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Pakistan Country Risk Report Q2 2019

Pakistan Country Risk Report Q2 2019

Key View:

We maintain our forecast for Pakistan's real GDP growth to slow to 4.4% in FY2018/19 and 4.1% in FY2019/20, from 5.4% in the previous fiscal year, despite the windfall from the decline in oil prices. This will likely be triggered by a non-oil import crunch, which in our view is looking increasingly likely over the coming months. The growing prospects of an impending global trade slowdown is likely to weigh on Pakistan's exports.

The ruling Pakistan Tehreek-e-Insaf party led by Prime Minister Imran Khan appears to be losing political momentum, as evidenced by the loss of seats during the October 2018 by-elections, even though it remains the most popular party. The government's anti-corruption efforts are pushing the opposition together, and this poses downside risks to policy-making. Religious hardliners have forced the state to backtrack on its policies on several occasions, highlighting the rising constraints faced by policymakers. We maintain Pakistan's poor Short-Term Political Risk Index score of 48.3 out of 100.

We expect the SBP to remain on hold for the remainder of FY2018/19 (July-June) after hiking by a cumulative 425bps to 10.00% in 2018. Inflation is likely to stabilise at around 6%, helped by the decline in oil prices and higher interest rates. The SBP will likely be mindful of a further tightening in the near term as the upcoming IMF bailout would typically result in fiscal tightening and exert downside pressure on the economy.Major Forecast Changes

We have revised our forecast for Pakistan's fiscal deficit as a share of GDP to come in at 6.0% in FY2018/19, from 5.8% previously. Although the government will likely have to cut its spending over the coming months, we believe that there will be limited room for policymakers to cut either current or development expenditure. Meanwhile, revenue growth is likely to be dragged down by the poor economic growth outlook.

We have turned neutral on the Pakistani rupee, from bearish previously, as we believe that the currency is past the worst of its steep decline suggested by the drop in oil prices and the large decline in the rupee's real effective exchange rate. The SBP's aggressive hiking cycle should help to stem rapid credit growth and help to redress the economic overheating that has undermined the country's external accounts. Over the long term, higher inflation will continue to drive the PKR weaker, and we forecast the currency to slide against the US dollar by about 4% per annum.

Key Risks


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Country Risk Summary
Economic Risk Index
Political Risk Index
SWOT
Economic – SWOT Analysis
Political – SWOT Analysis
Economic Outlook
Economic Growth Outlook
External Woes No Sign Of Ending Yet
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Outlook On External Position
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
TABLE: NET EXPORT AND IMPORT PARTNERS
TABLE: MAIN IMPORTS AND EXPORTS
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Monetary Policy
State Bank Of Pakistan Likely To Remain On Hold In FY2018/19
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Fiscal Policy And Public Debt Outlook
Fiscal Tightening Still In The Offing
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
Currency Forecast
Pakistani Rupee Past The Worst Of The Sell-Off
TABLE: CURRENCY FORECAST
Pakistan Country Risk Q2 2019THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings’ Credit Rating. Any comments or data included in the report is solely derived from Fitch Solutions Macro Research and independent sources. Fitch Ratings’ analysts do not share data or information with Fitch Solutions Macro Research.Contents10-Year Forecast
The Pakistani Economy To 2028
Significant Opportunities For Growth
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Political Outlook
Domestic Politics
Pakistan's Ruling PTI Will Struggle To Reverse Waning Momentum
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Instability To Prevail, But Outright Collapse Unlikely
TABLE: SCENARIO MATRIX: EVOLUTION OF STATE
TABLE: SCENARIO MATRIX: CENTRIFUGAL VERSUS CENTRIPETAL FORCES
Operational Risk
TABLE: FITCH SOLUTIONS OPERATIONAL RISK
Conflict Risk
TABLE: MAIN ACTIVE TERRORIST GROUPS
TABLE: POLITICAL VIOLENCE RISK
TABLE: MAJOR CONFLICT FLASHPOINTS
TABLE: BUSINESS RESPONSE TO CONFLICT RISK
Transport Network
TABLE: ROAD RISKS
TABLE: RAIL RISKS
TABLE: PORTS AND INLAND WATERWAYS RISKS
TABLE: AIR TRANSPORT RISKS
Global Macro Outlook
Volatility Feeding Into Slower Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % y-o-y
Index Tables
TABLE: PAKISTAN – MACROECONOMIC DATA & FORECASTS

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