Pakistan Business Projection Industry Update Quarter 3 2012

  • April 2014
  • -
  • Business Monitor International
  • -
  • 46 pages

Includes 3 FREE quarterly updates

Core Views
Looking ahead at the next fiscal year (FY2012/13, July-June), we expect a recovery in economic growth as domestic demand improves on the back of easing domestic macroeconomic conditions (mainly the loosening of monetary policy). However, considering the ongoing risks of the government's precarious fiscal situation and the lingering energy crisis, the recovery presently sits on unstable ground. Therefore, our 3.0% real Gross Domestic Product growth projection for FY2012/13 remains below consensus. Despite the recent stubbornness of consumer price inflation, we continue to hold a dovish view on the State Bank of Pakistan (SBP)'s policy rates, given our outlook for continued disinflation on the back of falling money supply growth. We expect 100 basis points (bps) of additional cuts, taking the SBP's reverse repo rate to 11.00% in the coming months.
The country's current account balance will face further downside pressure in the months ahead as the recent rally in global oil prices cause a further deterioration of the country's terms of trade. We highlight the risk of remittance inflow volatility and remain concerned regarding the lack of foreign investment. The amount of circular debt in the country's power segment is surpassing crisis levels and the government's poor fiscal position suggests that near-term options to alleviate some of this pressure remain limited. Unless long-term structural reforms (such as energy price liberalisation) are prusued, the risk of a recurrence of the problem will remain.

Major Projection Changes
We downgraded our real Gross Domestic Product growth projection for FY2012/13 to 3.0%, from 4.0% previously, given the aforementioned risks. We have marginally downgraded our FY2011/12 (July-June) current account projection to US Dollar 4.4bn (or 2.0% of Gross Domestic Product ), from US Dollar 2.7bn previously.

Key Risks To Outlook
Upside Risks To Inflation: Should external financing fail to materialise or should the government fail to mobilise its domestic resource base, it could result in further budgetary borrowings from the banking system, thus stoking inflation. Downside Risks To Growth: On a related note, should government borrowings from the banking system intensify, businesses' struggle with tight credit conditions could worsen. Furthermore, the central bank could decide against further easing, or, at worst, be forced to reverse its loose position.

Table Of Contents

Executive Summary 5

Core Views
...5
Major Projection Changes.5
Key Risks To Outlook5
Chapter 1: Political Outlook.. 7
Industry SWOT Analysis 7
BMI Political Risk Ratings.. 7
Domestic Politics. 8
A Normalisation Of Pakistan-US Relations?...8
Relations between Pakistan and the US look set to normalise, following the November 26 2011 NATO attack that created a significant
rift between the two allies. In particular, we highlight the completion of Pakistans US policy reboot - a significant stepping stone, bringing
the country closer towards a constructive reengagement with Washington. Economic and military aid, the Afghanistan war's endgame,
the geopolitics of South Asia, and Pakistani-Iranian energy cooperation remain at stake in the context of Pakistan-US ties.
TABLE: PAKISTAN POLITICAL OVERVIEW8
Instability To Prevail, But Outright Collapse Unlikely..10
Pakistan is at risk of experiencing years of instability and militant activity, but an outright collapse of the state is unlikely unless the core
province of Punjab becomes ungovernable. Under such circumstances, we would not preclude a military coup. Meanwhile, owing to its
strategic importance, Pakistan's foreign allies will do everything they can to ensure its stability.
SCENARIO MATRIX: EVOLUTION OF STATE10
SCENARIO MATRIX: CENTRIFUGAL VERSUS CENTRIPETAL FORCES.11
Chapter 2: Economic Outlook.. 13
Industry SWOT Analysis ... 13
BMI Economic Risk Ratings.. 13
Economic Activity... 14
Recovery On Unstable Ground...14
Looking ahead into the next fiscal year (FY2012/13, July-June), we expect a recovery in real Gross Domestic Product growth (after a two-year slowdown)
as domestic demand improves on the back of easing domestic macroeconomic conditions (mainly the loosening of monetary policy).
TABLE: ECONOMIC ACTIVITY...14
Expenditure Breakdown....15
Monetary Policy.. 17
SBP In A Tight Spot, Expected To Stay Dovish..17
With consumer price inflation looking relatively stubborn of late, it appears that the State Bank of Pakistan (SBP), which has been
pursuing easy monetary policy since mid-2011, is caught in a tight policy spot (pausing on rates in its last two policy decisions). T.
TABLE: MONETARY POLICY.17
Balance Of Payments... 19
Pressure On Reserves To Continue19
We continue to believe that Pakistan's current account balance will face further downside pressure in the months ahead as the recent
rally in global oil prices cause a further deterioration of the country's terms of trade. Even though remittances have been stronger-thanexpected,
we note that inflows remain highly volatile and the recent recovery in growth will likely prove unsustainable.
TABLE: CURRENT ACCOUNT....19
Fiscal Policy... 21
Poor Governance Points To Prolonged Circular Debt Crisis21
The amount of circular debt in Pakistan's power segment is surpassing crisis levels and the government's deteriorating fiscal position
suggests that near-term options to alleviate some of this pressure remain limited. As such, the economy will continue to suffer greatly
under the energy crisis the circular debt problem creates.
TABLE: FISCAL POLICY...21
Chapter 3: 10-Year Projection 25
The Pakistani Economy To 2021 25
Sustained Underperformance ....25
Given Pakistan's ongoing security woes, and the lack of a clear resolution to them, we see a period of relatively subdued economic
growth for the years ahead. Indeed, while we acknowledge that Pakistan has the potential to enjoy economic growth as experienced
elsewhere in emerging Asia, we believe that conditions within the country will conspire against this - causing a protracted period of
underperformance.
TABLE: LONG-TERM MACROECONOMIC FORECASTS..25
Chapter 4: Business Environment 27
Industry SWOT Analysis ... 27
BMI Business Environment Risk Ratings 27

Environment Overview Outlook. 28
Introduction ....28
Institutions .... 28
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS..28
TABLE: BMI LEGAL FRAMEWORK RATING..29
TABLE: LABOUR FORCE QUALITY.30
Infrastructure 31
TABLE: ASIA, ANNUAL FDI INFLOWS.31
TABLE: TRADE AND INVESTMENT RATINGS....32
Market Orientation .. 33
TABLE: TOP EXPORT DESTINATIONS33
Operational Risk 35
Chapter 5: Key Segments ... 37
Defence 37
Freight.. 40

Headline Market Data
....40
TABLE: MANPOWER AVAILABLE FOR MILITARY SERVICES, from 2009 to 2016 (AGED 16-49, UNLESS OTHERWISE STATED).... 41
TABLE: PAKISTAN'S DEFENCE EXPENDITURE, from 2009 to 2016 .42
TABLE: RAIL FREIGHT, from 2007 to 2016 ..43
TABLE: MARITIME FREIGHT - THROUGHPUT, from 2007 to 2016 ('000 TONNES)..43
Other Key Segments ... 44
TABLE: AUTOS SECTOR KEY INDICATORS.44
TABLE: FOOD AND DRINK SECTOR KEY INDICATORS..44
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS45
TABLE: OIL AND GAS SECTOR KEY INDICATORS45
TABLE: PHARMA SECTOR KEY INDICATORS...45
TABLE: TELECOMS SECTOR KEY INDICATORS....46
Chapter 6: BMI World Assumptions. 47
World Outlook.... 47
World Economy Continues To Muddle Through ...47
TABLE: GLOBAL ASSUMPTIONS....47
TABLE: DEVELOPED STATES REAL Gross Domestic Product GROWTH FORECAST.48
TABLE: REAL Gross Domestic Product GROWTH CONSENSUS FORECASTS...48
TABLE: EMERGING MARKETS REAL Gross Domestic Product GROWTH FORECAST49

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