2012-11-15 20:02:51 - Pakistan Business Forecast Report Q1 2013 - a new country guide report on companiesandmarkets.com
With general elections scheduled to be held in early 2013, we believe that the ruling Pakistan People´s Party (PPP), which heads up the present coalition government, faces an uphill struggle for re-election.
The government´s handling of the economy and its relationship with the US are likely to be its key political liabilities.
We believe that the State Bank of Pakistan (SBP)´s aggressive easing of monetary policy should continue to aid the economy´s recovery this fiscal year (FY2012/13, July-June). That said, structural factors â such as the government´s fiscal mismanagement, the long-running energy crisis, the bleak security environment, and the country´s heavy dependence on still sluggish developed markets â will likely continue to hamper the economy´s prospects.
Looking at the recent slew of export
data from South Asia´s frontier markets (Bangladesh, Pakistan, and Sri Lanka), it appears that the worst is most probably now behind us, with earnings looking set to embark on a sustained recovery. Given our commodities team´s constructive outlook on global cotton prices, there is good reason to be optimistic on export earnings from a terms of trade point of view.
The fiscal incentives introduced by the recently-finalised and longawaited Special Economic Zones Act, 2012 should help to alleviate the weak state of investment activity in Pakistan. As such, the new law is a welcome move from the government.
The SBP surprised with a policy rate cut in August. While we continue to see mild consumer price disinflation going forward, the steady rise of core inflation over the past few years will likely keep the central bank away from further easing. Therefore, we are sticking to our neutral outlook on policy rates.
Major Forecast Changes
In light of the unexpected 150 basis points (bps) rate cut in August, we have made some marginal adjustments to our expenditure growth forecasts, and we now expect real GDP growth to tick up to 4.0% this fiscal year from 3.7% in FY2011/12.
Key Risks To Outlook
Upside Risks To Inflation: Should external financing fail to materialise or should the government fail to mobilise its domestic resource base, it could result in further budgetary borrowings from the banking system, thus stoking inflation. Furthermore, still elevated global food and energy prices remain of particular concern from an inflationary standpoint.
Downside Risk To Policy Rate: While we do not expect any additional rate cuts from the central bank, we highlight that should the SBP´s latest measure fail to result in a substantial improvement of economic activity over the coming months, then the likelihood of further easing down the line would certainly increase.
Downside Risks To Growth: As previously mentioned, several structural factors continue to pose significant headwinds to growth.
Should any of these intensify in the coming months, real GDP growth for the year could very well fall below our 4.0% projection.
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