Pakistan Country Risk Report Q2 2019
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.
Learn how to effectively navigate the market research process to help guide your organization on the journey to success.Download eBook