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Pakistan Business Forecast Report Q2 2010

Published by: Business Monitor International

Published: Feb. 5, 2010 - 80 Pages


Table of Contents


Executive Summary
Better Days Ahead?
Chapter 1: Political Outlook
Domestic Politics I
President’s Position Looking Precarious
Pakistan’s President Asif Ali Zardari has suffered a slump in popular support since taking office as the country continues
to be plagued by a bloody insurgency and poor economic conditions.
Domestic Politics II
Questions About Politics And Security
The dire security situation endured by Pakistan in 2009 looks set to persist through 2010 and beyond. At the same time,
Pakistan’s military looks set to remain pre-eminent, having the potential to overthrow the democratically elected executive
and return Pakistan to dictatorship.
Long-Term Political Outlook
Instability To Prevail, 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.
Table: Pakistan Political Overview
Chapter 2: Economic Outlook
Economic Activity
Insurgency To Hold Back Economy
While Pakistan managed to come through the global financial crisis and its own currency collapse to register 2.0% growth
in FY2008/09 (July-June), we do not see much to smile about going forward.
Table: ECONOMIC ACTIVITY
Monetary Policy
Inflation Jumps, But Rates To Go Lower
Despite a jump in Pakistan’s rate of consumer price inflation in November, we continue to believe that the State Bank of
Pakistan will instigate further cuts to its monetary policy rate in 2010.
Table: MONETAR Y POLICY
Fiscal Policy
Fiscal Deficits Here To Stay
Although Pakistan’s fiscal position has consolidated through 2009, we believe that the government’s budget position
remains extremely vulnerable.
Table: FISCAL POLICY
Balance Of Payments
Remittance Risk Spells Danger For Rupee
While many currencies have staged recoveries against the US dollar as the global economy continues to recover, we do
not expect the same to happen for the Pakistani rupee.
Tabl e: EXCHANGE RATE
Chapter 3: 10-Year Forecast
The Pakistani Economy To 2019
Sustained Underperformance To 2020
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.
Tabl e: Long -Term Macr oeconomic Forecasts
Chapter 4: Special Report
Political Risk In The Next Decade
What To Expect In 2010-2019
Tabl e: Countri es Facing Major Leadershi p Succ essi on In 2010-2019
Tabl e: Countri es At Ris k Of Major Politic al Upheaval
Tabl e: Countri es At Ris k Of Int erst ate Conflict Or Height ened Bil ateral Tensi on
Table: Countri es Facing Secessi onist Or Autonomy Movements , Ins urg enci es, Or Civil Wars
Table: Pivotal States
Chapter 5: Business Environment
Business Environment Outlook
TABLE: BMI BUSINESS AND OPE RATIONAL RISK RATINGS
TABLE: BMI LEGAL FRAME WORK RATINGS
Infrastructure
Market Orientation
TA BLE: ASIA, ANNUAL FDI INFLOWS
TABLE: BMI TRADE RATINGS
TA BLE: TOP EXPORT DESTINATI ONS
Operational Risk
Chapter 6: Key Sectors
Pharmaceuticals
Tabl e: Pakist an - Drug Ex pendit ure Indic ators , Hist oric al Data and Forecasts
Power
Table: Pakistan’s Power Sector, 2007-2014
Chapter 7: BMI Global Assumptions
Global Outlook
2010 Looking Rosier
TABLE: GLOBAL AND REGIONAL REA L GDP GROWTH
TABLE: developed market exch ang e rates
Tabl e: Emerging Market Exch ang e Rates
TABLE: GLOBAL ASSUMP TIONS
TA BLE: DEVELOPED STAT ES
TABLE: EME RGING MA RKE TS

Abstract

Pakistan continues to struggle under the weight of its militant insurgency. The political landscapeis plagued by a dire security situation in combination with uncertainties over the presidency ofAsif Ali Zardari. The countless terrorist attacks conducted through 2009 illustrate the resilience ofPakistan’s militant insurgency, especially when considered against the backdrop of military gainsby the Pakistani army in both the Swat Valley and South Waziristan. Futhermore, the poor securitysituation is acting as a significant drag on the Pakistani economy, with continued instability deterringprivate sector investment and diverting scarce government resources away from areas suchas education and infrastructure spending to expensive military campaigns. With this backdrop inmind, we expect Pakistan to be a regional underperformer, registering just 3.2% real GDP growthin the years FY2010/11-FY2014/15 (July-June). We also doubt that Pakistan’s business environmentcan improve significantly without a drastic improvement in security.

Politically, Pakistan looks set for further instability in the months ahead. The country’s president,Asif Ali Zardari, is facing calls for his resignation after Pakistan’s supreme court ruled that a decreeproviding him - and thousands of politicians and bureaucrats - immunity from prosecution isunconstitutional. The president may now be forced from office due to the many charges of corruptionagainst him. Added to this, Pakistan’s militant insurgency continues seemingly unabated. Webelieve that Pakistan faces a long, hard struggle against the Taliban before the security situationrecords tangible improvement. Crucial to Pakistan’s future will be developments within Afghanistan,given the close links between the militant insurgencies within the two countries.

Pakistan’s economy is in a period of persistant weakness. Indeed, the economy is performing wellbelow potential - a situation we expect to continue as the country continues to be plagued by awoeful security environment, political instability, low investment spending and relatively tight fiscalconditions. We forecast real GDP growth to come in at a disappointing 2.4% in FY2009/10 and2.2% in FY2010/11. Indeed, we believe that Pakistan’s fiscal position remains perilous, meaningthe country will almost certainly require further financial support from the international community. Afurther risk for the economy is remittances from abroad, which we believe cannot continue growingas in past years - thereby curtailing a vital crutch for the rupee and the wider economy. However,falling inflation should provide an opportunity for the State Bank of Pakistan to lend support to theeconomy via interest rates cuts in coming months.

T he business environment remains highly challenging, with the shaky security situation and the direenergy shortage continuing to weigh on economic activity. In a positive development, the EuropeanInvestment Bank announced on November 24 2009 that it would invest US$150mn in a fund tofinance renewable energy projects in Pakistan. The Asian Development Bank is also contributingUS$510mn to the $2.2bn renewable energy programme. Other investors include the World Bank,USAid and the German government’s GTZ. Additionally, US President Barrack Obama signed aUS$7.5bn aid package for Pakistan on October 15 2009 - some of which will be channelled towardsPakistan’s woeful electricity infrastructure. At present, Pakistan’s power generation capacity fallswell short of demand, inflicting costly blackouts on the domestic economy.

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