U N I T E D B A N K L I M I T E D

Economy Review
Contents
Politics – The Next War 1
Inflation Down but Not Out 2
Current Account Stays Firm but Risks Persist 3
Economic Recovery to Continue 4

UBL Research
June 24, 2010
www.ubl.com.pk
All rights reserved. UBL Research 2010 SEE LAST PAGE FOR IMPORTANT DISCLOSURES
 U N I T E D B A N K L I M I T E D Economy Review – June 2010

The Next War?

Reports have emerged that the Pakistani-based militant group, Lashkar-
e-Taiba (LeT), has expanded its operations in Afghanistan, targeting
both Afghans and Indians. LeT has allegedly set-up training camps,
which has led to volatility in relations between Pakistan and India.
Although, Pakistan no longer supports the militant group, escalation in
such activities, particularly against Indian targets, could be a glimpse of
what may unfold as the July 2011 deadline for withdrawal of American
forces in Afghanistan approaches.

War and its Costs

The possibility of a prolonged proxy war with India in Afghanistan would
be detrimental to the country’s already weakened economic resources.
Pakistan has been embattling terrorist elements in the tribal areas that
strained its resources to a degree that its budget deficit failed to meet
International Monetary Fund’s (IMF) criteria for March’10. On top of
this, the pledged foreign support has to a great extent failed to
materialize other than pent up payments under the United States (US)
Coalition Support Fund (CSF), which were recently received. Although
the Government’s budget deficit target for 2011 is not out of bounds at
PKR685billion (4% of GDP), defense expenditure for 2011 stands at
PKR442billion, up 17% compared to last year and accounts for a
whopping 16% of the total budgeted expenditure for the year.

Pot Pourri – The American Way

General Stanley McChrystal, head of all US and NATO forces in
Afghanistan, was axed given his derogatory remarks about US
Government officials in a Rolling Stones Magazine article. These
included (1) criticizing nearly all members of US President Obama’s
National Security team (2) stating that US President Obama appeared
“uncomfortable and intimidated” in his first meeting with the General
and (3) dismissing Vice-President Joseph R. Biden as “Bite Me”. The
change in command in Afghanistan could very well make it difficult for
US to stick to its July 2011 deadline for withdrawal. However, the US
may still go ahead with the withdrawal given that its own finances are
constrained to the extent that it is finding it hard even to extend
benefits to its unemployed.

A New Perspective
This may be the time of a change in attitude towards India altogether. It
may now be in the country’s best interests to view India as a partner in
uplifting South Asia in these challenging economic times. This could
Saad Hashemy very well be the need of the day given that our major trade and
+9221-99033-2241 strategic partnerships have traditionally been with the West, which
saad.hashemy@ubl.com.pk have been the worst hit in the current economic crisis.

1|UBL RESEARCH
 U N I T E D B A N K L I M I T E D Economy Review – June 2010

Inflation Down but Not Out

Figure 1 – Consumer Price Indices SPI On the Uptick
16%
14% Although the Sensitive Price Index (SPI) deflated week on week at the
12%
start of the month, this was largely on the back of a drop in fuel prices.
The index as on the 17th of June’10 was up 58 basis points week on
10%
week, taking it up by 43 basis points month on month. Food prices are
8%
fueling this uptick; the magnitude of the volatility however remains
Aug-09
Sep-09

Feb-10

Apr-10
May-10
Jun-10
Jul-09

Jan-10

Mar-10
Nov-09
Dec-09
Oct-09

subdued.
CPI Discount Rate Table 1 - Price Indices: CPI, WPI and SPI - April'10 & SPI Trend April-May'10 Source: FBS
NFNE Average Jul-Jun'10 Index ∆ YoY ∆ MoM Week ended SPI Index %∆ WoW %∆ YoY
Source: FBS, UBL Research CPI 0.06% 13.07% 3-Jun 249.42 -0.32% 16.63%
WPI -0.06% 15.18% 10-Jun 249.84 0.17% 16.43%
Figure 2 – SPI Trend Feb-May’10 SPI 0.87% 21.21% 17-Jun 251.28 0.58% 16.45%
2%
With oil prices expected to decline further next month, respite could be
1% seen from the transport and communication subhead of the Consumer
0%
Price Index (CPI), which will have strong second round implications.
These factors should lead headline inflation to average in the range of
-1% 12.50%-12.60% year-on-year for June’10.
15-Apr

29-Apr
18-Feb

1-Apr

13-May

27-May

10-Jun
4-Mar

18-Mar

Looking to Fiscal Year 2011

Week-on-week Month-on-month
Source: FBS, UBL Research With the new budget came the rather optimistic single digit headline
Figure 3 – T-Bill Auction Cut-off Rates
inflation target for the year, at 9.5% year-on-year. There are significant
12.6% upside risks to this target however, with sales taxes (GST) being raised
12.4% from July 1st, 2010, by 1% across the board, the range rising from 16%-
12.2% 25% to 17%-26%. Further, Value Added Tax (VAT), which is now being
12.0% referred to as “reformed GST” is still on the cards and there are
11.8% expectations that action on that front is due by Oct’10. Further,
11.6%
subsidies for the power sector have been reduced to PKR84billion for
11-Mar

25-Mar

22-Apr
8-Apr

6-May

20-May
11-Feb

25-Feb

17-Jun
3-Jun

the next fiscal year, as compared to PKR147billion in Jul’09-Jun’10. It is

3-M 6-M 12-M hence likely that we should see a power tariff pass through in the first
Source: SBP, UBL Research few months of the next fiscal year. Given these impending shocks, our
preliminary estimates for average year-on-year Jul’10-Dec’10 Inflation is
Figure 4 – PKRV Trend Jan-May’10 in the range of 12.50%-12.75%.
12.5%

Interest Rate Outlook

12.0%
Downturn in international fuel prices has helped pull inflation down at
11.5%
the end of Fiscal Year 2009-10, however year-on-year numbers remain
high. Further price pressures, going forward, are not expected to
23-Apr
12-Feb
26-Feb
12-Mar
26-Mar
1-Jan
15-Jan
29-Jan

7-May
9-Apr

21-May
4-Jun
18-Jun

subside due to hike in taxes and power tariff. Hence, we expect the
State Bank of Pakistan (SBP) to opt to continue on its consolidation
3M 6M 12M
Source: SBP, UBL Research phase vis-à-vis monetary policy and may have to re-assess status-quo on
Syed Murtaza Hasnain interest rates in the next review scheduled July’10.
+9221-99033-2898
syed.hasnain@ubl.com.pk

2|UBL RESEARCH
 U N I T E D B A N K L I M I T E D Economy Review – June 2010

Current Account Stays Firm but Risks Persist

Table 2: External Accounts Current Account in Surplus in May’10
MoM Jul'09- YoY
USD Millions May'10 Chg. May'10 Chg. For the month of May’10, current account recorded a surplus of
USD136million, an improvement of USD388million over USD252million
Current A/C 136 388 -2,981 5,697
deficit recorded in Apr’10. Month-on-month improvement was driven
Trade -876 201 -10,082 1,560
by reimbursement of USD756million under Coalition Support Fund
Exports 1,717 -98 17,855 542.5
(CSF), which is recorded as services inflows, and remittance inflows of
Imports 2,593 -299 27,937 -1,017
USD758million (up 0.3% over Apr’10). Jul’09-May’10 deficit stood at
Services 509 508 -1,408 1,651 USD2.98billion, down 63% year-on-year. USD8.1billion remittances
Income -423 -112 -3,007 1,095 during the year (up 14% year-on-year) have been the key contributor to
Remittances 758 2 8,065 989 reduction in current account deficit.
Other Transfers 168 -211 3,451 403
Financial A/C 560 575 4,035 -403 Current Account also posted surplus of USD16million in Feb’10, when
FDI 219 -20 2,030 -1,301
Pakistan received USD349million in lieu of CSF. Pending CSF
FPI 136 23 -134 948
reimbursements of USD700million, expected by Dec’10, will likely keep
Current Account deficit down in coming months.
BOP 238 242 781 4,652

Trade Deficit Narrows by USD201million

Source: SBP, UBL Research
Figure 5: Trend in Exports and Imports

3,000
Backed by decline in non-oil imports, trade deficit for May’10 stood at
USD876million compared to USD1.1billion last month. Import bill
USD Millions

2,000 declined by USD299million month-on-month, with major decrease

coming in imports of chemical (down USD42million), machinery (down
1,000 USD36million) and textiles (downUSD33million).
0 Owing to USD51million fall in textile exports, arising from export quota
Aug-09

Jan-10

Mar-10
Nov-09
Dec-09
Sep-09
Oct-09

Feb-10

Apr-10
Jul-09

May-10

on cotton yarn, exports aggregated to USD1.72billion posting 6%

month-on-month decline. However, with Jul’09-May’10 exports at
Imports Exports USD17.9billion, we expect exports to outperform annual target of
USD18.8billion, and sum over USD19billion.
Source: SBP, UBL Research

Figure 6: External Financing Needs

Another IMF Program?
15 12.5 14.1 13 6.5% Despite substantial stabilization of current account, external account
10.8
9.7 9.8 hinges on IMF support. Since joining the two-year Standby Agreement
USD Billions

6.0%
10
5.5%
(SBA) in Nov’08, foreign reserves have risen to USD15.6billion in Jun’10
5 compared to USD6.6billion in Nov’08, and Balance of Payments (BoP)
5.0%
has improved from deficit of USD5.8billion in Nov’08 to surplus of
0 4.5%
USD781million in May’10. However, USD5.9billion BoP support from
2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

IMF remains basis of external account stabilization and foreign reserve

buildup.
Extermal Financing % of GDP (RHS)
Once IMF loan repayment start in 2011-12, external financing needs will
Source: IMF, UBL Research
grow from USD9.8billion in 2010-11 to USD14.1billion in 2013-14.
Moreover, as uncertainty clouds maturity of pledged external support
Asim Jahangir
+9221-99033-7036 and policy discipline likely to wane in the absence of IMF umbrella, we
asim.jahangir@ubl.com.pk expect Pakistan negotiating another IMF loan after current SBA ends in
Nov’10.

3|UBL RESEARCH
 U N I T E D B A N K L I M I T E D Economy Review – June 2010

Economic Recovery to Continue

The country’s economy did show signs of modest recovery during 2009-
Figure 7 – GDP Growth Rate
10. Provisional figures indicate GDP growth of approximately 4.1%
(after restating growth figures for previous 2 years) during the current
9%
fiscal year against the target of 3.3%. This higher-than-anticipated
7% growth can be attributed to the recovery seen in industrial sector, which
grew by 4.9% and outperformed the target by 3.2 percentage points.
5%
Table 3 – 2009-2010 Growth Targets & Provisional Numbers
3% Target Actual* Diff
Agriculture 3.8% 2.0% -1.8%
1% Industry 1.7% 4.9% 3.2%
Manufacturing 1.8% 5.1% 3.3%
2010P

2011T
2006
2003

2004

2005

2007

2008

2009

Large-Scale Manufacturing 1.0% 4.3% 3.3%

Small-Scale Manufacturing 3.0% 7.5% 4.5%
P – Provisional, T - Target
Services 3.9% 4.6% 0.7%
Source: Economic Survey, Annual Outlook GDP 3.3% 4.1% 0.8%
*Provisional Numbers Source: Economic Survey
Figure 8 – Contribution in GDP Growth
7% Recovery to Continue in 2010-2011
6%
5% Along with presenting the annual budget for 2010-2011, Ministry of
4% Finance also set out targets for the upcoming fiscal year. Economic
3% managers of the country estimate that GDP will grow by 4.5% in 2010-
2%
2011 with agriculture, industrial and services sectors showing growths
1%
0% of 3.8%, 4.9% and 4.7% and contributing 0.8%, 1.2% and 2.5% to the
-1% overall GDP growth respectively.
2010T

2010P

2011T
2006

2007

2008

2009

Performance of agriculture sector remained weak during the current

fiscal year. However, it is expected that agricultural production will
Agri Manufacturing Services improve with output of major and minor crops expected to grow by
P – Provisional, T - Target
Source: Economic Survey, Annual Outlook 3.7% and 3.0% compared to a decline of -0.2% and -1.2% respectively in
Figure 9 – Sectoral Share
2009-10. Livestock, which proved to be the saving grace this year
posting growth of 4.1%, is expected to grow by 4.2% in 2010-2011.
2011T Economic managers expect the recovery in industrial sector to continue
21% during 2010-2011. Manufacturing sector, which grew by over 4% in
26% 2009-2010 after showing a record decline in the previous year, is
2000
expected to grow by 5.6% in the upcoming fiscal year. Textile sector,
53%
51% which didn’t fare so well during the current year, is expected to benefit
from improved cotton availability.
23% 25%
Outlook
The growth targets set by the ministry for the upcoming fiscal year
seem over optimistic and portray the best case scenario for the country.
Agri Industry Services In reality, the economy remains extremely vulnerable and slippages in
Source: Economic Survey, Annual Outlook variables such as credit availability, power availability and inflation pose
a serious downside risk. Banks remain on a cautious footing and credit
availability might be an issue going forward. In addition, cost of
production is likely to increase on the back of higher electricity tariff and
Farhan
Farhan Firdous
Firdous Ali
Ali consequent inflationary pressures.
+9221-99033-7007
+9221-99033-7007
farhan.firdous@ubl.com.pk
farhan.firdous@ubl.com.pk

4|UBL RESEARCH
 U N I T E D B A N K L I M I T E D Economy Review – June 2010

Disclaimer
This report has been prepared by United Bank Limited’s Research
Department (“UBL Research”) and is provided for information purposes
only and is not and should not in any event be construed as legal,
business or any other form of advice. While reasonable care has been
taken to ensure that information contained in this report is not untrue
or misleading at time of publication, UBL Research makes no
representation as to its accuracy or completeness and it should not be
relied upon for any lending/investment decisions as such. From time to
time, United Bank Limited and/or any of its officers, executives and
directors may, as permitted by applicable laws, be interested in any
transaction, in any securities directly or indirectly subject of this report.
United Bank Limited as a banking company may have business
relationships, including corporate, commercial and investment banking
relationships with companies / organizations referred to in this report.
This report is provided only for the information of professional advisers
who are expected to make their own investment decisions without
undue reliance on this report and UBL Research accepts no
responsibility whatsoever for any direct or indirect consequential loss
arising from any use of this report or its contents. This report may not
be reproduced, distributed or published by any recipient for any
purpose without the prior written permission of UBL Research. UBL
Research assumes no liability or responsibility for any errors or
omissions in the contents of this report. Information discussed in this
report may not reflect the current legal or factual position in respect of
any particular matter.

5|UBL RESEARCH