khalilzad clinch a deal.

First America bought Pakistani dictator’s cooperation with promise of “aid” to go into Afghanistan and now it is offering “aid”, to extricate itself from this mess.

As Sethi says, gone are the days when Taliban were terrorists and Pakistan was a double dealing little guy.

This seems to be Trump’s pragmatic side. But the establishment side (CIA) is still singing the old song.

And alarm bells and sirens are blaring in Bharat Mata!

Anonymous said...

As part of eBRI initiative Pakistan is being offered one of the first 5G network sites by Chinese brothers. Karachi is most likely candidate. Some local vested interests are trying to scuttle but China has launched a pitch in our press to get public support.

Nayyer Ali said...

I wouldnt get carried away with this minor point that the Taliban and US supposedly agreed to. In theory the Taliban claimed that they would not let other terrorist groups use Afghanistan in the future, with the US conceding that in the context of a final deal it would eventually pull out its combat forces. But that does not bind the US from aiding the Afghan government or keeping CIA assets in country with drones, which would be enough to hold the Taliban at bay. In addition, part of any deal would require the Afghan govt and the Taliban to negotiate peace. What would those terms be? At a minimum the Taliban would have to cease-fire for a prolonged period of time to prove they are committed to ending the civil war. How many votes would the Taliban win in an election? Opinion surveys show they have less than 5% support among the people (and all of that is confined to Pashtuns).
In addition the US House and Senate both voted overwhelmingly in opposition to any withdrawal, and so none is going to take place, Trump doesnt have the attention span to carry out such a policy, much less negotiate a final deal the Afghan govt agrees to in the next 12 months (after which US elections will paralyze his administration from major actions).
Finally, even a US withdrawal would not doom the Afghans. The Afghan communists easily held off the Mujahideen from the Soviet withdrawal in 1989 till 1992 when they lost their Soviet aid with the collapse of the Soviet Union. The US is not going to collapse, and will continue to provide whatever aid needed to keep the Taliban out of Kabul. Finally, if the Taliban violated a cease-fire and tried an all out assault, US B-52's from Qatar and Diego Garcia would chop them to pieces. Don't forget the Taliban were utterly wiped out in 2001 by B-52's, CIA and Special Forces, and the ragtag Northern Alliance militia, no major US ground forces were involved in that fight.

Riaz Haq said...

Debt concerns relating to the China-Pakistan Economic Corridor (CPEC) projects will begin to recede on the back of improving transparency while political risks have been diminished, says Fitch Solutions.

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.

Anonymous said...

Riaz sab, how much money you suggest ordinary Pakistanis like me should invest in Pakistan Banao certificates. The yeilds are very attractive. What do you feel about risks?

Riaz Haq said...

Anon: "The yeilds are very attractive. What do you feel about risks?"

Pakistan's government debt is currently rated several notches below investment grade by international rating agencies.

Pakistan's bonds are therefore equivalent to high-yield corporate bonds traded on international debt markets. Such bonds fetch in excess of 7% annual return. If you want high return , you can invest in these bonds.

The only reason you should buy Pakistan Banao Certificates (PBC) is to help your home country.

Riaz Haq said...

It’s time to bring #American troops home from #Afghanistan. More than 17 years after 911, #UnitedStates military is engaged in counterterrorism in 80 nations on six continents. #America's price tag will reach $5.9 trillion by the end of fiscal year 2019

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.

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.

Riaz Haq said...

#Pakistan’s #trade #deficit down 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. #Exports: $13.23 billion, #Imports $ 32.49 billion.

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.

Riaz Haq said...

#Pakistan set to secure funding from #SaudiArabia and #IMF. Ex US State Dept @vali_nasr :“Any #Afghan settlement needs #Pakistan. Pakistan is playing ball with the US and that means Pakistan is in a position to make demands as well.” via @financialtimes

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.

Riaz Haq said...

JPMorgan, CLSA vie for $2 billion #Pakistan #power sale of National Power Parks Management Co., state-owned firm that owns and runs #LNG-fired 1,230-megawatt Haveli Bahadur Shah plant and the 1,223-megawatt Balloki plant. #Privatization via @technology

JPMorgan Chase & Co., CLSA and Credit Suisse Group AG are among foreign banks pitching for a role on Pakistan’s biggest privatization in over a decade, which could raise around $2 billion, people with knowledge of the matter said.

The government’s sale of two LNG-fired power plants could draw interest from Chinese and Middle Eastern investors, one of the people said, asking not to be identified because the information is private. Pakistan received about 10 bids from groups seeking a financial advisory role and expects to pick banks by the end of March, another person said.

Citigroup Inc. and Standard Chartered Plc made their own separate proposals, while Lazard Ltd. is pitching with Pakistani brokerage Next Capital Ltd., the people said.

Prime Minister Imran Khan is pursuing a divestment that would rank as one of the biggest-ever mergers and acquisitions in Pakistan, as he seeks to bridge a financing gap of more than $12 billion and avoid a balance-of-payments crisis. The nation has secured loans from Saudi Arabia and the United Arab Emirates and is close to a loan agreement with the International Monetary Fund.

Privatization Push
Pakistan is selling National Power Parks Management Co., the state-owned firm that owns and runs the 1,230-megawatt Haveli Bahadur Shah plant and the 1,223-megawatt Balloki plant. Both plants started operations in the past two years. The government has said it aims to complete the privatization of the power assets in the financial year ending June 30.

The sale would rank as Pakistan’s largest privatization since 2006, when Emirates Telecommunications Group Co. bought a $2.6 billion stake in Pakistan Telecommunication Co. in the country’s biggest-ever M&A transaction, data compiled by Bloomberg show. The power plant divestment is set to become Pakistan’s largest privatization in the energy sector, according to government figures dating back to 1991.

Pak Brunei Investment Co. is also pitching for a role on the power plant divestments in a group with Zeeruk International Pvt, the people said. BMA Capital Management Ltd. and CPCS Transcom Ltd. have submitted a joint proposal, according to Salman Virani, head of investment banking at BMA Capital.

Habib Bank Ltd. and China International Capital Corp. are partnering with JPMorgan, a representative for Habib Bank said in response to Bloomberg queries. CLSA submitted a joint proposal with Bank Alfalah Ltd. and their local brokerage venture, while Credit Suisse is pitching together with Pakistan’s Elixir Securities Ltd., the people said.

A representative for the Pakistan’s Privatisation Commission said the government has no comment. Representatives for CICC, Citigroup, CLSA, Credit Suisse, JPMorgan, Standard Chartered, Elixir Securities and Next Capital also declined to comment. Representatives for Lazard, Bank Alfalah, Pak Brunei and Zeeruk didn’t immediately respond to queries.

Riaz Haq said...

#China Giving #Pakistan $3.5 Billion in #Loans, #Grants. #Beijing will soon deposit $2.5 billion in the State Bank of Pakistan (SBP), raising to $4.5 billion the total amount in commercial loans China has given Pakistan this fiscal year. #CPEC

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.

Riaz Haq said...

#SaudiCrownPrince #MBSinPakistan said $20 billion investment was only “first phase” of a deepening collaboration and added that “we cannot say no to Pakistan . . . We are creating a great future for #SaudiArabia and #Pakistan.”

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.