Karachi, June 09, 2023 (PPI-OT): FY23 Economic Survey: Exogenous factors pose a challenge

FY23 GDP growth has been estimated at 0.29% for FY23, compared to 6.1% recorded in FY22 and the target of 5% GDP growth for the year. The slowdown in the economy has been attributed to: i) the FX crisis in the country, and ii) the Aug’22 floods that had wide spread impact on the country’s agricultural output, with losses estimated at US$30bn.

Sector-wise, Agriculture/Manufacturing/Services sectors witnessed a change of +1.55%/- 2.94%/+0.86% in FY23. The floods had led to losses of two staple crops for the country, i.e. cotton and rice, which was offset by the increase in wheat/maize/sugarcane to the tune of 5.4%/6.9%/2.8%, respectively, during the year. Furthermore, LSM saw a contraction of 8.11% in 9MFY23, driven by supply disruptions in the local market.

Driven by higher commodity prices, rolling back of subsidies, and the weakness in the local currency, FY23 has been marred by high inflation readings. To note, in 11MFY23 period, CPI headline inflation has averaged ~29.2%, reaching as high as 38.0%YoY in the month of May’23.

Despite the growth in the country’s tax collection, up 16.5%YoY in 9MFY23, challenges remained in the form of higher domestic debt servicing costs, due to elevated interest rates in the country and elsewhere in the world. To note, mark-up payments grew by 69.1% in 9MFY23, pushing current expenditures up by 25.3%YoY.

Current expenditures are likely to reach ~PkR14.6tn in FY24, whereas tax collection has been targeted at PkR9.2tn, while non-tax revenues are estimated to bring another~PkR2.6bn in FY24.

Going forward, the measures in today’s budgets are likely to determine the trajectory of the market in the short-term. Resumption of the IMF program would be crucial for the country, but remain a stop gap solution until the country implements some difficult decisions. With this backdrop, we continue to advocate for the E and P and Technology sectors, due to the US$-based revenue sources, with minimal foreign currency cost components.

Survival vs. Stability - a precarious situation: Ahead of the budget FY24, the Ministry of Finance has released the Economic Survey FY23, highlighting the country’s economic indicators during the year. The full year GDP growth has been estimated at 0.29% for FY23, compared to 6.1% recorded in FY22 and the target of 5% GDP growth for the year. The slowdown in the economy has been attributed to: i) the FX crisis in the country, and ii) the Aug’22 floods that had widespread impact on the country’s agricultural output, with losses estimated at US$30bn by the MoF. Sector-wise, Agriculture/Manufacturing/Services sectors witnessed a change of +1.55%/-2.94%/+0.86% in FY23.

The floods had led to losses of two staple crops for the country, i.e. cotton and rice, which was offset by the increase in wheat/maize/sugarcane to the tune of 5.4%/6.9%/2.8%, respectively, during the year. Furthermore, LSM saw a contraction of 8.11% in 9MFY23, driven by supply disruptions in the local market, as a result of import restrictions. These challenges were further exacerbated by the disruptions in the global market due to the ongoing Russia-Ukraine conflict. To note, over the course of FY23 (so far), FX reserves held by the SBP have dropped from US$9.8bn at the end of FY22 to US$33.9bn as of Jun 2, 2023. Consequently, in the same period, the US$ has become ~40% more expensive in local currency terms. The country’s Current Account Deficit has been administratively managed, clocking in at US$3.3bn in 10MFY23, compared to US$13.6bn in the SPLY-using import restrictions.

Single-digit CPI readings, a story far away! Driven by higher commodity prices, rolling back of subsidies, and the weakness in the local currency, FY23 has been marred by high inflation readings. To note, in 11MFY23 period, CPI headline inflation has averaged ~29.2%, reaching as high as 38.0%YoY in the month of May’23. Inflationary readings are expected to remain elevated going into FY24, with the full year estimate standing at ~20.8%--with the impact of the heightened base established this year becoming truly visible in the latter half of the fiscal year. There is, however, upside risk to our estimate in case the currency loses more value than anticipated, and/or commodity prices start trading higher in the global markets.

Fiscal challenges continuing: Despite the growth in the country’s tax collection, up 16.5%YoY in 9MFY23, challenges remained in the form of higher domestic debt servicing costs, due to elevated interest rates in the country and elsewhere in the world. To note, mark-up payments grew by 69.1% in the first 9 months of the fiscal year, pushing the current expenditures up by 25.3%YoY. This led to a fiscal deficit of PkR3.9tn in 10MFY23, while the primary balance stands at a surplus of PkR503.8bn during the period. The debt servicing cost for the country is expected to remain elevated, as a result of the elevated interest rate environment, likely to continue for the foreseeable future. As per estimates, Current expenditures are likely to reach ~PkR14.6tn in FY24, whereas tax collection has been targeted at PkR9.2tn, while non-tax revenues are estimated to bring another ~PkR2.6bn in FY24.

Debt burden intensifies: Pakistan’s total public debt has been recorded at PkR59.2tn as of Mar’23, compared to PkR49.2bn at the end of FY22. As earlier mentioned, the funding requirement for the government is likely to increase further going forward, as short-term maturities become due and a fiscal deficit continues to haunt the country. The SBP’s auction calendar indicates that the government will borrow ~PkR10tn from commercial banks in the next three months, wherein PkR8.7tn will be raised through Market Treasury Bills (PkR7.5tn of which would be used to repay maturing T-Bills), and PkR1.7tn from Pakistan Investment Bonds.

Investment Perspective: According to statements by the Finance Minister, the FY24 budget is likely to focus on growing Pakistan’s export potential, with heightened incentives for the Technology sector (targeting exports of US$4.5bn in FY24). However, all eyes would steadily be fixed on the resumption of the IMF program, which would bring about the necessary funding for Pakistan to avert a default. As the country continues to avert a default, imports and consequently manufacturing activity in the country is likely to remain lacklustre going forward. With this backdrop, we continue to advocate Technology and E and Ps-sectors that are beneficiaries of the weakness in the PKR.

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