Pakistan Mild Respite Ahead

Pakistan ended FY22 with a 4-year high current account deficit (CAD) of US$17.4 billion (4.6% of GDP) as against US$2.82 billion (0.8% of GDP) a year ago.

CAD for June 2022 swelled 59%MoM to US$2.3 billion as imports hit a record high of US$7.04 billion on the back of energy imports. This was despite the second highest monthly exports and seasonal rise in remittances.

In the absence of adequate foreign exchange liquidity, the disruption in goods imports along with administrative ban on non-essential items is likely to trim CAD to a sizeable extent in the coming months.

However, Pakistan’s leading brokerage house Inter Market Securities sticks to its base case estimate of US$12.6 billion (3.0% of GDP) for FY23. The most contraction in import bill will be led by absence of TERF-related machinery and COVID-19 vaccinations in addition to the respite from palm oil imports.

Trade deficit hit an all-time high of US$3.9 billion in June 2022 owing to record imports of US$7.04 billion, despite second highest monthly exports of US$3.1 billion, up 26%MoM.

Pakistan’s energy requirements surged tremendously during June 2022, as country’s monthly oil import bill hit the highest mark of US$2.9 billion.

Going forward, imports are likely to stay lower than FY22 monthly average of US$6.0 billion owing to low machinery and vaccination imports, coupled with relatively lower international oil prices and crack spreads.

Some savings will also likely emerge from Foods imports as international palm oil prices have come off by 50% recently. All this is in addition to bottlenecks created by inadequacy of foreign exchange liquidity and administrative measures to curb non-essential imports.

A against this , export of textiles and clothing remained high in FY22 owing to summer demand and adequate energy availability, but home textile demand growth may unlikely stay put in FY23.

Remittances during June 2022 increased 18% to US$2.8 billion on account of seasonal rise from Eid-festivity-flows, managing to remain above FY22 monthly average of US$2.6 billion.

Cumulatively, remittances have risen 6%YoY to US$31.2 billion in FY22. The brokerage house believes, remittance growth is likely to remain tepid as the normalized travel, opening up avenues of non-banking channels.

Despite the US$2.3 billion rollover from China in June 2022, Reserves held by State bank of Pakistan (SBP) increased by a meager US$420 million June 2022 amid elevated imports keeping import cover around 1.5 months.

The IMF staff level agreement is through and the US$1.17 billion tranche is subject to Board approval, and likely to be released by end August 22.

The brokerage house believes, Pakistan’s attempts towards overcoming the foreign exchange liquidity constraints will be difficult, more specifically in terms of bond issuances in the current scheme of things.

This will garner an approval for executing an express transaction to sell government stake in State-Owned Entities (SOEs).

Pakistan: Uncertainty continue to mar economic performance

The Supreme Court of Pakistan has announced its verdict in favor of Ch. Pervaiz Elahi, who has finally assumed the charge of Chief Minister Punjab.

Punjab’s economic and political importance is unparalleled for any party looking to form a government in the center. The province has a population of about 110 million, making up 52% of the country’s populace.

In the FY23 budget, Punjab had budgeted a surplus of PKR125 billion, and federal allocations of PKR1.7 trillion were envisaged for the province (50% of the divisible pool). Any alterations to the budgeted provincial surplus, though unlikely, can result in trouble for future tranches from the IMF.

PTI Chairman, Imran Khan, has repeatedly asked for fair and free elections ever since his ouster in April this year. Following the recent events, PML-N Chief, Nawaz Sharif, also stated that he was in favor of holding early general elections as delaying the same would be disadvantageous to the country.

With Punjab firmly under the PTI coalition and its nominee Pervaiz Elahi at the helm of the provincial government, PTI is now expected to make a move towards the National Assembly and make its government in the center.

The political crisis in the country which started after the dismissal of Imran Khan from his office has seen Pak Rupee depreciate by 27% against the Greenback.

The current political uncertainty comes at a time when the country is already struggling with soaring current account deficit and colossal foreign debt repayments which in confluence with the political uncertainty had put serious pressure on the currency.

The current political and economic uncertainty has resulted in markets starting to price in default risk, resultantly the yields on Eurobonds/Sukuks have reached all-time high, with the December 2022 maturity instrument yields soaring to 45.6%.

At the same time, the PKR depreciation has continued unabated, despite Pakistan having reached an SLA, where concerns over filling a US$4 billion funding gap identified by the IMF remain.

Analysts expect the IMF program to resume soon irrespective of political developments, toning down the uncertainties surrounding Pakistan’s external vulnerability.

However, domestic issues (elections, inflation, interest rates) are likely keep Pakistan’s equities market under pressure.

Eroding foreign exchange reserves rendering State Bank of Pakistan helpless

One of the prime mandates of the central banks around the world, particularly of the third world countries, is to manage exchange rate efficiently and effectively, and State Bank of Pakistan (SBP) is no exception.

However, the recent free-fall of parity raises many questions that include:

1) Isn’t SBP allowed to intervene?

2) Has SBP lost capacity to intervene?

3) Aren’t some groups having vested interest responsible for the present trauma?

 With the utmost disgust, I have to say that the SBP is helplessly watching from the sidelines as the rupee is registering from one all-time low to another low.

Even a Pakistani of ordinary wit understands that in the absence of enough foreign exchange reserves, the SBP can only watch the trauma helplessly.

Please allow me to say that purposely created political turmoil has become the source of all kinds of shocks, pushing Pakistan to imminent default.

Added to political instability are: 1) structural weaknesses of the external sector, 2) higher global prices of fuel and food commodities, 3) geopolitical pressures rendering Pakistan helpless and 4) delay in the revival of the International Monetary Fund (IMF) program.

Between April 7 and July 22, rupee has lost more than 21% value against US$.

Now, the most disturbing question is how long will the rupee continue to decline?

I am afraid neither the Government of Pakistan (GoP), nor the SBP has the reply. Copybook reply being presented is, “Things will become better when US$ 1.17 billion tranche is released, hopefully in last week of August”.

However, analysts say Pakistan needs around US$35 billion for debt serving etc. Therefore, IMF tranche is peanuts and inflows from China, Saudi Arabia and UAE will provide a temporary breathing space only.

One needs not be a genius to understand that if Pakistan’s import bill of goods and services continues to eat up more than 90% of the foreign exchange earnings through remittances, export proceeds and foreign investment then hardly anything is left for external debt servicing.

I am forced to infer that the GoP will continue to borrow for debt servicing and will never attain comfortable level of foreign exchange reserves in the foreseeable future.

Dishonest western media not reporting correct situation of oil market

Over the years I have been saying that Western media often rum ‘tinted’ reports. This morning I got yet another proof to support my attribution.

It has been reported that for the second straight week, the main oil futures contracts have seen a marked rejuvenation in open interest, primarily coming from bullish long positions.

It was inferred that despite ongoing fears of an economic recession, traders believe that the selloff earlier this month was overdone.

This means the markets are largely ignoring the return of Libyan oil. In addition, Europe’s natural gas woes have strengthened demand prospects for middle distillates, with diesel switching in the winter months now a very real possibility.

The spread between the world’s two leading crude benchmarks, Brent and WTI, is as wide as it has been in more than three years, moving as far as US$8.50 per barrel recently.

Previous strength in WTI has been tangibly beaten down by weakening gasoline demand and several consecutive stocks builds.

US crude exports have seen a substantial drop compared to record highs seen in April-May, but the wide Brent-WTI spread will provide a huge boost to European buying of the American benchmark.  

The OPEC+ group had a massive shortfall of 2.84 million barrels per day (bpd) in June between actual production and the target oil output level as part of the deal. 

As OPEC+ is unwinding its cuts, more and more members are falling further behind their quotas due to a lack of capacity or investment in supply.

In June, the compliance rate at the OPEC+ group soared to 320% from an estimated 256% in May, according to Argus’s sources, suggesting that the gap between nameplate production per the agreement and actual production continues to widen. 

Per an Argus survey from earlier this month, OPEC+ pumped more than 2.5 million bpd below its target in June, despite a rebound in Russia’s oil production that helped the group’s output rise by 730,000 bpd from May. 

Russia’s oil production rose in June and was approaching the levels last seen in February, just before the Russian invasion of Ukraine. Most of the rebound was due to higher intake from domestic refiners.  

The ten OPEC producers in the OPEC+ pact pumped 24.8 million bpd of crude oil in June, with production falling one million bpd short of the target levels.

Top OPEC producer Saudi Arabia naturally raised its crude oil production by the most in June compared to May.

Yet, per OPEC’s secondary sources, even the Saudis were lagging behind their quota for June. Saudi Arabia’s oil production rose by 159,000 bpd to 10.585 million bpd. To compare, the Saudi target was 10.663 million bpd, the Kingdom was 78,000 bpd below its quota last month using secondary source figures.

OPEC+ is expected to continue to underperform by a lot compared to its production targets for July and August after the group decided to accelerate the rollback of the cuts and have those completely unwound by the end of August. 

Would Hezbollah risk war with Israel over Karish gas rig?

Less than a month before the Karish gas rig is set to start operations, Hezbollah’s Secretary General Hassan Nasrallah has upped his rhetoric to use force to stop Israel from extracting gas.

“If the extraction of oil and gas from Karish begins in September before Lebanon obtains its right, we would be heading to a problem and we will do anything to achieve our objective,” Nasrallah said in an interview on al-Mayadeen TV on Tuesday night.

“No one wishes for war and the decision is in Israel's hands, not in our hands,” he said. But his opponents say, “It is in Nasrallah’s hands, and the leader of the Lebanese terror group knows it. They say, “He is making a calculated gamble that the negotiations over the disputed maritime border will end in favor of Lebanon.

Nasrallah warned, “All fields are under threat and that no Israeli target at sea or on land is out of the reach of the resistance’s precision missiles.”

While tension has risen significantly between Israel and Hezbollah, the intelligence community does not think that Nasrallah would drag the entire region into war over the rig. But, the intelligence community is not always right. 

They refer to the Second Lebanon War. Haaretz’s Amos Harel, a senior officer said that a day before the ambush of troops and kidnapping of two reservists in 2006, we didn’t have a clue.

Another example where the military did not expect war was last year in May when Hamas launched a barrage of rockets toward Jerusalem. That led to 11 days of conflict between Hamas, Palestinian Islamic Jihad and the IDF and over 4,000 rockets and mortars fired into Israel.

Israel knows Hezbollah is not like Hamas. Over the last 15 years, since the Second Lebanon War, Hezbollah has significantly increased its capabilities which will cause untold damage and cause significant casualties in Israel.

With the help of Iran, the group has rebuilt its arsenal and it is estimated that Hezbollah has between 130,000-150,000 rockets and missiles, many that can reach deep into Israel, including ballistic missiles with a range of 700 kilometers and a handful of precision missiles that are expected to be fired toward strategic sites.

It is believed that in the next war, Hezbollah will try to fire some 1,500-3,000 rockets per day until the last day of the conflict. 

Threats from Nasrallah are nothing new; it’s almost as if whenever he says something it’s to threaten Israel and the IDF.

But recently, Israel has taken the threats more seriously, and Defense Minister Benny Gantz told Alon Ben David of Channel 13 that the situation on the northern border is sensitive.

 "The person who made the lives of Lebanon's citizens worse is Nasrallah, I hope he stops while he still can. He understands that he needs to be careful,” Gantz said, adding, "If he challenges us, we will take off our gloves and we will hurt them.”

Israel sees the Karish rig as a strategic asset several kilometers south of the area over which negotiations are being conducted, and has warned that it will defend it.

But Nasrallah, who sees himself as the defender of Lebanon, also wants to defend it from Israel, even if that means dragging the already crumbling Lebanese state into war with the IDF.

When asked if the group could win a future war with Israel, Nasrallah said that the Lebanese should be confident in the resistance’s capabilities.

 Nasrallah, who answers to Tehran and not to Beirut, added that while the group has not asked anyone to join a future war on our side, it is not known if other forces might join such a war, and this a strong probability.

Hezbollah has made it clear that they will continue to challenge Israel over the rig, despite the real risk of deteriorating into a full-blown war. 

Unlike previous wars, this would be a war over a strategic economic asset. Lebanon has been suffering from a crippling economic crisis since 2019 that has only gotten worse with the global food and fuel crisis. A ruling in favor of Lebanon would allow the country to finally have some breathing room for its population which has not had a break in years.

Israel, of course, is not immune to the crisis and the Karish was set to be an answer to the country’s expanding demand for energy. The excess gas would also be available for export, such as for Europe, which is reeling from Russia’s war in Ukraine and its threat to shut off or reduce supply to the continent over its support for Kyiv.

Isreal anticipates that it would not look like a war with Hamas and it would not look like the war between Russia and Ukraine. A war with Hezbollah would drag the entire region into a war that would also see all terror groups and Iranian proxies take part. And the complete destruction and deadly consequences of the war would be on Nasrallah, not the IDF. 

China sends troops and tanks to Russia to participate in military games

Reportedly, Chinese People’s Liberation Army has sent a delegation to Russia to take part in Moscow’s International Army Games next month, the first time the event has been held since Russia invaded Ukraine.

A train carrying personnel, military tanks and vehicles recently left Manzhouli, Inner Mongolia in China’s north, headed to Zabaikalsk in Russia’s Far East, the military channel of state broadcaster CCTV reported on Monday, without giving further details.

The Chinese team is expected to compete against counterparts from 37 countries and regions at the event – Russia’s largest multinational military exercise. It will take place between August 13 and 27 across 12 countries, including Russia, Iran, India, Kazakhstan, Uzbekistan, Azerbaijan and Armenia.

First held in 2015, this year’s International Army Games is being held amid heightened tensions between Russia and the West after Moscow attacked Ukraine on February 24.

Venezuela – which broke off relations with the United States in 2019 after President Nicolas Maduro assumed a second term in an election that Washington considered a “sham” – is to host a sniper competition as part of the war games.

It will be the first time the Russian-led exercise has been held in the western hemisphere. That could be a “strategic move” for China, Russia, Iran and Venezuela “to preposition forward-deployed military assets in Latin America and the Caribbean”, the Centre for a Secure Free Society, a Washington-based think tank, said in a recent report.

Meanwhile, Niger and Rwanda will be the first African countries to make their debut at the games, according to the Russian defence ministry.

China has been a regular participant since 2015 and will host three competitions, including an infantry fighting vehicles game and a frigate race.

Chinese and Russian forces have stepped up joint military exercises since 2005, both bilaterally and through multilateral platforms, and these have become more regular in recent years as both countries face increasing acrimony from the West.

China’s PLA is also looking to learn from its Russian counterparts, which have carried out military operations in a number of regions in recent years, from the North Caucasus and Georgia to Ukraine and Syria.

While Beijing and Moscow have said their military cooperation does not target any third country, it has prompted growing suspicion from the West.

In its latest defence white paper released on Friday, the Japanese defence ministry said the deepening of military cooperation between China and Russia, including joint air and navy drills in Northeast Asia, “will have a direct effect on the security situation surrounding” Japan.

The International Army Games, organized by Russia’s defence ministry, brings together the militaries of dozens of countries every year in an event it says is to sharpen their skills in combat operations, including a 50km (31-mile) march through the snow.

It comes as 14 NATO allies last month took part in a 13-day joint exercise in the Baltic. Among those taking part were the United States, Norway, the United Kingdom, Germany, France and Belgium. Finland and Sweden – which applied for Nato membership after Russia’s invasion of Ukraine – also joined the exercise.

It involved more than 45 ships, 75 aircraft and 7,500 personnel and covered amphibious operations; anti-submarine and air defence drills that NATO said would demonstrate the flexibility of the maritime forces.

  

Global food crisis demands urgent response

Russian President Vladimir Putin’s invasion of Ukraine shocked the world, forced Western countries to respond, and is driving up the cost of energy and food across the globe. 

However, the most urgent economic, social, and human crises are unfolding in poorer countries where populations face war, spillover-driven inflation, and more expensive foreign-currency debt.

Together these dynamics put populations in Asia, Africa, and some parts of Latin America and the Caribbean at risk of shortages, riots, unrest, and famine. The conflict in Ukraine is directly affecting supplies of food. News of a deal between Russia and Ukraine to allow grain exports is welcome. Russia and Ukraine together account for nearly a third of global wheat supplies, so any stoppage or constriction in trade affects access to basic foodstuffs for many.

Wheat prices are up while sunflower oil, meat, poultry, and a raft of other staples have also risen, driven by higher fuel and fertilizer costs. The United Nations' Food Price Index, which captures the effects of war and supply disruptions, recently reached an all-time high of 156, up from 103 in 2020.

The alarming economic and political crisis in Sri Lanka shows what may occur elsewhere. Long-standing poor governance and corruption in the South Asian country has combined with economic crises, price hikes, and fuel and food shortages to snap the threads of economic and societal stability. The result is unrest, riots, and a collapse of the government.

Sri Lanka is unlikely to be the last country to face economic and governmental strife. Other poorly run, indebted, and stressed states - and their populations - could be weeks or months from similar turmoil. As Kristalina Georgieva, Managing Director, International Monetary Fund, points out, food crises “can unleash social unrest, (yet) … hunger is the world’s greatest solvable problem”.

As the rich in the West grumble, governments in poorer states are reacting by placing restrictions on food exports, according to World Bank President, David Malpass. While inflation is bad for all, the poorest were already spending at least half of their income on food. They have extraordinarily little room to absorb price increases before they go hungry and their children face malnutrition.

Oxfam estimates as many as 323 million people are on the brink of starvation; the United Nations reckons 869 million are facing hunger. Unfortunately, the leaders of the world’s wealthy states are so far doing too little to avert the developing food emergency. In June the G7 group of nations, led by the United States, pledged US$4.5 billion to address the looming food shortage, but this is not enough to avoid disaster.

It’s not the first time insufficient pledges by the world’s richest economies have delivered worse outcomes for the planet. Two years ago epidemiologists estimated that vaccinating the populations of lower-income countries against Covid-19 would cost just US$2 billion. The costs of a failure to equitably distribute the vaccine are conversely massive. 

It is estimated that the negative impact for lower-income countries was US$156 billion in 2021–2022 and US$216 billion the following year. Yet rich nation donors came up with only US$700 million, while providing economic support worth US$15 trillion for their own populations.

The food crisis requires rapid action and resources of at least US$22 billion, according to the UN World Food Program. Delay will only increase the human, economic, and societal costs.

The invasion of Ukraine has hobbled the G20, whose members include Russia. The group’s recent meeting in Indonesia ended in discord. Yet the pandemic also demonstrated that when crisis strikes only state actors, acting collectively, can marshal the necessary resources, spur private and public policy action, and get fast results.

The International Monetary Fund, World Bank, and regional multilateral development banks in Asia, Latin America and Africa should be charged with managing the food and fuel crisis and equipped to step in urgently. These bodies, although consensual in nature, can direct resources and relief without a veto from Russia or its allies. This institutional room to act must be used swiftly.

We believe the response cannot wait until the World Bank and IMF hold their annual meetings in October. The leadership of these and other pillars of the global financial system must be empowered and act now.

First, they should monitor the fiscal and economic stability of countries facing increased distress from debt and rising food prices.

Second, they should redirect existing and additional multilateral and bilateral resources. Current promises, such as the US$2.3 billion committed by the World Bank, are insufficient.

Third, leaders whose countries are in or nearing a crisis should receive multilateral support, with no shaming of that necessary step from public or private creditors and credit ratings agencies.

Finally, public and private creditors should exercise restraint and be willing to take haircuts on their debt to secure stability. No one should profit from malnutrition and misery. Lenders must be part of the solution, not the problem.

National political and financial leaders still must work to avoid a food price crisis, famine, and human catastrophe. Recent history suggests politicians often lack the will to act, even though they know what is needed and that the upfront financial costs are manageable.