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Pakistan Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views

While the Pakistani government has had some success in reducingthe number of terrorist attacks over the past 18 months, progresson addressing its root causes under the National Action Plan hasbeen much less promising. Aside from the still-considerable potentialfor terrorist attacks, the lack of free speech and the growing useof blasphemy laws will make it difficult for the country to attractforeign investment.We forecast the Pakistani economy to grow by 4.2% in FY2016/17,after an estimated growth rate of 4.7% in FY2015/16. Strong growthmomentum and an expansionary budget will be supportive factors,but the rise in global oil prices will remove a major growth tailwind.We are revising up our forecast for the Pakistani rupee, now expectingthe SBP to maintain the current peg at roughly PKR104.7/USD, whereit has been for most the year, rather than allow slight weakness. Acombination of booming remittances and still-favourable terms oftrade should keep dollar inflows strong, while increased financialaccount inflows should help to allow the central bank to build upreserves without the need to weaken the currency.

The 25 basis point (bps) cut in the benchmark interest rate in Maywill likely mark the last in the cycle, with near term inflation pressuresrising. The next move will likely be a hike, which we expect to comein the latter part of 2016, but we do not expect a major hiking cycleas structural inflationary pressures will remain benign.Pakistan's entry into the MSCI Emerging Markets Index will providea significant boost to the country's portfolio account inflows over thecoming years and highlights the progress made under the IMF-ledreforms since 2013. However, continued reforms will be needed toensure the country maintains its Emerging Market status and takesfull advantage of the impending inflows.Major Forecast ChangesWe have made two changes to our Pakistan economic forecasts thisquarter. Firstly, we are now pencilling in one rate hike by the SBPfollowing their shock decision to cut the benchmark interest rate by25bps in May. Indeed, it is likely that the SBP will look to reversecourse as price pressures build over the coming months.Secondly, we now forecast the currency to remain at the currentlevel of PKR104.7/USD as the central bank has the willingness andability to maintain the current peg over the coming fiscal year.

Table Of Contents

Pakistan Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Changes..5
Key Risks..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Solid Growth Ahead8
We forecast the Pakistani economy to grow by 4.2% in FY2016/17, after an estimated growth rate of 4.7% in FY2015/16. Strong growth
momentum and an expansionary budget will be supportive factors, but the rise in global oil prices will remove a major growth tailwind.
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS.9
TABLE: PRIVATE CONSUMPTION FORECASTS.9
TABLE: GOVERNMENT CONSUMPTION FORECASTS..9
Fiscal Policy And Public Debt Outlook 10
Continued Progress Despite Privatisation Setbacks..10
Pakistan's fiscal deficit should continue to narrow in line with revenue mobilisation attempts, in spite of the privatisation drive's failure
to launch. The government appears to be committed to medium-term fiscal reform, and we believe there is little risk of a fiscal crisis in
Pakistan any time soon.
TABLE: FIXED INVESTMENT FORECASTS.10
TABLE: NET EXPORTS FORECASTS..10
Structural Fiscal Position. 11
TABLE: MAIN SOURCES OF REVENUE and EXPENDITURE.11
TABLE: FISCAL AND PUBLIC DEBT FORECASTS..11
External Trade And Investment Outlook. 12
Entry Into MSCI EM Index A Boost To Economic Stability..12
Pakistan's entry into the MSCI Emerging Markets Index will provide a significant boost to the country's portfolio account inflows over the
coming years and highlights the progress made under the IMF-led reforms since 2013. However, continued reforms will be needed to
ensure the country maintains its Emerging Market status and takes full advantage of the impending inflows.
Outlook On External Position. 13
TABLE: MAIN EXPORT DESTINATIONS and IMPORT SOURCES13
TABLE: MAIN EXPORT AND IMPORT PRODUCTS..13
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE..14
TABLE: CURRENT ACCOUNT BALANCE..14
Monetary Policy.. 15
Next Move To Be A Hike15
The 25bps cut in the benchmark interest rate in May will likely mark the last in the cycle, with near-term inflation pressures rising. The
next move will likely be a hike, which we expect to come in the latter part of 2016, but we do not expect a major hiking cycle as structural
inflationary pressures will remain benign.
Monetary Policy Framework 15
Currency Forecast. 16
PKR: Peg To Remain In Place16
We are revising up our forecast for the Pakistani rupee, now expecting the SBP to maintain the current peg at roughly PKR104.7/USD,
where it has been for most the year, rather than allow slight weakness. A combination of booming remittances and still-favourable terms
of trade should keep dollar inflows strong, while increased financial account inflows should help to allow the central bank to build up
reserves without the need to weaken the currency.
TABLE: MONETARY POLICY FORECASTS.16
TABLE: BMI CURRENCY FORECAST..17
Chapter 2: 10-Year Forecast. 19
The Pakistan Economy To 2025 19
Significant Opportunities For Growth..19
While a number of significant obstacles could impede Pakistan's growth recovery, several positive domestic and external factors may be
combining to provide Pakistan with an opportunity to break out of its low-savings, low-income equilibrium. We forecast the savings rate
to rise back to 10.9% by end-FY2024/25, enabling investment to rise to 17.0% of GDP, which will see real GDP growth average 4.1%,
versus 3.9% over the past decade. Meanwhile, GDP per capita is set to rise to USD2,298 from USD1,389 at present, marking a 5.0
%annual increase.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.19
Chapter 3: Political Outlook. 23
SWOT Analysis 23
BMI Political Risk Index. 23
Domestic Politics.. 24
Losing The Fight Against Islamic Fundamentalism.24
While the Pakistan government has had some success in terms of reducing the number of terrorist attacks over the past 18 months,
progress on addressing its root causes under the National Action Plan has been much less promising. Aside from the still-considerable
potential for terrorist attacks, the lack of free speech and the growing use of blasphemy laws will make it difficult for the country to attract
foreign investment.
TABLE: POLITICAL OVERVIEW..24
Long-Term Political Outlook.. 25
Instability To Prevail, But Outright Collapse Unlikely.25
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: EVOLUTION OF STATE .26
TABLE: SCENARIO MATRIX: CENTRIFUGAL VERSUS CENTRIPETAL FORCES 26
Chapter 4: Operational Risk. 29
SWOT Analysis 29
Operational Risk Index.. 29
Operational Risk. 30
TABLE: OPERATIONAL RISK30
Market Size and Utilities 31
TABLE: ASIA - MARKET SIZE AND UTILITIES RISK..32
Labour Costs 37
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE.. 38
Chapter 5:BMI Global Macro Outlook. 41
Global Macro Outlook. 41
Brexit Risk Casts A Long Shadow..41
TABLE: GLOBAL ASSUMPTIONS..41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %..43
MACROECONOMIC FORECAST.45
MACROECONOMIC INDICATORS (PAKISTAN 2015-2025).45

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