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

Economy Review
Contents
Power Politics 1
Inflation is Resilient 2
External Account Continues to Improve 3
Industrial Activity Shows Growth 4

UBL Research
April 23, 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 – April 2010

Power Politics
With signing of 18th Amendment and announcement of energy
conservation strategy, the domestic political situation can never be
better with both the ruling government and opposition on board on
these critical issues. Yet challenges remain, given the International
Monetary Fund’s (IMF) concerns on lack of government’s will to
implement economic reforms and increase power tariff. Further,
economic growth and inflation for current year will likely fail to impress.
And then there is the specter of rising international oil prices.

Economics of Darkness
Prolonged outages are not as much due to lack of generation capacity
but more so because of the electricity distribution companies’ inability
to generate enough revenues to cover their costs. In essence,
generation and distribution of electricity is a loss making proposition.
The government has postponed the 6% raise in tariff as agreed with the
IMF, which will likely serve to aggravate the power crisis.

A Bitter-Sweet Relationship
Recent news reports suggest discord between the delicate yet
necessary relations with IMF. The government is reportedly seeking
two waivers – one relates to fiscal deficit while the other relates to
borrowing from the state bank. Further, lack of preparedness for Value-
Added Tax (VAT) could pose significant hurdles with the IMF Executive
Board when it meets early next month. It should be noted that
approximately 45% of foreign exchange reserves is borrowed money
from IMF.

Growth, Inflation & International Oil Prices

Economic growth for the current fiscal year is expected to remain
stifled. Although industrial sector has shown an uptick, agricultural
growth could be weak due to lower output in wheat, rice and
sugarcane. Pricing pressures can continue given the ongoing pass
through of energy costs and higher than expected food prices. Further,
international oil prices are rising with forecasts suggesting these may be
higher than USD100/barrel by next year. This could have dire
consequences for the country’s balance of payments given our
significant energy deficit.

Economic Issues Bigger Than Politics?

Is the economy now taking center stage in the minds of the common
man as against politics? Can we then expect political news to be Page 3
news as against Front Page news today? Such a day could be very close
Saad Hashemy if the government fails to deliver strong economic growth, contain price
+9221-99033-2241 pressures and abate the power crisis. On second thought, such a day
saad.hashemy@ubl.com.pk could be just around the corner.

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

Inflation is Resilient
Figure 1 – Consumer Price Index Sensitive Price Index (SPI) Inflation Remains Strong
15% Some respite was seen last week in Sensitive Price Index, with the index
14% dropping 17 basis points on the back of a drop in wheat prices. This
13% may be too little too late however, as the index has seen 125 basis point
12% increase so far in April’10, with oil prices having risen at the start of the
11% month, followed by second round effects pushing up food prices.
10% Inflation in the Consumer Price Index (CPI) remained strong again in
9% March, having risen 1.25% month-on-month (MoM), resulting in 12.91%
8% year-on-year (YoY) figure.
Aug-09

Nov-09
Dec-09
Jan-10

Mar-10
Oct-09

Apr-10
Sep-09

Feb-10

May-10
Jul-09

Jun-10

Table 1 - Price Indices: CPI, WPI and SPI - March'10 & SPI Trend April'10
Index ∆ YoY ∆ MoM Week ended SPI Index %∆ WoW %∆ YoY
CPI Discount Rate
CPI 12.91% 1.25% 1-Apr 246.99 0.63% 18.24%
Projected CPI Average CPI
WPI 21.80% 2.53% 8-Apr 248.94 0.79% 18.42%
Source: FBS, UBL Research SPI 18.17% 0.78% 15-Apr 248.51 -0.17% 17.39%
Source: FBS
Figure 2 – PKRV Rates

12.6%
Price Pressures to Continue
12.4% With global oil prices depicting a rising trend and being passed through
domestically, we expect continued pressure from the subhead of
12.2%
transportation. The situation will be further exacerbated, as second
12.0% round impacts of a hike in oil prices will raise input costs across the
11.8% board. Further, the International Monetary Fund (IMF) has cited
11.6%
concern, expecting 100% compliance on the issues of value added tax
(VAT), and subsidy removal from the power sector. While the expected
12-Feb

26-Feb

9-Apr
12-Mar

26-Mar
1-Jan

15-Jan

29-Jan

6% hike in energy tariffs does at this point seem to be deferred, it is an

3M 6M 12M impending eventuality.
Source: SBP, UBL Research We therefore perceive headline inflation near 12.75% year-on-year for
Figure 3 – T-Bill Cut-off Yield Trend April’10, in the absence of the tariff hike expected this month. We
further expect CPI to trend upward in the remainder of the fiscal year,
12.6%
averaging 13.30% for Jan-Jun’10 and around 12.0% for the Jul’09-Jun’10
12.4% period.
12.2%
12.0%
Interest Rate Expectations
11.8% A picture of market expectations can be gleamed from prevailing
11.6%
interest rates. Both PKRV and T-bill rates reflect the same outlook, with
3 month, 6 month and 12 month interest rates hovering in the 12.10%-
22-Apr
11-Feb

25-Feb

8-Apr
11-Mar

25-Mar
17-Dec

31-Dec

14-Jan

28-Jan

12.35% band and trending upward. This lends credence to our view
that the State Bank of Pakistan (SBP) will likely keep the discount rate
3-Month T-Bills 6-Month T-Bills unchanged in its next monetary policy review in May’10. However, SBP
12-Month T-Bills may have to re-asses status-quo on interest rates if current inflationary
Source: SBP, UBL Research
pressures do not subside.

Syed Murtaza Hasnain

+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 – April 2010

External Account Continues to Improve

Table 2 – External Accounts For March’10, Current Account deficit narrowed to USD40million,
MoM Jul'09- YoY
USD Millions Mar'10
∆ Mar'10 ∆
registering an improvement of USD10million over last month. Likewise,
Current A/C (40) 10 (2,702) 5,676 Jul’09-Mar’10 deficit is at USD2.7billion, compared to USD8.4billion
Trade (534) 270 (8,024) 2,238 during same period last year. Contraction in trade deficit to
Exports 1,938 411 14,389 69 USD534million (down 34% over last month) and rebound in remittances
Imports 2,472 141 22,413 (2,169) led to month-on-month improvement current account balance.
Services (244) (381) (1,907) 1,044 Further, external flows remained strong as FDI registered 67% month-
Income (298) (108) (2,268) 1,084 on-month increase to reach USD239million while portfolio investment
Remittances 764 175 6,551 893 was also up at USD113million.
Other Transfers
Financial A/C
272
18 (113)
54 2,946
3,537 (746)
418
Remittances Regain Momentum
FDI 239 96 1,544 (1,488) After declining for 5-months, remittance inflows for Mar’10 stood at
FPI 113 99 (182) 754 USD746million (up USD175million over Feb’10). Highest increase in
Capital A/C 1 (88) 187 49 remittances was from Saudi Arabia, which was up USD44million from
BOP (4) (93) 915 4,905 last month while inflows from UAE increase by USD41million. Jul’09-
Source: SBP, UBL Research Mar’10 remittances aggregated to USD6.5billion (up 16% year-on-year).
Figure 4 – Country-wise remittances trend Based on current trend, remittances for Jul-Jun’10 are likely to be at
900
least USD8billion.
750 Exports Up USD411million
600 Exports surged to USD1.94billion in March’10 – highest level since
USD Millions

450 Sep’08. For Jul’09-Mar’10, exports have aggregated to USD14.4billion

300 (up 0.7% year-on-year). Strong performance of exports was led by
textile sector, whose exports increased by USD165million over Feb’10 to
150
reach USD932million in Mar’10. Major contributions also came from
0
exports of vegetable products and mineral products, which were up
Aug-09

Sep-09

Feb-10
Jul-09

Nov-09

Dec-09

Jan-10

Mar-10
Oct-09

USD65million and USD51million respectively over Feb’10.

PKR Strengthening…
USA U.K. Saudi Arabia UAE All Others
During Jul’09-Feb’10, PKR underwent average monthly depreciation of
Source: SBP, UBL Research 0.56% and touched a low of USD/PKR85.35. Improving external account
Figure 5 – Exchange rate trend situation backed by increased inflows have somewhat reversed this
86
trend. PKR has appreciated by 1% since Feb’10, and is trading around
the USD/PKR84 mark. Owing to improvements in external sector, we
85 expect PKR to resist any sharp declines in the short term.
…But so are Oil Prices
USD/PKR

84

83 We expect current account deficit to remain below USD5billion during

Jul’09-Jun’10 (vs. 8.5billion in Jul’08-Jun’09). However, it should be
82
noted that the improvement has come broadly due to lower imports,
14-Feb-10

15-Apr-10
30-Jan-10
01-Dec-09

16-Dec-09

31-Dec-09

15-Jan-10

01-Mar-10

16-Mar-10

31-Mar-10

which reflect slowdown in economic activity. Moreover, oil prices are

on the rise again. A continuation of oil price increase could dampen
domestic production and pose serious challenges to Pakistan’s external
Source: Bloomberg accounts.
Asim Jahangir
+9221-99033-7036
asim.jahangir@ubl.com.pk

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

Industrial Activity Shows Growth

Figure 6 – Year-on-Year LSM Growth Trend As per Federal Bureau of Statistics (FBS) latest release, quantum index
for Large Scale Manufacturing (LSM) increased by 5.75% year-on-year
10% (YoY) in Feb’10. For the period Jul’09-Feb’10, current year’s index is up
5%
2.98% growth as compared to the same period last year. On a month-
0%
-5%
on-month basis, LSM index grew by 0.94% as compared to Jan’10. The
-10%
growth in Jul’09-Feb’10 of 2.98% was mainly driven by the automobile
-15% sector, which has consistently performed well during the year; healthy
-20% ginning activity as a result of good cotton crop; and increased cement
-25% and fertilizer production. On a month-on-month basis, higher sugar
production and continued improvement in ginning activity were the
Apr-09
Jul-08

Jul-09
Jan-09

Jan-10
Oct-08

Oct-09

major contributors.
2009 2010
Table 3 - Provisional Quantum Index for Large Scale Manufacturing
Source: FBS, UBL Research
Feb’10 Feb’09 ∆(%) Jul-Feb’10 Jul-Feb’09 ∆(%)
Figure 7 - Jul-Feb’10 LSM growth of selected items
LSM Index 219.23 207.31 5.75% 200.30 194.50 2.98%
40% Source: FBS

Textile Group: Textile sector, the largest segment of Pakistan’s

20% manufacturing industry, has shown improvement in Feb’10 compared
to the same period last year on the back of a good cotton crop.
0% Although yarn production was down -1.78% at 0.23 million tons in
Feb’10 compared to Feb’09, production of cotton cloth and ginning
activity were up by 2.56% and 5.81% to 84.1 million sq meters and
-20%
177,000 tons respectively. During Jul’09-Feb’10, textile items showed a
Cement
Beverages

Sugar
Metal Ind.

Jeeps/Cars
Cotton Yarn

Phos Fert.

Refrigerators
Cotton Ginning
Petroleum Products

similar trend, with yarn production down -2% while cotton cloth and
cotton ginning was up 0.2% and 5.8% respectively.
Food & Beverage: Compared to Feb’09, sugar production was up 5.98%
in Feb’10 while cigarettes and vegetable ghee were down -18% and -
4.85% respectively. Current year’s (Jul’09-Feb-’10) production of sugar
Source: FBS at 2.81 million tons still remains -3.2% lower as compared to the same
Figure 8 – Industry-Wise LSM Weights period last year, largely because of the sugar crisis witnessed earlier.
Autos Overall, food & beverage group’s production declined by -7.4% during
Steel
Sugar Cement
5.3%
4.6% Textile
Jul’09-Feb’10 as compared to the same period last year.
5.5% 5.5% 32.6%
Autos group: Autos group remains the major reason for the recovery
Engineering being witnessed in large scare manufacturing during the current fiscal
0.6%
year. Except buses, all other vehicles posted double digits growth on a
Chemicals
6.4% YoY basis in Feb’10. The sector’s production was up 52.2% during
Pharma Jul’09-Feb’10 as compared to the same period last year. On a month-
6.7% on-month basis, however, the group’s total production declined by -
Petroleum
Others 10%.
7.0% 17.2%
Is recovery sustainable?
Source: SBP Manufacturing sector’s growth going forward is highly dependent on
domestic and external factors. Rise in commodity prices internationally
Farhan Firdous Ali can hurt production. Domestically, higher cost of production due to rise
+9221-99033-7007
farhan.firdous@ubl.com.pk in electricity tariff, and availability of power and financing will remain an
issue going forward.
4|UBL RESEARCH
 U N I T E D B A N K L I M I T E D Economy Review – April 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