Pakistan Country Risk Report Q2 2016
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 Changes
We 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.
- Executive Summary
- Core Views
- Major Forecast Changes
- Key Risks
- Chapter 1: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Index
- Economic Growth Outlook
- Upside Growth Potential Amid Energy And Security Gains
- We forecast real GDP growth to come in at 4.3% in FY2015/16 and 4.2% in FY2016/17, helped by cheaper energy prices and an
- improved security situation.
- GDP By Expenditure Outlook
- TABLE: GDP GROWTH FORECASTS
- TABLE: PRIVATE CONSUMPTION FORECASTS
- Monetary Policy
- Inflation Bottoming Out
- 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 FORECASTS
- TABLE: FIXED INVESTMENT FORECASTS
- TABLE: NET EXPORTS FORECASTS
- Monetary Policy Framework
- External Trade And Investment Outlook
- Oil Price Drop Providing Major Support
- 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
- TABLE: NET EXPORT AND IMPORT PARTNERS
- TABLE: MAIN IMPORTS AND EXPORTS
- TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
- Fiscal Policy And Public Debt Outlook
- Budget Remain On Course Despite Setbacks
- 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
- TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
- Currency Forecast
- PKR: Stability With A Weakening Bias
- 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 FORECAST
- Chapter 2: 10-Year Forecast
- The Pakistani Economy To 2025
- South Asia's Serial Underperformer
- 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 FORECASTS
- Chapter 3: Political Outlook
- SWOT Analysis
- BMI Political Risk Index
- Domestics Politics
- One Year On, Terror Strategy Bearing Fruit
- 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 OVERVIEW
- Long-Term Political Outlook
- Instability To Prevail, But 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. 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
- TABLE: SCENARIO MATRIX: CENTRIFUGAL VERSUS CENTRIPETAL FORCES
- Chapter 4: Operational Risk
- SWOT Analysis
- Operational Risk Index
- TABLE: OPERATIONAL RISK
- Trade Procedures And Governance
- TABLE: TRADE PROCEDURES AND GOVERNANCE RISK
- TABLE: EXPORT AND IMPORT DOCUMENTS
- TABLE: TRADE PROCEDURES BREAKDOWN
- Vulnerability To Crime
- Chapter 5: BMI Global Macro Outlook
- Global Macro Outlook
- Unfinished Business In 2016
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
- TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
- TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
- TABLE: PAKISTAN – MACROECONOMIC DATA & FORECASTS