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Outlook 2012 – II: Growth is SBP’s responsibility

February 14, 2014
January 04, 2012


Business Recorder LogoPakistan could be heading for another difficult year, despite signs of another strong growth pattern seen in the remittances inflow.

If our exports do not grow and we continue to miscalculate our food demand we may see pressure exerting on the country’s balance of payment (BoP).

Risk of higher oil price due to escalating tension in the Gulf region and depleting foreign investments will add pressure on the current account deficit.

Pakistan’s biggest threat is the rising oil price in the international market.

For consumption, the country purchases Light Arabian Oil and for the current fiscal year the projected average annual price is USD 108 per barrel.

Until December 15, the country purchased oil worth USD 7.1 billion and for the remaining the Pakistan is expected to spend USD 6.6 billion to meet its oil requirement.

Any surge in oil price beyond USD 108 per barrel will hit the BoP position.

Similarly, a fall will provide some comfort.

But our oil target for the calendar year 2012 is USD 15 billion against USD 13.5 billion as I remain bullish for oil, which likely to end up higher by 10 percent to 15 percent.The fiscal deficit is another problematic area to manage, which is targeted to hit 6.5 percent during the current fiscal year.

However, despite the circular debt adjustment in the last quarter of 2011, this debt is once again picking up fast and could end up with another Rs 300 billion figure if subsidies go unchecked and if another adjustment is required, it may increase the fiscal deficit to over 7 percent.High interest policy has started to backfire, as debt financing has become a menace and revenue shortfall looks imminent if the economy continues to experience slowdown.

Any distortion could push the numbers close to rupees one trillion and 5 percent discount rate cut would annually reduce this number by Rs 325 billion or USD 3.624 billion.External debt position will continue to deteriorate, which could get closer to USD 70 billion.

But depreciation of rupee will have a severe impact in rupee terms, and this number is likely to surge by another 10 percent to 15 percent by the end of 2012.IMF payments due in 2012 will be keenly watched as slowdown in receivables could add pressure.

The profile suggest that payment due in February is USD 400 million, in June USD 500 million, in September USD 400 million and in December 2012 USD 600 million.

Total amount to be paid during 2012 is USD 1.9 billion.

To counter IMF payment, Pakistan’s only hope is expected donors funding of USD 2.6 billion.

Hopefully if the country is able to pocket 70 percent of the promised amount it may get some respite, but this does not ensure that Pakistan can escape from pressure on it balance of payment.

Exchange rate Pak rupee/USD @ 89.95A struggling eurozone will directly or indirectly drag the global economies due to economic meltdown that will cause currency volatility, which will add pressure on the global currencies.

Weak economies will struggle to keep pace with them and their currencies too may not be able to sustain shocks that could weaken the currency.

The risk is that Pak rupee could easily contract flue from its Saarc partners and its competitors that may not sustain the global economic pressure.A lot will depend on the country’s current account position.

The oil price hike could be the destroying factor that may lead to an imbalance, so all eyes will be on the import figures.

Export remains a risky proposition as nothing can be claimed about the good work done to increase exports.

The country has already witnessed a fall in export volume and such a fall will not impact the economy.

Managing the fiscal deficit is a difficult challenge facing the country and it leads to a weak rupee scenario.

If the pressure on economy goes unchecked, we could witness another 10-12 percent fall in the value of rupee against the US dollar in 2012.International market outlook Debt management will remain the global priority.

Growth, job creation, inflation, higher food prices, higher oil, higher energy etc are all secondary issues.

This means that the world may be heading for another difficult year.

It is evident from the constant downside revision of global economy suggesting that recession will continue to be the dominating factor.

It will not be surprising to see many economies heading to the negative growth areas.

Europe will remain a key talking point in the first half of 2012, as the European market is expected to remain fragile where risk of contagion is high.Global focus in the first two quarters of 2012 would be on Europe as it could be a difficult beginning since banks will have to meet the capital adequacy requirement, which poses a difficulty to lend in the corporate sector meaning tighter credit conditions.Majority of countries in eurozone region are facing fiscal tightening and will have to curtail spending to bring down the surging deficit numbers unacceptable to policymakers.

Higher funding cost is another factor that would hinder growth in the region.But Europe could face a bigger problem of balance of payment as many countries are required to feed their import bill.

The problem is that the US has stopped lending to European banks.

There are reports of flight of capital from European countries, which is also bad news for the region.Overall, outlook for 2012 looks very difficult because despite numerous announcements, meetings and commitments, the outcome is not convincing or very impressive, which creates doubts, though the European central bank injected roughly euro 500 billion in December 2011, but the market is unsure about the next direction because banks did not give loans to businesses to boost economy.

Neither had they offered funds to banks that offered profitable return due to mistrust.

Some of the estimates suggest that in 2012, Europe requires USD two trillion to meet the funding demand.

The credibility factor of EU remains an unresolved issue.

Therefore, the Eurozone break-up is still a huge possibility.The other influencing factor that could impact the Eurozone economies in 2012 is the rating cut, which may be a common news flash during the year.

Europe cannot escape from a further rate cut and quantitative easing and elections in Europe will provide more clues about the mood of people.However, I expect the Eurozone to remain intact.

Despite opposition, euro will go for more quantitative easing, which is the only option available.

Monetary union will not break up, but we will surely see some countries parting ways.

There is a huge risk that any unfavourable event could lead to protectionism and hence European currency will come under severe pressure.Unlike Europe, sentiment for the US economy is in mildly bullish mode for the short term period.

Recent US economic data have further helped in setting the tone.

The US is already done with the big event of downgrading.

US banks have tightened the noose around European banks and are refraining from lending, which gives further strength to their banking system.

But despite a cold shoulder attitude shown by the Chinese, investment in US Treasuries remains very attractive, which performed better than corporate bonds and was the best performing asset class of 2011, which means demand for US treasuries this year would remain high.The other positive for the US economy and US dollar in comparison with Europe is that US is expected to grow slightly above 2 percent versus zero percent growth expected in Europe.

So if the US is performing well, US investors will invest in US, which is good enough for stimulation for the US economy.I think to avoid interruption US will continue with its monetary easing policy to keep up the pace of growth and USA will go for 3rd monetary easing to boost its housing sector, which could improve the job market condition.However, we should keep focusing on the European sovereign debt problem that could have a contagion effect, as it may easily spill over into US economy as well.

Europe’s goods and services to the US accounts for over USD 400 billion.

US Bank’s exposure to German and French banks is roughly USD 1.2 trillion and to PIIGS country is around USD 640 billion.

So worsening of the European problem could easily drag USA as well.Gold I remain short-term to medium-term bearish for gold, as new money may not flow into the metal.

In the 1st quarter we will see more problems all over the globe.

So this may not encourage the central bank to buy at current levels.

Minus China, mostly the central bank is buying US Treasuries, which is now considered as one of the most safe haven assets.European quantitative easing money will not go into the hands of investors, as evidence shows that banks are refraining to lend to its counter party despite good return due to lack of confidence fearing that their money may not get blocked.It is yet to be seen if China’s easing has done the trick and enough liquidity is available in the hands of the physical buyers to buy gold.

I doubt that Bank of China will soon begin purchasing gold.

It is likely to hold on to see the market sentiment on Euro zone development, which is a major global concern.The Indian economy, which is the 2nd largest buyer of gold as well, is also crumbling due to large rollover of borrowed funds that too will be maturing until June 2012, so this quarter is crucial for the Indian economy and its currency will be under severe pressure.

The Indian rupee has so far lost 18 percent means Indian buyers’ purchasing power is eroding.So, when there is a liquidity constraint and no cash in hand is available, why would new investors borrow by paying cost and purchase gold that offers zero return, when there is so much uncertainty.

So this quarter gold should remain under pressure.Furthermore, a stronger US dollar tone will keep the metal price under check.

However, any collapse or a financial disaster type of situation occurring in Europe due to disagreement or failure to meet commitment could lend support to gold.Gold @ $1592 may struggle to penetrate beyond $1680.

Looking for break $1470 that would help gold to test $1411 and probably may hit my target $1385, which may be the last leg of this rally.

Before making a bounce as buyers will emerge below my target levels.

But in later months gold requires a monthly close above $1650 for a move to $1850 or retest $1980.Brent oil & light Arabian oil @ $109.60 I am bullish on oil, which is likely to be up by 10-15 percent on average by the end of the current year, based on December 2011 closing.

It does not include any future supply disruption, which can be caused due to escalating tension in Middle East involving Iran.

Any eruption means choking of Hormuz, which could push oil to any levels beyond USD 200 barrels per day.Tough in economic term there is global slowdown, which may linger on for longer duration, but we have to realise that overall global growthwill remain in positive territory and will not fall below zero.

Annual population growth rate is 1.1 percent and will remain around those levels, which means 77 million babies that suggest more food consumption.

Housing need will be increased, car production will not stop, more planes will fly and industries and factories will keep on running.The point I am highlighting is that oil demand will always be there.

There may be lot talk about alternate energy, but at the moment there is no oil substitution available for a few more years and once there is an alternate available, then there will be need to lay down special cables and grids according to the specification, which may take another 3-5 years.Despite the Libyan supply disruption, which on an average was cut by roughly over one million barrels per day Opec production was at the optimum level.

But oil prices never eased and it seems that people are comfortable with oil’s three digit figure.My serious observation is that global leaders are least worried about the oil and gold price surge, which has become an essential requirement for many nations as well as for the people.

The other important factor could be that higher gold price suits the global central banks because if we look at foreign exchange composition of global reserves, their holding is 10 percent, so higher prices helps Central Banks to show their reserve position healthy.But imagine higher oil prices are disastrous for any economy and specially the US is the biggest loser because in 2010 the US imported oil at 11.8 million barrels per day (MBPD) and @ USD 10 price ease it can save USD 43 billion annually, so if the US announces opening its oil reserves tap or makes serious efforts to ease oil prices, the oil price will collapse and 50 percent or USD 50 prices fall means US saves USD 215 billion annually.

(11.8 MBPD x 365 days x $50 = $215.35 billion).But the 50 percent fall means the world will be deprived of cash USD 1.57 trillion annually because the world’s daily oil consumption is roughly 86 million barrels per day (use above calculation).

So the bottom line is that oil prices are intentionally kept higher because there is no other source that generates so much of cash money.

Major players are well aware of this game.

Who are the major players J.P.

Morgan-Chase, CITI bank etc? It’s all about connections.Euro @ 1.3030 will remain under severe pressure during the first quarter.

Technically, the currency will find first support around 1.2238 areas with crucial support at 1.1866.

I will not be surprised to see a bounce from here, but may find resistance at around 1.25 zones and that requires a monthly close above this level, failing to penetrate beyond, means another dip and break of 1.1866 for 1.0895 or possibly 1.0462.However, on the upside break above 1.3620 would suggest Euro could be heading for more gains and may test another important resistance level of 1.3980.

A break here confirms more bullish move towards 1.4550.I am bearish for the euro and looking for a substantial fall.

But Sarkozy’s election will play a key role in currency moves, because if he wins he may not be willing to give up euro neither would the German leader be willing to support the French leader’s thought.

Sarkozy’s exit could mean Germany’s domination which may provide support to the euro.GBP @ 1.5595 despite the tough economic conditions and plenty of problems such as high inflation, deficit and job losses piling up in the UK, there is a growing risk of negative growth for the second consecutive time, which means another recession in the next quarter.

The BoE will go for another round of quantitative easing, but the British economy is likely to do well in the second half.The pound sterling may occasionally enjoy against euro in crosses, but the British currency’s level on break 1.5230 to watch is 1.4950, but requires a clear break for a test of 1.4373 or possibly Cable will be dragged down to 1.3550 due to European financial crisis because Europe is the UK’s largest trade partner.

However, on the upside a break of 1.6355 could be threatening for a test of 1.7565.JPY @ 76.70 I believe that the yen will continue to blossom despite economic difficulties, the lowest return in bond yield and threat of BoJ intervention.

I am looking for a convincing break of 74.80 this year for a move to 73.85.

The real test could come around 70 yen per US dollar, only a break would pave the way for 68.50.

However, suggest watching 79.90 a break would encourage for a test of 82.75 that could brighten chances of a test of 84.50.CHF @ 93.60 is the currency to watch, as investors will keenly follow this currency during euro meltdown, if that happens.

In crosses, SNB may have to frequently step in, as market could retest EUR/CHF 1.20 levels.

I am expecting a break of 0.9580 for 0.9943.

A clean break and monthly close of this level would pave way for 1.0430.

However, if 0.9020 breaks, 0.8776 would be an important level to watch, which could mean test of 0.80.


Copyright Business Recorder, 2012

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