Pakistan unlikely to face oil shock


KARACHI – Positive economic fronts including wheat export of around $2 billion, privatisation of key public entities owing to enough liquidity in the international market, gain of US support in the shape of $1.5 billion Kerry-Lugar grant and IMF’s assistance would not let the country face an oil shock, similar to 2008, when oil prices rose to an all time high of $147 per barrel, taking a toll on Pakistan’s economy.
Similarly, unlike 2008, it expected that the local bourse would not melt as sufficient liquidity and leverage in the market exists, in fact an 11.7 percent upside is seen to the index target of 13,300 points.
Despite higher oil prices, Pakistan’s external sector’s resilience has improved, triggered primarily by rising exports and remittances. Pakistan received substantial FDIs worth $5.4 billion in 2008, compared to a meager $1.3 billion in the ongoing fiscal year, while privatisation flows have also dried. Despite this, Pakistan has managed to sustain its foreign exchange reserves.
“The oil price rally usually lasts for six to nine months and we are already in the sixth month of the current cycle. If the rally continues for another six months, Pakistan will have enough options to sustain this shock”, said Muzzammil Aslam at JS.
Options include higher exports prospects, led by textile (comprising 60 percent of the total exports), higher cotton prices and improved farm output. Cotton prices registered a peak of $0.90, compared to 2011’s high of $2.29 per pound. Cotton prices are anticipated to stay put for the next couple of months, while a decline is expected from September 2011 onwards, he said. He maintained that, even if cotton prices decline 30 percent by next year, it would be sufficient to absorb oil price of $120 per barrel.
Rising oil prices always spark a panic amongst policy makers, investors and general public as oil commands a third of Pakistan’s import bill and play’s an eminent role in contributing to inflationary expectation. Consequently, it encourages capital flight. Since July 2010, oil prices have already surged by 46 percent.
Economic recovery of the US holds the key. Slowdown in BRIC economies particularly China, European debt crisis and ease off in the Middle East crisis, are expected to bring down oil prices in the months to follow, he added. This is also reflected from the global oil price forecast of $108 per barrel for Brent by major global investment houses.