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Economic Update

all about economy

382 replies to this topic

#1
Mansoor

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    Economics: Deflation in perishable food items keeps inflation lower side…

    Synopsis…
    • Monthly CPI recorded at 6.93% YoY as compared to 7.7% YoY was recorded in the same period last year. However, on MoM basis, CPI inflation witnessed a decline of 0.39% as against an increase of 0.4% in the previous month.
    • Food items, especially perishable food items have shown a deflation of 10.8% YoY and Housing, Water, Electricity, Gas & Fuels were the major drivers which drag down the overall inflation. Whereas, Clothing & Footwear and Furnishing & Household Equipment Maintenance weremajor heads whose prices witnessed an increase of14.51% and 13.4% respectively.
    • We expect another dip of 50-100bps in discount rate maybe expected in upcoming monetary policy. Diminishing foreign currency reserves due to weak external in flows would be a key risk for the economy.

    Headline inflation recorded at 6.93% YoY…
    The Pakistan Bureau of Statistics (PBS) has released the inflation numbers for the month of Nov’ 2012. Headline inflation (CPI) has registered an increase of 6.93% YoY in the month of Nov’ 2012 as compared to CPI 7.7% YoY was recorded in the same period last year. On sequential basis, CPI inflation witnessed a decline of 0.39% in Nov’ 2012 as compared to an increase of 0.40% in previous month.

    Moreover, average inflation stood at 8.39% YoY in the first five months of FY13 as against 11.10% was recorded in the last year. However, CPI (NFNE) primarily constituted by nonfood and non-energy also showed a declining trend as it clocks at 9.7% YoY (0.2% MoM) in Nov’ 2012 as against10.1% YoY in the previous month.

    Deflation in perishable food items and gas were major drivers…
    Deflation in perishable food items and gas prices kept inflation lower side as prices of perishable food items which constitute a weight of 4.99% of total CPI basket showed a declined of 10.8% YoY. Onion, Tomatoes and Sugar were main food items whose prices declined by 37%, 42% and 19%. In addition to this, another support came from lower gas price which restricted overall inflation growth as its price declined by 42% YoY. Whereas, Clothing & Footwear and Furnishing & Household Equipment Maintenance were major heads whose prices witnessed an increase of 14.51% and 13.4% respectively.

    Another cut of 50bps may be expected in discount rate…
    Another cut of 50-100bps in discount rate may be expected in upcoming monetary policy on account of lower inflation (full year inflation target of 9.5% for FY13). Diminishing foreign currency reserves due to weak external inflows, higher import, payments to IMF and non materialization of target receipts such as 3G license fees and payment from Etisalat would threat economy going forward.
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    #2
    Mansoor

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    Challenges for the new government
    Real GDP growth of Pakistan has averaged less than 3.5% in the last three years (FY10‐FY12),
    considerably lower than the boom years’ (FY04‐FY07) average GDP growth of 7%+. Kick starting the
    growth momentum and investor confidence in the presence of 1) achieving sustainable political
    stability, 2) tackling acute energy shortages, 3) funding the twin deficits and budgetary borrowing, 4)
    improving governance, 5) reinitiating the reform process and attracting foreign direct investment
    (FDI) – leveraging the strengths of Pakistan, and 6) developing human capital (education, specifically
    technical training) sum up some of the near to long term economic challenges and costs which the
    incoming government would be facing from day one. Furthermore, we would like to emphasize that
    Pakistan needs to leverage the abundance of resources and talent available in the country alongside
    a strict regime of good governance.

    Dealing with the economic slowdown: In our view, Pakistan requires a three pronged strategy via I)
    public sector platform involving infrastructure (power, roads and other civic amenities), leveraging
    the population by focusing on developing human capital and improving governance, II) private sector
    platform involving public‐private partnerships and joint ventures (JVs) (e.g. trade, tourism, mining)
    and III) government debt/equity swap – reinitiating privatization programs to boost activities that can
    specifically increase production and employment generation in the economy.


    I) Public Sector Platform
    Improving Infrastructure: Since a modern economy cannot run without adequate infrastructure, we
    believe the single biggest structural problem which is retarding the growth of the economy is the
    shortage of electricity. The power sector is also consuming sizable amounts of public sector money as
    government revenues continue to be recklessly pumped into this sector. In this regard, the power
    sector on average has accounted for the most, consuming 69% of the total subsidies share since
    FY00. The amount of subsidies to the power sector in the last five years has been PkR1.23tn, placing
    a significant burden on the economy. We would like to highlight that subsidies to the power sector,
    also extended to cover both technical and non‐technical losses, largely accounted for the fuel price
    differential where the market price of power generation (cost of crude oil) was not passed on to the
    consumers (the genesis of the stubborn circular debt issue).

    Single biggest bottleneck: The power sector crisis, in our view, should be tackled to ease distress in
    the economy through a series of short‐term to long‐term measures via. 1) reducing the gap between
    the billed amount and the cost of generation through tariff hikes, 2) immediately utilizing furnace oil
    (FO) based idle capacity in the system (negative on the BoP profile), 3) transferring FO supply from
    inefficient WAPDA units to relatively efficient IPPs and 4) convert or set up power plants to run on
    coal – one time cost of technology today.

    Higher tariffs: The current cost of generating electricity is about PkR21/unit (avg.) for furnace oil and
    diesel based generation, compared with the current average price of PkR15.07/unit for the general
    supply tariff (for consumption exceeding 700 units). That being said, we have estimated subsidies to
    the power sector at PkR4.90/unit (FY12) while the total cost to produce electricity comes to be
    around PkR20/unit. Statistically speaking, this implies that billed cost is still about 33%‐39% below
    the cost of generation. With regards to firing up excess unutilized generation capacity amid power
    shortfall exceeding 5,000MWs in the peak season, it would be prudent from WAPDA’s point of view
    to ensure that the existing unutilized capacity is utilized first before setting up new power plants.
    Excess capacity available: Based on the Energy Year Book 2011, we have estimated that around
    3,309MWs FO based capacity (assuming that 30% of FO based thermal capacity remains unutilized
    from the total idle FO based capacity in the system) remains unutilized in the system (see Annexure
    1). In this regard, IPPs such as Hubco and Kapco have excess capacity of 400+MWs while smaller IPPs
    such as the AES plants, Gul Ahmed and Tapal all have excess capacities as well. That being said, based
    on the Energy Yearbook 2011, WAPDA’s own generation plants have an estimated unutilized FO
    based capacity of 1,255MWs. Additionally, the KESC also has excess FO based capacity of 519MWs.
    On the flip side, firing up the 3,309MWs on FO would also have short‐term ramifications as it would
    place negative shocks on the external account in the short term; we estimate total FO requirement of
    5.38mn tons (assuming 45% efficiency of existing plants) which should cost about US$4.01bn.

    First priority to efficient plants: The efficiency of power plants set‐up in the 1990s has visibly
    declined and there is an urgent need to upgrade and improve the current power infrastructure. It is
    interesting to note that WAPDA’s most inefficient FO based units (total FO generation: 6,626GWh)
    have an average fuel cost of PkR14.10/kWh compared to the average fuel cost of PkR10.98/unit for
    relatively efficient IPPs. In this regard, fuel cost savings of around PkR15bn‐PkR21bn (assuming
    production of 4,845GWh‐6,626GWh) can result if FO fuel is diverted from inefficient WAPDA plants
    to efficient IPPs.


    Conversion on coal: With an acute gas shortage predicted in the near future and the sensitivity of a
    rising oil import bill, the conversion of Pakistan’s existing public sector thermal power plants to coal
    has gained advocacy in policy circles. In this regard, it is estimated that gas supply of the country will
    undergo an expected depletion to half of the current levels by FY20 (if new resources are not
    mobilized), whereas 27% of Pakistan’s total power generation is gas based. At present coal
    constitutes only 6.3% of our primary energy supplies, whereas, consumption has increased at 5‐year
    CAGR of 11%. Moreover, the cost of coal based power generation is 36% lower as compared to gas
    based generation and a sizable 80% lower as compared to RFO based generation. However, we
    highlight that this long term solution involves a one‐time cost of conversion to coal and coal
    availability challenges. As per our estimates, the capital cost of conversion from gas to coal stands at
    US$464/kW, which excludes coal handling, storage and other infrastructure costs. In addition,
    conversion entails a suspension period of up to 48 months in the near term. Moreover, with regard
    to coal availability, while imported coal exposes the economy to price volatility, available local
    sources provide a unique opportunity for cheap power generation. In this regard, it is estimated that
    the Thar Desert has coal reserves of approximately 175.5bn tons, through which 20,000MW of
    electricity can be generated by 2019. While the explored Thar coal deposits are low in sulphur and
    ash content and coal burning comes with the cost of green house gases, technology is available today
    to harness the potential of Thar coal.

    Improving post crop harvest supply chain infrastructure: Despite contributing 21% to the total GDP
    of Pakistan and providing employment to 45% of the country’s labor force, the potential of Pakistan’s
    agriculture sector has yet to be completely harnessed due to a lack of proper post‐harvest supply
    chain infrastructure. For example, out of the total 10mn‐12mn tons of fruits and vegetables
    (~PkR48bn/~US$500mn in exports) produced annually, an estimated 30% of this produce is wasted in
    transit, post harvest to the market, specifically due to the lack of roads, storage and refrigeration
    facilities. We believe a fast track highway development program linking the untapped rural farming
    constituencies (Balochistan and KP) together with cold chain infrastructure establishment along the
    agriculture value chain is necessary to form the base of sustained agricultural growth going forward.

    Improving governance: We emphasize that our intention here is not to highlight inefficiencies of
    particular governments but instead concentrate on the importance of addressing long term
    structural issues instead of implementing short‐term fire fighting techniques to address immediate
    problems. The following analysis is only to obtain a broad overview of the cost of weak governance
    and does not include losses incurred by other public sector corporations in aviation, gas distribution,
    power generation and distribution, steel, engineering works, et cetera.

    Statistically speaking, as a proxy, the cost of weak governance can be estimated by analyzing the
    performance vs. support provided to Public Sector Enterprises (PSEs) and public sector commercial
    banks (PSCBs). Looking through the lens of an administrator, the amount of support rendered to the
    eight PSEs viz. 1) Water and Power Development Authority (WAPDA), 2) Pakistan International
    Airlines (PIA), 3) Pakistan Railways (PR), 4) Pakistan Steel (PS), 5) National Highway Authority (NHA),
    6) Pakistan Agriculture Storage and Services Corporation (PASSCO), 7) Trading Corporation of
    Pakistan (TCP) and 8) Utility Stores Corporation (USC) in the form of subsidies and loans continue to
    put a strain on the economy by resulting in destabilizing national budgets and overrunning
    expenditures. Historically, lack of political will, red tape, bureaucratic hurdles and labor unions of the
    Public Sector Enterprises (PSEs) have strongly opposed a complete overhaul of PSEs. Poor
    governance has resulted in an inefficient value chain by reducing productivity and raising transaction
    costs. While we find encouragement from the present political commitment regarding the welfare of
    the PSEs and their impact on Pakistan’s economy, we underline the importance of overdue reforms

    like complete hierarchical restructuring, privatization, public‐private partnerships to plug the drain in
    national resources.
    **********


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    #3
    Mansoor

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    Pakistan’s Economy 2013
    The single-digit inflation and discount rate came as a breather to the corporate sector while deteriorating fiscal account remains one big issue. Not only these two indicators, but also the slowdown in gov't borrowing made 1HFY13 worth an applause. However, 2HFY13 remains critical as gov't borrowing takes a U-turn, which is expected to cap investor excitements. We expect CPI to remain below 9%, contained well against full-year target of 9.5%. Further, with the realization of flows from the US under the CSF umbrella, we estimate CAD to be around 1% of GDP in FY13, which would be quite manageable keeping other smaller flows in perspective. What actually is threatening for the overall BoP, and thus for PKR, is the debt servicing portion, with the repayment due to IMF left around ~ USD 1.7bn in 2HFY13. Inflows worth USD 1-1.5bn and outflows worth USD 3bn should plunge Forex reserves at around USD 12.5bn end of FY13. Already frail, PKR is expected to further weaken against USD, we incorporate an 8.5% total hit during FY13.

    Arif Habib Research
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    #4
    fasee

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    Below is an excerpt of our detailed Strategy Report to be released later today.
    Pakistan’s Politics 2013
    Following increasingly noisy last five years, Pakistan’s politics enters a thrillingly action-packed arena (elections with uncertainty looming) with expected change in its run-of-the-mill, political-party setup as new political alliances flex muscles for power. With historic completion of the full five-year term of the Democratic gov’t, Pakistan politics enters 2013 carrying with it a lot of excess baggage in terms of macro and socio-economic issues as the latest economic fallout (last five years) speaks for itself. If popularity polls were something credible to go by, to represent people’s will, two Political parties –one relatively fresh, and the other already a veteran– could be PTI and PML-N that have emerged as the only-gaining parties in the last 5 years while the rest being at losing end.
    Pakistan’s Economy 2013
    The single-digit inflation and discount rate came as a breather to the corporate sector while deteriorating fiscal account remains one big issue. Not only these two indicators, but also the slowdown in gov't borrowing made 1HFY13 worth an applause. However, 2HFY13 remains critical as gov't borrowing takes a U-turn, which is expected to cap investor excitements. We expect CPI to remain below 9%, contained well against full-year target of 9.5%. Further, with the realization of flows from the US under the CSF umbrella, we estimate CAD to be around 1% of GDP in FY13, which would be quite manageable keeping other smaller flows in perspective. What actually is threatening for the overall BoP, and thus for PKR, is the debt servicing portion, with the repayment due to IMF left around ~ USD 1.7bn in 2HFY13. Inflows worth USD 1-1.5bn and outflows worth USD 3bn should plunge Forex reserves at around USD 12.5bn end of FY13. Already frail, PKR is expected to further weaken against USD, we incorporate an 8.5% total hit during FY13.
    Pakistan Equities 2013
    Despite a solid 49% return in 2012 (~38% in USD) and perhaps with global equities being on the rise too, KSE100’s deep discount to regional peers remains (47% on PE, 48% on Ev/EBITDA, 49% on PEG, 29% on PBV, while a fat 66% on DY and a substantial 19% on RoE). We believe, this is more-than-enough to counterbalance perceived risks of i) reversal in inflation and thus interest rates (already higher), ii) one of the lowest GDP growth rates, and iii) soaring currency and political risks, along with other economic risk-associated premiums required by investors.
    KSE100 Index Target at 19,994pts; 18% Alpha in 2013!
    If we adjust prevailing regional discounts to historical levels (average discount ranging 5%-48%), laced with justified PE/PEG, Earnings Growth and the Target Price models, a weighted average index target of 19,994 appears, a solid 3,089pts jump by 2013-end, with a total return of 18% YoY. On the other hand, higher Alphas can be achieved, and Betas minimized, through timely rebalancing of recommended portfolio containing IPPs, Cements, Textiles, Telecom, OMCs and Fertilizers. We recommend overweight stance on a select of stocks from these sectors that are expected to drive index target to the estimated levels in 2013.
    It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.

    #5
    fasee

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    arif habib targettgin 20 k index in 2013...hmmm...and one surprise is...they are not recomending BANKs at all
    It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.

    #6
    Mansoor

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    View Postfasee, on 01 January 2013 - 02:49 PM, said:

    arif habib targettgin 20 k index in 2013...hmmm...and one surprise is...they are not recomending BANKs at all

    Yes, i think Arif uncle is still with Zardari, thats why suggesting 19,994 for 2013..... abi Qadri Darma k bahd they might be giving 12k target. :P
    **********


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