1HFY11- Sufficient Liquidity in the System

Ample liquidity – M2 grew 16.1% YoY during 1HFY11: M2 increased by 16.1% YoY. Unlike FY10, growth was driven by increase in both NFA and NDA.

NFA showed phenomenal 54.5% YoY growth: Sustained foreign inflows during 1HFY11 accelerated NFA growth, which increased by 54.5% YoY, significantly higher than 33%YoY growth recorded during 1HFY10. However, sustainability of growth in NFA remains uncertain.

NDA growth fuelled by persistent GoP borrowing; 3QFY11 T-Bill Auction target PKR980bn: High defence and flood related expenditure needs have forced GoP to borrow from SBP, and more so due to non receipt of promised foreign funds. This has triggered a 12.3% YoY growth in NDA, only marginally higher than 11.6% growth registered in 1HFY10. GoP borrowing trend likely to hold in 2HFY11- evident from 3QFY11 T-Bill auction target (PKR980bn).

2HFY11 likely to see similar momentum in M2 growth: Delay in important tax reforms is certainly going to strain GoP finances in 2HFY11, unless other revenue generation measures and foreign support materialises in 2HFY11. We, hence, believe GoP will continue its borrowing streak, which will drive NDA growth. NFA growth on the other hand may also sustain (base effect), given current growth in remittances persists and pending foreign payments (IMF tranche, Tokyo Pledges) arrive during 2HFY11.

NFA showed phenomenal 54.5% YoY growth

Accelerated Net Foreign Assets (NFA) growth recorded at 54.5% YoY during 1HFY11 can be ascribed to higher foreign inflows during 1HFY11. Inflows include flood related aid, coalition support funds (USD633mn) and most importantly improved remittance inflows under SBP’s Pakistan Remittance Initiative (17% YoY growth for 1HFY11). However, sustainability of this growth rate remains uncertain given tardiness of promised foreign commitments (Tokyo Pledges, FoDP payments).

NDA growth fuelled by persistent GoP borrowing; 3QFY11 T-Bill Auction target PKR980bn

Net Domestic Assets (NDA) grew by 12.3% YoY, only marginally higher than 11.6% growth registered in 1HFY11. Growth was as usual driven by high government borrowing (+21% YoY)

required to finance defence and flood related expenditures and to compensate for absence of some promised foreign commitments. Moreover, a minimal, seasonal up tick in private sector credit (+5.4% YoY) also contributed. In the upcoming half, we expect momentum in GoP borrowing will persist, and in fact may rise given GoP has to bridge PKR82bn revenue shortfall due to RGST and flood surcharge deferment. This is also reflected in the T-Bill auction targets set at PKR980bn for 3QFY11 (43%/83% higher than 1QFY11/2QFY11).

2HFY11 likely to see similar momentum in M2 growth

Delay in important tax reforms is certainly going to strain GoP finances in 2HFY11. Room, however, may be created if budgetary support promised by U.S, China and Japan materialises, and other revenue generation measures (FBR currently considering amendments in withholding tax or tax on corporate gross assets) are implemented in 2HFY11. In an otherwise scenario, GoP will ultimately have to borrow from SBP, which will drive NDA growth. NFA growth, on the other hand, may also sustain, given current growth in remittances persists and pending foreign payments (IMF tranche, Tokyo Pledges) arrive during 2HFY11.

Economic & Political News

Monetary policy on January 29

Central bank will announce on January 29 its monetary policy for the subsequent two months.

16.8% rise in 1HFY11 remittances

In December 2010, USD863.1mn was sent home by overseas Pakistanis, up 23.7% when compared with USD697.6mn received in the same month of last year. Remittances show rising trend as USD5.29bn was received in 1HFY11, showing an increase of USD761.2mn or 16.8%, when compared with USD4.53bn received during the same period of last fiscal year. The monthly average of remittances for 1HFY11 was USD881.9mn as compared to USD755.0mn during the corresponding period of last fiscal year, registering an increase of 16.8%.

CPI inflation up 15.68% in December

The CPI inflation soared by 15.68% in December 2010 over the same period of last year with phenomenal increase in perishable food items. According to the FBS data, the food inflation rose by 20.36% in December 2010 with cost of perishable food items going up by 43.52% and non-perishable by 17.12%. Analysis of the FBS data showed that inflation rate measured through Wholesale Price Index (WPI) shot up to 24.40% and weekly inflation measured by the Sensitive Price Indicator (SPI) soared to 21.65%.
Analyst Certification:
The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Disclaimer

The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

Contributed By