Pakistan Business Forecast Report Q3 2014

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

Core Views

Pakistan's economy is picking up strongly, with the IMF's reform initiatives having a positive impact on the manufacturing sector. We believe that the Fund will release the third loan tranche of the Extended Fund Facility over the coming months, given the progress so far, and see upside risks to our already-above consensus real GDP growth forecast for FY2013/14 of 3.4%. We continue to forecast an acceleration in growth to 4.0% in FY2014/15.

The appreciation of the Pakistani rupee since December 2013 has been nothing short of spectacular. The currency has strengthened by over 10% from the December trough, and while there have been some genuinely positive signs on the macroeconomic front, the unprecedented move may also have stemmed from the State Bank of Pakistan's desire to send a message that the rupee is not a one-way losing bet. However, we expect the recent strength to subside over the coming months, and forecast the unit to weaken back to PKR 100.00/USD over the coming months.

We believe that headline consumer price inflation (CPI) will continue on its broadly declining trend over the coming months and quarters as money supply growth continues to cool, the impact of the stronger rupee keeps imported price inflation muted, and supply-side developments continue to gather momentum. We are forecasting CPI to end FY2013/14 and FY2014/15 at 7.5% and 6.5% respectively. Pakistan's recent USD1.5bn 'gift' from Saudi Arabia has raised a number of questions regarding the implications for the former's stance on Syria, and the Iran-Pakistan (IP) gas pipeline project. With the Pakistani economy in a fragile state, and in great need of external financing, the grant was difficult to refuse, but is likely to lead to a further deterioration of relations with neighbouring Iran.

Major Forecast Changes

We have upgraded our FY2013/14 real and FY2014/15 exchange rate forecasts for the rupee, owing to the intense strength seen at the start of 2013. While we still expect the unit gradually depreciate, we now expect it to average PKR99.8/USD in FY2013/14 and PKR100.5/USD in FY2014/15.
We have also rolled back our expectations for further interest rate hikes by the State Bank of Pakistan, due to the disinflationary pressure provided by recent currency strength. We expect the reverse repo rate to remain at 10.00% in FY2013/14 and FY2014/15.

Table Of Contents

Pakistan Business Forecast Report Q3 2014
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Saudi Grant To Undermine Relations With Iran 8
Pakistan's recent USD1.5bn 'gift' from Saudi Arabia has raised a number of questions regarding the implication s for the former's stance
on Syria, and the Iran-Pakistan (IP) gas pipeline project. With the Pakistani economy in a fragile state, and in great need of external
financing, the grant was difficult to refuse, but is likely to lead to a further deterioration of relations with neighbouring Iran.
TABLE: Political Overview 8
Long-Term Political Outlook 9
Instability To Prevail, But Outright Collapse Unlikely 9
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, due to its
strategic importance, Pakistan's foreign allies will do everything they can to ensure its stability.
TABLE: SCENARIO MATRIX: EVO LUTION OF STATE 10
TABLE: SCENARIO MATRIX: CENTRIFUGAL VERSUS CENTRIPETAL FOR CES 11
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Manufacturing Activity Surging On Reform Progress 14
Pakistan's economy is picking up strongly, with the IMF's reform initiatives having a positive impact on the manufacturing sector. We
believe that the Fund will release the third loan tranche of the Extended Fund Facility (EFF) over the coming months, given the progress
so far, and see upside risks to our already-above consensus real GDP growth forecast for FY2013/14 of 3.4%.
TABLE: ECONOMIC ACTIVITY 14
Fiscal Policy 15
Energy Reforms To Support Fiscal Accounts 15
The Pakistani government's efforts to reform the country's energy sector, which include reducing subsidies, improving concessional and
production sharing contracts, and the upcoming partial privatisation of two of its national oil companies, should provide support to the
fiscal accounts. In addition to direct savings via reduced subsidies, and the revenue boost provided by the partial asset sales, greater
energy production would provide a major boost to the manufacturing sector, which would in turn allow tax revenues to rise from their
current low base.
TABLE: FISCAL POLICY 16
Monetary Policy 17
Positive Developments On The Inflation Front 17
We believe that headline consumer price inflation (CPI) will continue on its broadly declining trend over the coming months and quarters
as money supply growth continues to cool, the impact of the stronger rupee keeps imported price inflation muted, and supply-side
developments continue to gather momentum. We are forecasting CPI to end FY2013/14 and FY2014/15 at 7.5% and 6.5% respectively.
TABLE: MONETARY POLICY 17
Exchange Rate Policy 19
PKR: Recent Surge Likely To Subside 19
TABLE: Pakistan Currency Forecast 19
TABLE: EXCHANGE RATE 20
Chapter 3: 10-Year Forecast 21
The Pakistani Economy To 2023 21
South Asia's Serial Underperformer 21
Despite holding some of hallmarks of an attractive emerging market growth story, Pakistan's economy has been stuck in a secular
growth downtrend for decades. This failure can largely been be put down to myopic government policies, a hostile business
environment, and acute security risks - three factors that are unlikely to change materially over the coming decade. For this reason,
we are forecasting a rather lacklustre 3.9% average annual expansion through to 2023, meaning that Pakistan will remain very much a
regional underperformer.
TABLE: Long -Term Mac roec onomic Forecasts 21
Chapter 4: Business Environment 25
SWOT Analysis 25
BMI Business Environment Risk Ratings 25
Business Environment Outlook 26
Institutions 26
Table : BMI Busines and Ope rati on Ris k Ratings 26
Table : BMI Legal Framew ork Rating 27
Table: Labour Force Quality 28
Infrastructure 29
TABLE: ASIA - ANNUAL FDI INFLOWS 29
Table : Trade and Investment Ratings 30
Market Orientation 31
TABLE: Top Exp ort Destinati ons 31
Operational Risk 33
Chapter 5: Key Sectors 35
Defence 35
TABLE: Pakistan 's Defence Expenditu re, 2010-2017 36
Freight Transport 39
Table : Air Freight , 2011-2018 40
TABLE: Maritime Freight , 2011-2018 40
TABLE: Rail Freight , 2011-2018 41
Other Key Sectors 43
table: Food and Drink Sector Key Indicators 43
table: Autos Sector Key Indicators 43
table : Pha rma Sect or Key Indicat ors 43
table : Telec oms Sect or Key Indicat ors 44
table: Oil and Gas Sector Key Indicators 44
table: Infrastructure Sector Key Indicators 44
Chapter 6: BMI Global Assumptions 45
Global Outlook 45
Chinese Economy Under Pressure 45
Table : Global Assumpti ons 45
Table : Devel oped States , Real GDP Growt H, % 46
Table : BMI VERSUS BLOO MBERG CONSENSUS REAL GDP GRO WTH FOR ECASTS, % 46
Table : Eme rging Markets , Real GDP Growth , % 47

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