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Thursday, February 15, 2024

JP Morgan points to improved economic situation in Pakistan: Farrukh

The minister said the report predicted a decline in the fiscal deficit from the current 7.1 percent to 5.9 percent of the GDP during the next financial year.

Minister of State for Information and Broadcasting Farrukh Habib Thursday said that JP Morgan had asked the investors for investing in Pakistan to reap benefits of its improved economic situation.

In a tweet, he said the world’s biggest institution of Investment and Financial services (JP Morgan), in its recent report, had predicted Pakistan’s GDP (Gross Domestic Product) growth at 4.7 percent for the fiscal year 2021-22. It also projected the volume of the economy to around $329 billion during the next financial year, he added.

Read more: Economic Survey out: Pakistan shows strong growth among world economies despite pandemic

The minister said the report predicted a decline in the fiscal deficit from the current 7.1 percent to 5.9 percent of the GDP during the next financial year and added that it would eventually bring down the GDP to debt ratio from 87.6 percent to 81.6 percent.

At the beginning of the report titled, ‘Pakistan: Reassessing the investment thesis’, one of the leading financial services company said that the recent months have been good for the country’s economy in terms of the IMF deal, the current account being ‘well supported’, and it argues that the fiscal deficit should continue to shrink in Pakistan in GDP terms.

However, it has rung the alarm bells in terms of risks to current accounts from ‘fading remittances’, inflation, the country’s vulnerability to new waves of COVID-19 supported by the low vaccination rate, largely negative real yields, and political pressure to stimulate growth in the country.

JP Morgan told the investors to keep an eye out for certain key issues and policies in Pakistan in the coming months to wonder whether to invest in the economy or not.

The issues were the IMF EFF deal, or the Extended Fund Facility, for which Pakistan got its third tranche in March 2021 and the fourth one is supposed to be released in June 2021; the FY22 budget which is to be presented on 11th June 2021; Balance of Payments dynamics, for which in April 2021, the credit as per SBP was $5.86 billion and the debit was $6.06 billion; the FX policy, which remains reliant on market forces; monetary policy, which has been recently declared in the recent MPC meeting; and the Growth outlook which is looking good for Pakistan right now.

For the hard currency strategy for investors in Pakistan, the report said, “The favorable read-through from recent IMF developments has been credit positive amid strong investor interest towards Pakistan.”

It added, “We add a new outright PKSTAN 8.25% 2024 long in line with our EM Asia sovereign theme of picking attractive yielding short duration bonds while staying MW PAKISTAN in the Model Portfolio given global considerations.”

This showed a market weight stance to the investors.

Some Key Predictions in the report

Regarding the IMF program, JP Morgan said, ” we expect implementation of the current USD 6bn EFF to remain challenging.” This they said as they quote reports that the FY22 target has already been asked to be lowered, and the government’s decision to not increase the tax burden on the salaried class.

The report said, ” Clearly, further deterioration of Pakistan’s COVID-19 situation against a backdrop of low vaccination levels is a headwind weighing on the growth outlook and the ability to achieve the recalibrated IMF program targets.”

It is worth mentioning here, however, that over the last couple of weeks the positivity has gone down. As of June 10th-June 11th, the positivity ratio was 3.20 percent down from the high peak more than three weeks ago.

According to Reuters, “The average number of new infections reported each day in Pakistan falls by more than 1,200 over the last 3 weeks, 22% of its previous peak.”

The report expects the Debt-to-GDP ratio to decline. It reads, “Debt-to-GDP declined to an estimated 83.9% in FY21, down from a revised 87.6% in FY20. We expect this to decrease again in FY22 (81.5%).”

It added, “The larger denominator and expenditure contracting in GDP terms allowed the improvement. However, it is worth noting that in FY20, spending was mostly cut in capital expenditure as projects were blocked by the pandemic, and projections for FY21 are also pointing in the same direction.”

The report expects the current account deficit to deteriorate higher than USD2.3billion in the outgoing fiscal year, owing to higher imports as economic activity resumption and higher commodity prices. Another major determinant of this estimate is the remittances. The report read, “Workers’ remittances, the key non-debt BoP inflow for Pakistan, have provided overwhelming support for the CAB, but we expect this to weaken going forward.”

The Financial institution’s report expects Foreign Exchange reserves to rise, and said, “We expect FX reserves to rise in the coming months, driven by increased financial inflows, while an increase in SDR(Special Drawing Rights) presents further upside”

On the monetary side, the report expects the interest rate to increase from 7 percent to 8 percent in the upcoming FY22, but risks of no-action are high.

Lastly, on the growth side, the report by JP Morgan expects the economy to continue growing around 4% during the FY22. This is an upward revision of their previous forecast of a GDP growth rate of 3.7 percent. The report shies away from the official government’s prediction of 5 percent because of the “downside risks from a worsening
COVID-19 outlook.”

The report came at a time when the Economic Survey of Pakistan for the fiscal year 2020-21 was released by the finance minister on 10th June, when Pakistan’s provisional GDP saw a sharp upward tick to 3.9% percent in 2020-21, compared to the fall in the preceding fiscal year’s downward contraction of 5 percent.

APP with additional input by GVS News Desk