Oil on deferred payment by Saudis to ease Pakistan’s external account

Economic observers foresee substantial ease in the country’s troubled external account as the change of guard in Islamabad has started to emerge with Saudi Arabia taking the lead in extending an olive branch to the newly-elected Sharif-led government. Riyadh, reportedly, is expected to extend a bailout package by supplying crude and furnace oil on deferred payments to enable Pakistan to resolve the chronic circular debt issue.
“Though no official announcement has been made yet, the development would provide respite to the country’s external account and lend support to government’s effort for energy sector reforms,” said analysts at Topline Research. Ensuing, they said, it should bode well for Pakistan’s energy companies by improving their cash-flow position.
“We have suggested in our report titled ‘Post Elections: Trigger and Liquidity’ dated May 10, 2013, efforts to resolve energy crisis and security issues hold the potential for the market to re-rate on historical multiples of 8.5x (last 10-years average),” analysts said. Citing news reports, analysts said as soon as the Sharif-led PML-N takes charge at the Center, the Saudi government is expected to extend a bailout package similar to the one in 1998.
Pakistan had received approximately $3.5 billion worth of oil on deferred payment between 1998 and 2002 which later was converted into grants, they recalled. “This time… a package of US$12-15 billion that includes 100,000 barrels of crude oil and 15,000 tonnes of furnace oil per day on deferred payment for three years is expected,” they said.
“With the mentioned quantities representing above 50% of imported quantity, our back of paper calculations suggest the quantum of package may exceed $20 billion or approx $7 billion a year, on prevailing oil prices,” they added.
“Subject to the materialisation of the news, the development would substantially ease the pressure on the external account as oil bill of $14.4 billion in FY12 stands around at 35% of our total import bill,” analyst said. Subsequently, they said, Pakistan’s delayed re-entry in the IMF program may not pose high risk and provide stability to Pakistani rupee against the greenback.
“On the fiscal front, the development is likely to create space for the government to address structural weaknesses in the energy sector leading to the infamous circular debt,” they added. Analyst were of the view that development on this front may potentially unlock values on energy stocks that include OGDC, PPL, PSO, HUBCO and other listed independent power producers (IPPs).