Pakistan Country Risk Report Q4 2018
Risks are rising that Pakistan could enter into a recession over the coming 12 months, which, given its high positive working age population growth, would mean sub-2% real GDP growth. Given the country's huge external imbalances, either a spike in oil prices, political instability, a reduction in Chinese investment, or a global slowdown, could provide the catalyst for a recession.
Pakistan's external accounts are deteriorating rapidly, with the trade deficit falling to new record lows and foreign reserves dropping to dangerously low levels. A narrowing in the deficit is highly likely over the coming quarters as dollar availability dries up, resulting in a potentially destabilising drop in imports.
We expect the SBP to hike its policy rate further by 50bps to 7.00% in FY2018/19. The central bank's 50bps hike at its May 25 meeting will likely be insufficient to address the country's weakening currency, which is being driven by the widening fiscal and external deficits. Further increases in oil prices and rising interest rates in the US would make it more difficult for the SBP to balance growth and inflation risks, as well as support the currency.
We maintain our view that the Pakistani economy is increasingly in need of external financial assistance as its fiscal and external positions continue to deteriorate just two years after the end of the IMF's Extended Fund Facility arrangement. Pakistan's strategic geopolitical importance means that financial assistance will likely remain forthcoming, but any help is unlikely to put the country on a sustainable fiscal trajectory from where it can achieve quality long-term economic growth.
The SBP's decision to devalue the rupee by more than 4.0% on June 11-18, the third such move since December 2017, should help to ease some pressure on the country's external accounts, but is unlikely to prove sufficient. Large external imbalances and a deteriorating inflation picture suggest that the PKR still has further to weaken over the medium-to-long term, even as it is likely to remain stable in the near term given the upcoming election. We expect the rupee to weaken against the US dollar by an average of 4.0% per annum over the coming years, with risks skewed to the downside.
The July 25 general elections look set to be a closely fought race between the ruling PLM-N, which has a large grassroots support base, and the main opposition PTI, which has the implicit support of the powerful and respected military establishment. A PTI victory would likely see the trends of increased social conservatism and reduced fiscal conservatism deepen, undermining the PML-N's efforts to move the country more towards greater liberalism.
Learn how to effectively navigate the market research process to help guide your organization on the journey to success.Download eBook