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Pakistan Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 39 pages

Core Views

A sharp drop in terrorist activity in 2015 is beginning to have positiveeffects on the Pakistani economy, following Islamabad’s aggressiveapproach against terrorists based in the North Waziristan borderregion that were stepped up following the Peshawar military schoolattacks in December 2014. While significant challenges remain, apromising change in tack by the establishment may be in the offing,with the potential to provide more medium-term stability.We forecast real GDP growth to come in at 4.3% in FY2015/16and 4.2% in FY2016/17, helped by cheaper energy prices andan improved security situation. Pakistan’s chronically low savingsrate is finally beginning to increase, which will provide support forsustainable investment over the coming years.

The inflation cycle in Pakistan has likely turned and we expect theState Bank of Pakistan to begin hiking rates in mid-to-late 2016. Thatsaid, continued low oil prices will prevent the need for the centralbank to hike aggressively, and we are forecasting just 50 basis pointsof hikes in the benchmark rate this year from the current multi-yearlow of 6.00%.The decline in crude oil prices is having a dramatic positive impacton Pakistan’s trade account. The trade deficit is narrowing despite asurge in the non-oil trade deficit, providing support to both economicgrowth and the country’s international reserve buffer.The Pakistani government remains broadly on course in its effortsto narrow the country’s longstanding fiscal deficit, with the latest IMFloan disbursement testament to ongoing reform efforts. We continueto see the fiscal deficit narrowing over the coming years to 4.8% ofGDP in FY2015/16 and 4.4% of GDP in FY2016/17.Pakistan is winning international recognition for the developmentof its Islamic financial sector, and we continue to expect Shariahcompliantbanking to grow in prominence over the coming yearswith the help of the authorities’ push to grow the sector.Major Forecast ChangesWe have made a sizable revision to our forecast for Pakistan’scurrent account, with the ongoing drop in oil prices likely to causea healthy current account surplus of 1.2% of GDP in FY2015/16.This compares with a deficit of 1.0% in FY2014/15, and our previousforecast for a balanced current account position.

Table Of Contents

Pakistan Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Upside Growth Potential Amid Energy And Security Gains8
We forecast real GDP growth to come in at 43% in FY2015/16 and 42% in FY2016/17, helped by cheaper energy prices and an
improved security situation
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS9
TABLE: PRIVATE CONSUMPTION FORECASTS9
Monetary Policy 10
Inflation Bottoming Out10
The inflation cycle in Pakistan has likely turned and we expect the State Bank of Pakistan to begin hiking rates in mid-to-late
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
Monetary Policy Framework 11
External Trade And Investment Outlook 12
Oil Price Drop Providing Major Support12
The decline in crude oil prices is having a dramatic positive impact on Pakistan's trade account The trade deficit is narrowing despite a
surge in the non-oil trade deficit, providing support to both economic growth and the country's international reserve buffer
Outlook On External Position 13
TABLE: NET EXPORT AND IMPORT PARTNERS13
TABLE: MAIN IMPORTS AND EXPORTS14
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE14
Fiscal Policy And Public Debt Outlook 15
Budget Remain On Course Despite Setbacks15
The Pakistani government remains broadly on course in its efforts to narrow the country's longstanding fiscal deficit, with the latest IMF
loan disbursement testament to ongoing reform efforts
Structural Fiscal Position 15
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES15
Currency Forecast 16
PKR: Stability With A Weakening Bias16
While we continue to see slight weakness in the Pakistani rupee over the course of 2016, this weakness will likely be very minor
compared with prior years
TABLE: BMI CURRENCY FORECAST17
Chapter 2: 10-Year Forecast 19
The Pakistani Economy To 2025 19
South Asia's Serial Underperformer19
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
TABLE: LONG-TERM MACROECONOMIC FORECASTS19
Chapter 3: Political Outlook 21
SWOT Analysis 21
BMI Political Risk Index 21
Domestics Politics 22
One Year On, Terror Strategy Bearing Fruit22
A sharp drop in terrorist activity in 2015 is beginning to have positive effects on the Pakistani economy, following Islamabad's aggressive
approach against terrorists based in the North Waziristan border region that were stepped up following the Peshawar military school
attacks in December 2014 While significant challenges remain, a promising change in tack by the establishment may be in the offing,
with the potential to provide more medium-term stability
TABLE: POLITICAL OVERVIEW22
Long-Term Political Outlook 24
Instability To Prevail, But Outright Collapse Unlikely24
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 24
TABLE: SCENARIO MATRIX: CENTRIFUGAL VERSUS CENTRIPETAL FORCES 25
Chapter 4: Operational Risk 27
SWOT Analysis 27
Operational Risk Index 27
TABLE: OPERATIONAL RISK28
Trade Procedures And Governance 29
TABLE: TRADE PROCEDURES AND GOVERNANCE RISK29
TABLE: EXPORT AND IMPORT DOCUMENTS30
TABLE: TRADE PROCEDURES BREAKDOWN30
Vulnerability To Crime 31
Chapter 5: BMI Global Macro Outlook 35
Global Macro Outlook 35
Unfinished Business In 201635
TABLE: GLOBAL ASSUMPTIONS35
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %36
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 36
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %37
TABLE: PAKISTAN - MACROECONOMIC DATA and FORECASTS39

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