KARACHI: The brokerage houses that keep their eyes on corporate earnings have flooded the market with their reports on the scale of damage that might be caused to the economy and various sectors by rains and floods.
Zeeshan Afzal at Topline Securities envisaged “an eventual loss to stand at 0.6 to 0.8 per cent of GDP: “So far the cost of floods is estimated at $0.5 billion by Sept 7,” said the analyst and added that the eventual cost could reach $1.5 to $2bn.
He believed that floods would primarily affect commodity producing segment of the economy in shape of agriculture loss and low operating activity in the manufacturing sector. “In the services sector, which constitutes 58pc of GDP, slowdown in transportation would affect industry off-take and push commodity prices up,” analysts said. Based on initial assessment, Topline revised down GDP growth estimate to 4.2pc for FY15 from 4.5pc while maintaining inflation forecast at 7.5 to 8pc. The brokerage worked out that the floods could prove ‘negative’ for several sectors including OMCs and refineries, cements, fertiliser and insurance.
“Despite having been confined to the province of Punjab, the floods have already resulted in widespread damage and loss of lives,” says BMA Capital Management.
The brokerage affirmed that drawing lessons from flash floods in 2010, continued flooding in the Northern region and its potential trickle down into areas of Sindh warranted attention where on the economic side, the brokerage believed “likely repercussions for GDP growth as well as CPI, going forward”.
BMA thought that the ongoing floods would likely to have ‘severe repercussions for the macroeconomic stability and growth prospects of the country’. It worried that the devastating floods in Punjab and likely to hit Sindh, would drag overall GDP growth target.
Though BMA did not quote a figure regarding likely damage to GDP, it recalled that in 2010, GDP growth had dropped to just 2.6pc in FY11 against targeted 4.5pc. “Supply side disruptions amidst loss of crops is likely to push inflation northwards in the months ahead with particular emphasis on food inflation”, BMA noted and thought that the SBP may stay on the side of caution and maintain the policy rate at current levels in its upcoming monetary policy review this month, which the house previously thought would cut down discount rate by 50bps. Sector-wise, BMA identified cement to emerge as ‘one of the hardest hit due to plant shutdowns and restricted off-take in coming months’.
Other sectors likely to suffer included: Fertiliser, textiles and oil and gas — both E&P and refining and marketing.
Conversely, analyst Ali Sufyan at brokerage Standard Capital Securities thought that all sectors except cement could suffer due to floods. His reason: “With some time lag, cement sector can flourish as floods will prompt increased development spending in the economy hence increasing cement companies’ profitability in 2QFY15”.
The analyst also noted that he did not expect cement sector to be impacted as most of the plants were located in Potohar or Soon Sakesar, which helped them escape devastation. Analyst also saw ‘lowering of GDP estimates, which could result in re-rating’.
Analyst Ali Sufyan observed that the floods could mainly hit the agricultural sector as crops were damaged in the area of Central Punjab from Jhelum River to Chenab River which encompasses all Punjab cities. “We see rice crop massively destroyed wherein cash crop cotton which was harvested could still be destroyed since there are no modern methods to stores bales”. Wheat cultivation was also thought to be delayed by about 25 to 30 days.
Ali Sufyan believed that floods would impact various sector in varying degrees. Those include fertiliser and power. In regard to the latter, the analyst reminded that the water had entered Muzaffargarh district where Kot Addu Power; PakGen and Lalpir were located. Lalpir was already reeling from a devastation caused in 2012. “Already Neelum Jhelum project has suffered since all machinery is drowned in Jhelum River. We have yet to hear about Narowal project of Hubco since that district is worst affected due to floods”, the analyst said.
Published in Dawn, September 10th , 2014
