Pakistan facing the toughest time of its history

According to a report by Pakistan’s leading brokerage house, Topline Securities, falling foreign exchange reserves and rising external funding gap is worrisome. Though, current account deficit is coming down, the biggest worry is external debt servicing.

Pakistan economy is passing through one of the toughest times in its 75-year history. Large external financing gap, challenging global financial markets, devastating floods and local political instability has increased the risk of timely external debt payments.

According to IMF data, Pakistan’s external debt repayment obligations are estimated US$73 billion over the next three years (FY23-25) as against prevailing foreign exchange reserves hovering US$8 billion at present.

The huge repayment are due to large external borrowings that have doubled in 7-years from US$65 billion in FY15 (24% of GDP) to US$130 billion (40% of GDP) in FY22.

Resultantly, Pakistan’s total debt and liabilities (domestic & external) have increased from Rs19.9 trillion (72% of GDP in FY15) to Rs60 trillion as of June, 2022 (90% of GDP).

Considering this external debt repayment crisis, the brokerage house think Pakistan will do a Debt Rescheduling (Base Case) with its bi-lateral lenders especially China as it forms 30% of government external debt and the repayment to China will be huge in next few years.

Pakistan must capitalize on its friendly relationship with China and must seek IMF led Debt Restructuring of at least US$30 billion for next 3 to 5years. Finance Minister has already hinted at rescheduling of bi-lateral loans without any haircuts.

The Sooner the government starts this process the better it will be. In case, current coalition Government delays it for political reasons than new Govt. coming to power after 2023 Elections will have to do this. The new government will have to enter into a new and a bigger IMF program to execute this much needed rescheduling.

Commercial lenders, Eurobonds investors, local lenders and others may or may not be affected from this rescheduling depending upon the negotiations.

Pakistan credit rating that was recently downgraded (Moody’s downgraded to Caa1 from B3) may also be adversely affected. 

The brokerage house claims to have seen precedence from other countries like Argentina, Angola, and Zambia etc. that also undertook restructuring of loans. Even in past, Pakistan restructured its Eurobond and rescheduled certain portion of Paris Club payments post nuclear tests in 1998.

Under the new IMF program along with debt restructuring, Pakistan will have to follow stringent monetary, exchange rate and fiscal policies. The economic growth is anticipated to remain slow. On top of all, while PKR will remain under pressure, interest rate may spike to higher levels despite receding inflation.

According to the brokerage house, under the Best-Case scenario if commodity prices fall 25% and financial markets improves that will provide the much-needed relief and the country may not require debt restructuring.

If the debt is not restructured on time, Pakistan’s debt crisis could worsen further which could hamper Pakistan’s ability to pay on time.

 

G-7 agrees US$60/barrel price for Russian oil

The Group of Seven (G7) nations and Australia on Friday said they had agreed a $60 per barrel price cap on Russian seaborne crude oil after European Union members overcame resistance from Poland and hammered out a political agreement earlier in the day. The price cap would take effect on December 05, 2022 or very soon thereafter. Details of the deal are due to be published in the EU legal journal on Sunday.

The Group of Seven (G7) is an intergovernmental political forum consisting of Canada, France, Germany, Italy, Japan, United Kingdom and United States; additionally, the European Union is a "non-enumerated member". It is officially organized around shared values of pluralism and representative government, with members making up world's largest IMF advanced economies and liberal democracies. As of 2020, G7 members account for over half of global net wealth (at over US$200 trillion), 32 to 46 percent of global gross domestic product, and 10 percent of the world's population (770 million people). Members are great powers in global affairs and maintain mutually close political, economic, diplomatic, and military relations

The nations said they anticipated that any revision of the price would include a form of grandfathering to allow compliant transactions concluded before the change.

"The Price Cap Coalition may also consider further action to ensure the effectiveness of the price cap," the statement read. No details were immediately available on what further actions could be taken.

The price cap, a G7 idea, aims to reduce Russia's income from selling oil, while preventing a spike in global oil prices after an EU embargo on Russian crude takes effect on December 05, 2022.

Warsaw had resisted the proposed level as it examined an adjustment mechanism to keep the cap below the market price. It had pushed in EU negotiations for the cap to be as low as possible to squeeze revenues to Russia and limit Moscow's ability to finance its war in Ukraine.

Polish Ambassador to the EU Andrzej Sados on Friday told reporters Poland had backed the EU deal, which included a mechanism to keep the oil price cap at least 5% below the market rate. US officials said the deal was unprecedented and demonstrated the resolve of the coalition opposing Russia's war.

A spokesperson for the Czech Republic, which holds the rotating EU presidency and oversees EU countries' negotiations, said it had launched the written procedure for all 27 EU countries to formally green light the deal, following Poland's approval.

European Commission President Ursula von der Leyen said the price cap would significantly reduce Russia's revenues.

"It will help us stabilize global energy prices, benefiting emerging economies around the world," von der Leyen said on Twitter, adding that the cap would be "adjustable over time" to react to market developments.

The G7 price cap will allow non-EU countries to continue importing seaborne Russian crude oil, but it will prohibit shipping, insurance and re-insurance companies from handling cargoes of Russian crude around the globe, unless it is sold for less than the price cap.

Because the most important shipping and insurance firms are based in G7 countries, the price cap would make it very difficult for Moscow to sell its oil for a higher price.

US Treasury Secretary Janet Yellen said the cap will particularly benefit low- and medium-income countries that have borne the brunt of high energy and food prices.

"With Russia’s economy already contracting and its budget increasingly stretched thin, the price cap will immediately cut into Putin’s most important source of revenue," Yellen said in a statement.

A senior US Treasury Department official told reporters on Friday that the US$60 per barrel price cap on Russian seaborne crude oil will keep global markets well supplied while institutionalizing discounts created by the threat of such a limit.

The chair of the Russian lower house's foreign affairs committee told Tass news agency on Friday the European Union was jeopardizing its own energy security.

The initial G7 proposal last week was for a price cap of $65-$70 per barrel with no adjustment mechanism. Since Russian Urals crude already traded lower, Poland, Lithuania and Estonia pushed for a lower price.

Russian Urals crude traded at around $67 a barrel on Friday.

EU countries have wrangled for days over the details, with those countries adding conditions to the deal - including that the price cap will be reviewed in mid-January and every two months after that, according to diplomats and an EU document.

The document also said a 45-day transitional period would apply to vessels carrying Russian crude that was loaded before December 05 and unloaded at its final destination by January 19, 2023.

United States Navy faces mental health crisis

The United States Navy and local authorities are investigating the suspected suicide deaths of four sailors all assigned to the same ship maintenance center in Norfolk, Virginia, in the span of less than a month. 

All four were assigned to Mid-Atlantic Regional Maintenance Center (MARMC) at Naval Station Norfolk, the Navy confirmed to The Hill on Friday. 

The most recently deceased of the four, Janelle Holder, was found dead on November 26, 2022 according to Lt. Cmdr. Rochelle Rieger, a public affairs officer with MARMC. 

The three other sailors, Kody Lee Decker of Virginia; Cameron Armstrong and Deonte Autry of Monroe, were found dead on October 29, November 05 and November 14, respectively.

“The circumstances surrounding these separate incidents are currently under investigation by local police departments and the US Navy,” Rieger said.  

“We mourn the loss of our shipmates and friends. Our thoughts and our deepest condolences are with these Sailors’ families, loved ones, and coworkers during this extremely difficult time,” she added. 

NBC News first reported on the deaths. 

Kayla Arestivo, a licensed counselor brought to the center in mid-November to help sailors in the unit, told NBC that she was inundated with the amount of hopelessness at that command.

She added that toxic leadership was an issue highlighted by the sailors she saw, including feeling overworked and undervalued by leaders.

A Navy spokesperson confirmed to The Hill that Arestivo, who is not typically on staff, was brought in along with other experts as part of a suicide prevention stand-down at MARMC between November 14 and 16. 

The stand-down included presentations from different mental health organizations — including the command’s own suicide prevention coordinator — which all of the center’s assigned 3,000 sailors and civilian staff were required to receive, the spokesperson said.  

They added that there were also counseling services made available, including one-on-one sessions and other resources. 

About 1,500 uniformed sailors and 1,500 civilian staff are assigned to MARMC, of these 1,500 sailors, about 500 are on limited duty for a variety of reasons, including mental or physical disabilities, are pregnant or postpartum mothers unable to be stationed aboard a ship or are dealing with personal circumstances such as a sick spouse. 

All four sailors suspected of dying by suicide were on limited duty, the spokesperson confirmed.

This is the Navy’s second major string of suicides within a year. 

In April, three sailors assigned to the USS George Washington — about 30 miles away from Norfolk in Newport News, Virginia — died by suicide within less than a week of each other.

 “One suicide is too many and MARMC leadership is taking a proactive approach to support the team, improve mental fitness, and manage the stress of its sailors,” Rieger said.

“We remain fully engaged with our sailors and their families to ensure their health and well-being, and to ensure a climate of trust that encourages sailors to ask for help.”

She added that leadership, chaplains, psychologists, and counselors are currently providing support and counseling to MARMC’s workforce and for anyone in need of help.

 

Pentagon warns Turkey against attacking Syria

The Pentagon has warned NATO member, Turkey against a new military operation in Syria. The Turkish strikes in Syria late last month endangered US troops and caused casualties for their partner forces. 

Defense Secretary Lloyd Austin on Wednesday spoke by phone with his Turkish counterpart, conveying his strong opposition to a new Turkish military operation in Syria. 

Austin expressed concern over escalating action in northern Syria and Turkey, including recent airstrikes, some of which directly threatened the safety of US personnel who are working with local partners in Syria to defeat ISIS.  

Secretary Austin called for de-escalation, and shared the Department’s strong opposition to a new Turkish military operation in Syria. 

Turkish President Recep Tayyip Erdoğan last month launched airstrikes on northern Syria and Iraq targeting Kurdish groups in the two neighboring countries. Ankara claims the strikes are in retaliation for a November 13, 2022 bombing in Istanbul that killed six people and injured 80 more. 

Erdoğan also suggested on November 23 that he also plans to order a ground invasion into northern Syria. 

The US has notably partnered with the Kurdish-led Syrian Democratic Forces (SDF) in the effort to defeat ISIS in the region and continues to work with the group to keep the terrorist group at bay. 

Since the Turkish strikes, the US military is operating at a reduced number of partner patrols with the SDF, Pentagon press secretary Brig. Gen. Pat Ryder told reporters Thursday.  

Ryder noted that while the US recognizes Turkey’s security concerns, the focus here is on preventing a destabilizing situation, which would put ISIS in an ability to reconstitute. 

He added that the US has frequent and open lines of communication with its Turkish allies at a variety of levels. 

“We did issue a statement highlighting the fact that a strike did come close to US personnel, and we clearly have communicated that,” he said. 

 

Pakistan Stock Exchange benchmark index falls 1.83%WoW

Pakistan Stock Exchange witnessed an overall volatile week ended on December 02, 2022. The uncertainty regarding the International Sukuk payment of US$1.1 billion lingered amongst market participant, dampening the overall sentiment as well as volumes.

Participation in the market remained overall low, with daily average trading volume traded rising nominally to 161.75 million shares as compared to 159.58 million shares traded in the earlier week.

The benchmark KSE-100 Index lost 786 points during the week, depicting a 1.83%WoW fall. The PKR also lost some footing against the US$, depreciating by 0.11% to end at PKR223.69/US$ on Friday.

CPI was still at multi-year highs, at 23.8% for November 2022, lower than expectations, as compared to 26.6% for October 2022.

Trade deficit for November 2022 was reported at US$2.8 billion, down 42%YoY while foreign exchange reserves held by State Bank of Pakistan (SBP) were reported at US$7.5 billion as of November 25, 2022.

On the international front, crude oil remained volatile, averaging at US$85/bbl as the global commodity remained in a limbo on the back of on/off Chinese lockdowns and discussions at European Union to work towards an agreeable price cap on Russian crude.

Other major news flows during the week were: 1) Sensitive Price Indicator (SPI) rose 0.48%WoW, 2) PTI decided to dissolve Punjab and KP assemblies, 3) Finance Minister Ishaq Dar confirmed the receipt of US$500 million from the Asian Infrastructure Investment Bank, 4) SBP raised PKR 214 billion through the auction of market treasury bills against target of PKR 850 billion, 5) Pakistan’s real effective exchange rate (REER), the value of the rupee against a basket of trading partner currencies, rose to 100.4 in October from 90.7 in the previous month.

Sector-wise, amongst mainboard sectors, Miscellaneous, Leasing Companies and Vanaspati & Allied Industries were amongst the top performers. As against this, Close-end mutual funds, Engineering and Cement were amongst the worst performers.

Flow wise, major net selling was recorded by Mutual Funds (net sell of US$6.3 million). Individuals absorbed most of the selling with a net buy of US$4.19 million.

Company-wise, top performers during the week were: PSEL, PGLC, IBFL, HUBC and SRVI, while top laggards included: PIOC, HGFA, CHCC, MLCF, and MUGHAL.

The market is expected to remain range-bound in the near future, with the risk-free rate standing at 16% currently. Equities continue to be unappealing for investors.

News regarding the International Sukuk payment of US$1.1 billion and the foreign exchange reserves position thereafter will be in focus.

Any developments regarding the 9th review by the IMF would be observed keenly, with a positive outcome possibly restoring sentiment regarding Pakistan’s external position. On the flip side market could become under further pressure by political uncertainty.

India: Reliance a major buyer of Russian oil

India's Reliance Industries, operator of the world's largest refining complex, is snapping up Russian refined fuels, including rare purchases of naphtha, after some Western buyers stopped Russian imports, trade flows data from Refinitiv showed.

Western sanctions against Russia over its invasion of Ukraine have led to an emergence of rare trade routes for Russian crude and refined products that were mainly sold to European countries.

India imported about 410,000 tons of naphtha, used for making petrochemicals, in Sept-Oct, the Refinitiv data showed.

Of this figure, Reliance received about 150,000 tons from the Russian ports of Ust-Luga, Tuapse and Novorossiysk during the two months, the data showed.

The private refiner did not buy Russian naphtha in 2020 and 2021. Its annual imports of Russian naphtha were restricted to just one parcel in four years to 2019, the data showed.

The data showed a panamax carrier Okyroe sailing towards India laden with about 59,000 tons of Russian naphtha.

"With European countries shutting down Russia, they need to find outlets for their naphtha," a trader based in India said, referring to Russian firms.

Russian naphtha is being sold at lower premiums to countries like India, two Asian naphtha traders said.

Reliance, its two plants together capable of processing 1.4 million barrels of oil a day, has emerged as a key buyer of Russian oil since Moscow's February military action in Ukraine.

It also buys straight run fuel oil from countries, including Iraq and Russia, to process at cokers in the two refineries in the western Indian state of Gujarat to boost refining margins.

Reliance's fuel oil imports from Russia have surged to a record 3 million tons since the beginning of this fiscal year in April, as compared to about 1.6 million for all of 2021/22, Refinitiv data shows.

Reliance is expected to receive about 409,000 tons of fuel oil in December, the data showed.

 

Saudi Arabia extends term for a US$3 billion deposit to Pakistan

The Saudi Fund for Development (SFD) has extended the term for the deposit provided by the Kingdom amounting to US$3 billion to the State Bank of Pakistan (SBP).

The extension of the term of the deposit is a continuation of the support provided by Saudi Arabia to Pakistan, as the deposit aims to shore up the foreign currency reserves in (SBP) and help Pakistan in facing the economic repercussions of the COVID-19 pandemic.

This also contributes to meeting external sector challenges and achieving sustainable economic growth for the country.

It is worth noting that the US$3billion deposit agreement was signed through the Saudi Fund for Development (SFD) with SBP in November 2021.

The issuance of the royal directive reflect the continuation of the close relationship between the two countries.