Pakistan Business Projection Industry Update Quarter 3 2012

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
A Look Into A PML-N Led Government
Based on the consolidated results of two nationwide polls on voting intentions, the Pakistan Muslim League-Nawaz (PML-N) is the
current frontrunner in Pakistan's upcoming general elections, scheduled for May 11. In this article, we briefly outline what a PML-N-led
government would imply with regards to three of the country's most pressing issues: the rising fiscal deficit, the long-running energy
crisis, and the bleak security environment.
TABLE: POLITICAL OVERVIEW 8
Long-Term Political Outlook 10
Instability To Prevail, But Outright Collapse Unlikely
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 stability.
TABLE: SCENARIO MATRIX - EVOLUTION OF STATE 11
TABLE: SCENARIO MATRIX - CENTRIFUGAL VERSUS CENTRIPETAL FORCES 12
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Risk Scenario: Severe External Payments Crunch Undoes Economy
According to most indications, the Pakistani economy is on track to record its highest annual real GDP growth rate since FY2006/07
(July-June) this fiscal year (FY2012/13), in line with our projection for full-year growth to come in at 4.0%. Setting aside our constructive
macroeconomic outlook on the country, we believe that a potential balance of payments crunch could quickly undo the economic
progress the country has made in recent years. In this article, we outline why and explore how such a scenario may manifest itself.
TABLE: ECONOMIC ACTIVITY 14
Monetary Policy 17
All Roads Point To Higher CPI
Price data coming out of Pakistan over the past few months have shown inflation softening yet again, running counter to our earlier
claim that headline consumer price inflation had bottomed out in November 2012. Nonetheless, we continue to believe that a reacceleration
of inflation is forthcoming given the ongoing surge of broad money supply growth. Furthermore, we note that other
measures of inflation continue to paint a less serene picture of current price conditions. We continue to believe that the central bank's
aggressive loosening cycle is over and that policy rates will remain on hold.
TABLE: MONETARY POLICY 17
Fiscal Policy 19
Calm Before Potential Fiscal Storm?
The government's budgetary performance in the first half of FY2012/13 (July-June) was neither encouraging nor alarming as the halfyear
budget deficit was largely unchanged from recent years. That said, the lack of any major fiscal reform (as indicated by the latest
numbers) suggests to us that a potential fiscal blowout could be in store in Pakistan as a deterioration in second half budget discipline
a recurring phenomenon - coupled with rising electoral pressures could prove to be a dangerous mix. Below, we highlight a few
obstacles to fiscal reform.
TABLE: FISCAL POLICY 19
Balance Of Payments 21
2012-2015 Trade Policy: The Good And The Bad
The government unveiled its Strategic Trade Policy Framework for 2012-2015, which specifically prioritises the need to boost the
country's export earnings. On balance, while the framework contains both positive (eg, the plans to rationalise tariff protection) and
negative (eg, the absence of any commitment to seek greater market access) elements, we believe that it should improve Pakistan's
external trade prospects in the years to come.
TABLE: CURRENT ACCOUNT 21
TABLE: RECENT TRADE AGREEMENTS 22
Chapter 3: 10-Year Forecast 25
The Pakistani Economy To 2022 25
Sustained Underperformance
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
SWOT Analysis 27
BMI Business Environment Risk Ratings 27
Business Environment Outlook 28
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 28
TABLE: BMI LEGAL FRAMEWORK RATING 29
Infrastructure 30
TABLE: LABOUR FORCE QUALITY 31
TABLE: ASIA - ANNUAL FDI INFLOWS 32
TABLE: TRADE AND INVESTMENT RATINGS 33
TABLE: TOP EXPORT DESTINATIONS 34
Operational Risk 35
Chapter 5: Key Sectors 37
Defence & Security 37
TABLE: PAKISTAN'S DEFENCE EXPENDITURE, 2011-2017 38
Freight Transport 41
TABLE: AIR FREIGHT 43
TABLE: RAIL FREIGHT 43
TABLE: MARITIME FREIGHT 43
Other Key Sectors 45
TABLE: AUTOS SECTOR KEY INDICATORS 45
TABLE: FOOD AND DRINK SECTOR KEY INDICATORS 45
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS 45
TABLE: PHARMA SECTOR KEY INDICATORS 46
TABLE: TELECOMS SECTOR KEY INDICATORS 46
Chapter 6: BMI Global Assumptions 47
Global Outlook 47
Lowering Our US And Eurozone Growth Forecasts 47
TABLE: GLOBAL ASSUMPTIONS 47
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 48
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 48
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 49