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“Outlook 2017” Global

January 2, 2017

@asadcmka
by Asad Rizvi

The year ended in a mixed note giving jitters across the world upsetting majority of the political commentators, financial leaders, analyst and forecasters by proving them wrong. Some of the notable events of the year were BREXIT, Trump’s Election Victory and Indian Rupee Note Demonetization.

Decade old, Euro-zone’s economic crisis too is lingering on and it has not been reduced by any means. Its Unemployment Rate of 10.2 pct is still more than twice of the US Employment rate. To avoid collapse, they have to constantly offer bailout program and have to mostly opt for a rollover with longer maturities to buy more time.

Liquidity condition in Euro-zone area remains very tight. Its Banking System has a tough task ahead, which will requires funding of around Euro 200 Billion (plus) to meet the liquidity implementation requirements known as (Basel 111), Net Stable Funding Ratio by Jan 01, 2019.

To maintain stability, ECB keeps on unveiling fresh stimulus frequently that exposes its claim of economic recovery/stability.

There is a huge perception that after invoking Article 50, exit of BREXIT will begin that could bring trade restriction. It could bring more misery and volatility in the European region/UK, unless they make some sort of arrangement or reach an understanding to sort out their differences.

Indications are becoming obvious that market has exaggerated opinion on both the issues, on Trump’s Election Victory and has over reacted to UK’s referendum decision to leave European Union.

The worrying factor for all those showing concern/uneasiness is because of the changing trend in Global Political and Financial Markets. It is evident that the beneficiaries are fearful of being deprived of gifted opportunities caused by the friendlier loose monetary and fiscal policies.

These unexplained beneficiaries have sensed that like past they may not enjoy stimulus package anymore, as all indicators are pointing that the future fiscal/monetary packages will no more be as cheap and friendly. Neither will it be according to the wishes of these elite minorities.

Though Global Financial system is looking stable, supported by unorthodox methods and creative accounting, but they are not alternative answer to the problems that require regular mending to hang on, as they are not permanent solutions.

The Global Economic Nuisance is due to wide Income and Expense Gap that needs to be filled with genuine cash money instead of relying on borrowed money. This is why in last 10-years injection through QE policy inflated Balance Sheets of Major Central Banks from USD 6 Trillion (2007) to USD 18 Trillion (Current) and yet Major Economies are struggling because good part of funding is allocated for structuring of troubled banks balance sheets instead of lending to corporate sector.

Recent shift in the pattern of thinking/approach of general public/voters is linked to growing inequality, which is spreading the protectionist approach worldwide. This pattern will stretch and will likely spread beyond, unless there is a complete shift in the attitude to counter challenges and narrow the cracks.

For Developed Economies attaining desirable level of growth will remain a big challenge for the financial sector market, as uneasiness will prevail unless there is clarity of macroeconomic policy guideline.

Some uncertainty will be reduced after triggering of Article 50 and Trump’s economic policy announcement that may provide clearer economic direction.

Tendency of Higher US Interest Rate phenomena will add pressure on number of Developed Economies opting for Ultra Loose Monetary Policy and Developing and Emerging Economies risks Flight of Capital. Shifting of Assets will always be a high prospect, as prices falls and when there is a rising interest rate trend that will add further pressure on its domestic currency.

Therefore, in all probability the decade old ongoing global tepid economic growth trend is likely to stretch for few more years.

Meanwhile, I will take clue from weak Chinese bond market suggesting liquidity stress and if it sooner decides to target asset bubble, which means BOC will opt for tightening and this will slowdown its economy, hence growth beyond 6.4 pct look tough.

Brent OIL @ $ 56.85 & WTI @ $ 53.85 = Opec & Non Opec members should not become too complacent about oil prices by projecting stability around $ 60-70 levels, as US Shale Oil is already responding to higher oil prices. US Rig count is already on the up growing steadily.

Oversupply will once again dominate against all odds. But strong US Dollar will be the depressing factor that should not be ignored, as pricing is Dollar based. Hence, Brent Oil is expected to average around & 52-55 and WIT will remain a notch below.

India’s demonization strategy to clamp down black money hoarders will have severe impact on its economy, as risk is likely to spread from external shock due to rising US Interest Rates and higher oil prices. Its remittances are likely to dip around USD 70 billion or below and exports may take a bite. The overall impact will be 1-3 pct decline on its GDP and Rupee will weaken by 3-5 pct.

While, Economies of Asian zones will remain under stress, as rising US Interest Rate trend can give shiver to the Asian market, as nearly three quarter of bonds are priced in US Dollar, which risks flight of capital.

ECONOMIC DATA PROJECTION 

FED Rate 0.75 pct = Looking for Two Hikes

US 10-Year Bond @ 2.445 pct = Target 2.90 pct

EURO @ 1.0480 = ECB policy and US Interest Rate will guide Euro, if 1.0050 survives then 1.10-12 zones will be test or else 0.9780

GBP @ 1.2284 = Choppy trade expected, on the dip if 1.1550 holds upside test of 1.27-29 is a good possibility or else 1.1040

JPY @ 117.30 = Likely to hold around 122 or else 125, break of 108 is required       for 102.

Chinese growth unlikely to move beyond 6.4 pct

Chinese Yuan @ 6.9429 = Target 7.25

Indian Growth Rate between 5 pct – 6 pct

Indian Rupees @ 68.13= To weaken by 2-4 pct

Brent OIL @ $ 56.85 & WTI @ $ 53.85 = Average around & 52-55 and WIT will remain a notch below.

GOLD @ $ 1150 = US Interest Rate pressure and low demand will add pressure on Gold $ 1260 should hold. Break of $ 990-1000 physiological, will further push Gold down towards $ 880. But buyers on dip will often pop up.

 (Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

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“Outlook 2017”

PAKISTAN OUTLOOK

This year Pakistan will be engulfed by an election fever. On the economic front, PML (N) government on completion of its 42 month period (December 2017) has averaged GDP growth of 4 pct (plus).

At its current pace, by the end of Fiscal Year 2016-17 Pakistan’s economy will miss its original growth rate target of 5.7 pct and may settle around 5.25 pct, which should be reasonable.

In next two quarters (July-Dec 2017) I am expecting the economy should get further boost and should hit growth rate of 5.35 pct or beyond. This means that on completion of PML (N) 5-year term the economy on an average is likely to grow at around 4.50 pct. Its predecessor (PPP) during its 5-year rule attained average growth rate of 3.10 pct.

In calendar year 2017, despite few odds, indications are pointing towards continuation of robust growth, as all out efforts will be made to leap forward because of the election year ahead. CPEC should be the major contributor.

Though Pakistan is done with three-year IMF program, but it is still under obligation to submit report regularly on six-monthly basis for next three-years for review purpose to confirm continuation of compliance of its specified economic reform program.

However, ruling party is comfortably placed and due to 2018 elections, it will not hesitate to take liberty to borrow excess fund. Hence, excessive role of “Fiat Money” will be witnessed that should provide cutting edge to the fiscal authorities, as they look poised to win another term.

A brief look at the economic plan will suggest that the ongoing spending of mix and match trend will have no stopping because opposition parties did not show their intention or economic sense to counter or prevent breach of limits, rules and regulations.

Neither have they ever made a serious effort to debate or pass series of legislation in parliament voicing their concern against economic disparity to support the lowest income category.

POLICY/DISCOUNT RATE & INFLATION =

Though in last couple of years, Pakistan’s Central Bank has played vital role in managing exchange rate and inflation/policy rate that has largely helped in stabilizing the market, SBP should relook and reconsider designing its policy rate strategy by effectively using its monetary tool. SBP should also demand strong Fiscal support, as the nation is already paying a very price to Finance country’s Debt (External & Domestic), which is not sustainable due to numerous unfavorable factors.

In its July 2016 Policy announcement, SBP targeted FY 17 CPI inflation between 4.5 pct to5.5 pct, which was further revised upward, as SBP’s latest report says they are expecting CPI inflation to remain within 6 pct target.

At the end of two quarters of FY 17, it is proving to be inaccurate assessment. Based on 5-months, inflation averaged 3.92 pct, it can safely be said that in the FY 17 end CPI inflation will close well below its July target level.

Despite continued low inflation rate era, SBP leaned towards cautious approach and in my view delayed rate cuts, which was one of the major reason for BENING Fiscal Policy Stance that offered High Return in Government Securities (PIB Yields and Coupons) that has caused excessive burden on exchequer resulting sharp increase in the size of Debt and it’s financing.

However, I do not see rising oil price a real threat to Pakistan’s economy, which can potentially gain another $ 5-7 before exhausting. Oil cost is likely to average below $ 55 levels in 2017.

Hence, I am not expecting inflation to make a big stride unless Domestic Oil prices are raised sharply, which will not happen as we approach elections. In fact my bet is that first a small up move, then cut in Domestic Petrol price, as oil on international market will gradually ease, which will be election gimmick.

Further, high storage of global food stocks in record volume indicates prices will remain lower. China poses a big threat/risk to all the commodity exporting countries, as it holds huge stock of major Agri-based commodities and if it decides to release its stock, global wheat, cotton and sugar prices will once again come under severe pressure.

In Pakistan too stocks are enough to cater the needs and unless there is extreme weather condition, crop production should not be a matter of concern. Instead support price factor will continue to haunt the government for its continuous dysfunctional behavior due excess food supply, lack of storage facilities and falling commodities prices around the globe will add to the unplanned support price misery.

Therefore, based on my calculation, in all probability inflation should not be a threat in remaining 4-quarters of calendar year 2017, which is unlikely to surge beyond 4.25 pct by the end of June and should comfortably stay around 4.80 pct by the end of December 2017.

DEBT & DEBT FINANCING =

Lack of vision/effort to counter odds is causing severe financial constrain on the National Kitty for which government is paying a very high price through expensive borrowings.

Ongoing Global Mess is evident that Economic Survival on External and Domestic Borrowings is only a makeshift arrangement and is temporary that repeatedly burst. If this strategy becomes a habit then it ultimately becomes hazardous that can turn into disaster.

Higher growth rate does not guarantee higher exports and higher tax collection or higher earnings. If we take a look at overall pattern of 42-month period growth graph of present regime, the trend shows GDP growth is constantly on the uptick, but Debt to GDP ratio has been worsening breaching the FRDL debt limit. Sharp Surge in Debt is more alarming, which also gives better sense of the all around performance of the economy.

Therefore, slowdown of Exports and poor Tax Collection environment, which is a reality, will never meet its expectation, which is forcing economy to borrow. Cost reduction therapy, is the immediate remedy, which suits Pakistan’s economy.

It can easily be done by further Slashing of Policy/Discount Rates and simultaneously by Lowering PIB Yields and Coupon Rate in line with inflation rate, which can be in a straight line or Flat Yield Curve. It is a cost free opportunity, which the economy is not capitalizing that will give relief to the exchequer by nearly Rs 300-400 Billion annually.

It is all about willingness (Monetary & Fiscal Policy) to assist the economy and to obtain best result. Central Bank will have to effectively use its monetary tool by further lowering of SBP Repo Rate (floor rate) of the corridor that will give much need boost to economy. Banks will start supporting the Domestic Economy by funding corporations through Private Sector Lending.

If Policy Rates, PIB Yields and Coupon Rates are substantially reduced, the overall impact will be tremendous, as increased Bank Lending will energize economic activity that will also give much need boost to increase Revenue Collection and job condition will improve resulting another Rs 300-400 Billion gains depending on the size.

While, unchanged or End of Easy Policy Rate and unaltered Fiscal Stance will deteriorate economic condition, as Cost of External and Domestic Borrowings will start causing damage to all the SBP’s good work. Current Account Deficit will worsen due to lower Exports earnings and Government Borrowings and Bank Investments in Government Securities will increase sharply to meet funding needs. Pressure will further mount on SBP Rupee/US Dollar Swaps. Circular Debt and Currency in Circulation are two other unforgettable bleeding entries.

Therefore, ideal strategy is that before the monster raises its head “ Try To Nip It In The Bud” so that borrowing cost is manageable. If it is left unchecked, severe impact will be felt in later 2-half’s of FY 18 and in Calendar year 2018.

EXCHANGE RATE Rs/USD @ 104.61

Exchange rate has many dimensions and can be viewed differently in two different countries because of economic factors that may differ from one another.

In Asian and in Emerging market economies, since 2009 ample of cheap money were made available due to ultra loose monetary policy stance adopted by Global Central Banks.

Recently, after US Dollar gaining strength and Interest Rate inching up, conditions have changed causing Flight of Capital, which is mounting pressure on local currencies fearing tightening due to shift in high yielding USD denominated asset.

In Asia, commodity exporting such as Malaysia, Indonesia, Thailand and India or Brazil in South America and Nigeria, Zambia and Ghana in Africa, as all countries are faced with huge risk because of the burden of debt service cost, which potentially affects economic growth.

Pakistan’s exchange policy is appropriate and is well managed by SBP. Based on FY June 2015 USD FX Reserves of USD 13.5 Billion Net FX Reserves with SBP that has surged to USD 18.1 Billion, by end of FY 2016 which is USD 18.3 Billion (current) what is the justification for weak Rupee?

It’s the poor Export policy, which needs to be corrected. Our Food Commodity Policy is very embarrassing. First producers get pat on their back in the name of Support Price, which since last half a decade is higher than the international market price, so they are unable to sell abroad because they cannot match the price, and hence exporters are blessed with 20-25 pct rebate to match the international market price.

Similarly Cotton industry carries a long list of grievances. Refund is their genuine demand, which is 18 pct of the total annual export. But the industry or the critics never uttered a word about the biggest incentive they are enjoying due to sharp slash of 7 pct in Export Finance Rate, which is down to 3 pct from 10 pct on January 01, 2011.

Combining two Export products, Food (USD 3.7 Billion) and Textile USD 12.75 Billion) the estimated size of Export is USD 16.45 Billion against Pakistan’s total export of USD 22 Billion.

Hence, depreciation of Pak Rupee is not the answer to low export growth. Since the country has nothing much to offer. Instead structural changes are required to create demand for Pakistani products. Therefore, modernization and complete overhauling of the industry is necessary to meet the required standard.

Like past, the cost of Depreciation will be very high without any guaranteed economic gain, it will cause more economic misery, as cost of debt that will also push inflation sharply higher.

However in calendar year 2017, pressure on Rupee will exert if 105 level surrenders, then Rupee could weaken by 2 pct.

CLOSING REMARKS

From economic perspective this is a challenging year for Pakistan, as the country will soon be approaching elections. The task ahead is daunting, as Oil prices are on the up, Exports have declined due to weakness in Export and Crop Policies, Tax Collection target remains a big challenge, FDI has fallen and Remittances growth has slowed down.

While, Debt (Domestic & External) is constantly piling up and the Source of its Financing is Borrowings and not Income, which is very disturbing. Circular debt remains a matter of concern.

Trend of Private Sector Bank Lending is alarming and extremely disappointing. As against Bank’s Deposit of Rs 10.66 Trillion, Investment of Rs 6.274 Trillion by Schedule Banks is in GOP Securities, which is a threatening, whereas Bank Lending to Private Sector is Rs 5.3 Trillion.

Here, I would like to share my past experience and let my readers understand that government can win another term.

In March 2008, I was Anchoring a LIVE TV Talk show “MONEY MATTERS” on AAJ Tv and during my talk show with the then Federal Caretaker Finance Minister, I asked him the reason for his unpopular economic stance that surly was the cost his PML (Q) government had to pay, as they lost the elections.

It was because the then Caretaker FM sharply slashed food and energy subsidy giving jolt to poor voting community. Petroleum prices was sharply hiked by nearly 15-20 pct. In a span of 6-months Pak Rupee lost 14 pct of its value against USD to hit highs of 69.70 in May 2008. This was one of the major causes that were never discussed that had easily toppled PML (Q).

I did ask Caretaker FM about the awkward timing of his decision to hike prices, as elections is knocking at the door and I clearly told him that prior to elections prices are eased by the ruling parties to obtain soft votes and you are doing just the opposite. I did convey that you can easily win the elections by reducing prices of Ghee, Atta, Sugar, Transportation and Electricity. Depreciation of Pak Rupee will have severe impact on prices, as it will hit inflation.

He was confident about his aggressive decision/act and was probably too sure that PML (Q) will win the election with ease. He was rather doing early homework for IMF loan without realizing the cost of his adventurism.

And in my view, this was one of the major causes of PML (Q) getting wiped out. This economic blunder was never been pointed out.

I think PML (N) government is smart and I do not expect them to make such blunder as they are comfortable placed. They will probably make best use of the opportunity.

Parting with IMF was the initial strategy that given them enough space to move freely. This is why in its first major move despite sharp hike in oil prices in the international market government has decided not to increase petroleum prices, hinting more such relief measures in coming months until elections to give comfort to the common man.

Now, ruling party has the required space to breath. They are expected to provide further relief and easy conditions to the general public, which may disturb economic numbers. But it will not be a matter of concern.

Hence, Rupee may remain stable with chances of minor downward adjustment possible, as all eyes will be on regional currencies for direction. I do not see big jump in energy prices (Petrol, Electricity & Gas Bill).

Inflation will not be a threat and is manageable. I will not be surprised to see further rate cut and sharp cut of PIB Coupon rate that will reduce financing cost and Bank lending to Private Sector could surge, which suits the government perfectly.

Since any costly move will be risky affair for the ruling government due to coming elections, hence, with determination to win next term, I am expecting PML (N) to play its card effectively and will make calculated moves.

GDP GROWTH RATE = 5.25 % (Jan-June 2017 ) = 5.35 % (July – Dec 2017)

INFLATION RATE = 4.25% (Jan – June 2017) = 4.80% (July – Dec 2017 )

SBP TARGET RATE = I do not see hike in Target Rate and I will not be surprised to see 25-50 basis point cut.

PKR/USD @ 104.80 = Could weaken by 1 pct to 2 pct

PIB YIELD = Expecting Downward adjustment ranging between 50-150 basis point as it will reduce borrowing cost and provide some breathing space. Minor reduction will not give respite and will substantially increase the burden due to growing size of debt.

FISCAL DEFICIT = Will miss Target 3.8 pct and will hit 4 pct or beyond (It does not include Circular Debt).

REMITTANCES = In Calendar year 2017, I do not see big fall in remittances, in later two half of FY 17 (Jan-June) flow will surge beyond USD 9.7 Billion. However, in remaining two months of July-Dec 2017, remittances may struggle to attain 9.5 Billion levels, but is likely to hit USD 19 Billion in four quarters of 2017.

TAX COLLECTION = Target Rs 3.621 Trillion will be missed.

DEBT SERVICING COST = Will surpass Rs 1.5 Trillion.

PSX @ 47,806 = Range 42.000 to 53.000. Likely to hit upside, but I am not ruling out large correction.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

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