Pakistan Business Forecast Report Q3 2008

Publication Date	May 2008
Publisher	Business Monitor
Product Type	Report
Pages	64
ISBN Number	1745-0632
Product Code	BMI02049

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Summary

New Government Faces Mounting Economic Challenges As Pakistan looks to successfully negotiate the path towards a more democratic system of government, we are optimistic that there is potential in the long-term health of the country. The resounding victory for parties advocating a restoration of judges ousted by President Pervez Musharraf indicates that constitutional reform will be implemented with little opposition by the president, although we see scope for internal division within the new governing coalition. While Prime Minister Yousaf Raza Gilani faces significant economic problems, we identify several opportunities to ensure that Pakistan achieves average annual growth of over 6.6% during our five-year forecast period. If the country seizes these openings, investor optimism will return, boosting a business environment that is still adversely affected by security concerns.

The convincing victory for parties aligned against Musharraf during February's national elections gives the new government a mandate to enact constitutional reform. While we still expect the coalition eventually to encounter internal divisions, especially if political heavyweights Asif Ali Zardari and Nawaz Sharif use by-elections to enter parliament, the commitment to restoring the authority of the legislature and judiciary should consolidate democratic institutions. So far, the indications are that reforms safeguarding the constitutional handover of power will be unopposed by either Musharraf or the army.

Gilani inherits an economy that is being challenged on several fronts, and these pose downside risks to our 6.6% annual growth forecast for FY07/08 (July-June). In the short term, the government will be hampered by high inflation, an enduring current account deficit and a burgeoning fiscal deficit.

However, we believe that long-term growth potential exists in numerous sectors, giving credence to our view that annual expansion over our forecast period to FY11/1 will average over 6.6%. In order to guarantee this, the government must improve the country's infrastructure and encourage industry to grasp openings to capture new markets for its goods. Finally, further scope for growth exists if the previous administration's privatisation policy is retained in order to help bolster declining foreign direct investment (FDI) inflows.

A reduction in foreign investment is worrying, as Pakistan's strength over the last few years has been the increasing openness of its FDI regime. Although opportunities to invest in Pakistan have improved markedly during recent years, the business environment still suffers from poor infrastructure and, most glaringly, an uncertain security outlook that has been steadily declining since March 007. In addition, procurement processes are bureaucratic and often lack transparency, presenting the danger of corruption. However, Pakistan does have one of the most liberal foreign investment regimes in South Asia, with a commitment to low tariffs and 100% foreign equity permitted in certain sectors. This should ensure that investment inflows will resume once global risk appetite returns.

Content

Executive summary
new Government Faces Mounting Economic Challenges
Chapter 1: Political Outlook6
- sWOt analysis
- BMi Political Risk Ratings
- Domestic Politics8
- new PM Underlines Democratic shift
- The huge parliamentary majority that secured the election of Yousaf Raza Gilani as Pakistan's new prime
- minister demonstrates the firm intention of the new government to enact constitutional reform
- Foreign Policy
- Changes in Foreign Policy Overstated
- Predictions of an about turn in Pakistan's international relations have been overplayed
- table: Pakistan Political Overview
Chapter 2: Economic Outlook
- sWOt analysis13
- BMi Economic Risk Ratings
- Economic activity
- Business Environment Restraining Long-term Growth
- If the new government can navigate the economy over three major hurdles - high inflation, an enduring current
- account deficit and a burgeoning fiscal deficit - then significant potential exists for expanding Pakistan's
- long-term growth
- table: Economic activity
- Monetary Policy
- Inflation Challenge To New Government
- With new Finance Minister Ishaq Dar criticising the previous government for allowing inflation to reach double
- figures, we expect the State Bank of Pakistan (SBP) to extend its current tightening cycle
- table: Monetary Policy18
- Balance Of Payments
- Trade Deficit Resuming Worsening Trend
- Pakistan's current account deficit is in danger of overshooting our forecast of 6.2% of GDP for FY07/08
- (July-June) as the country struggles to compensate for an import burden that is ballooning due to soaring
- commodity prices
- table: Balance Of Payments
- Fiscal Policy
- Fuel Price Hikes Fail To Plug Fiscal Deficit
- Pakistan's fiscal deficit will overshoot the 4.0% of GDP target set by the previous government for FY07/08
- (July-June), as revenue growth has slackened considerably
- table: Fiscal Policy21
Chapter 3: special Report
- Business Outlook For Global Frontier Markets
- Growing Fast On the new Frontier23
- The 41 states that BMI examines in a new report on our online service may make up only a small slice of the world
- economy, but they possess characteristics that will see them gain importance in the eyes of investors and global
- businesses over the coming years,
- table: Frontier Markets - key Data and Projections For top 10 Countries
- Frontier investment
- Potential and Pitfalls
- The spectacular macroeconomic performance of frontier markets in recent years has been matched by mildly
- successful efforts to deepen capital markets
- table: GDP Per Capita, Us$ (in Order Of % increase)
- Table: Diversify Through Frontier Markets - Correlation Coefficients January 2004-April 2008
- table: Frontier Market indices
- Regional Overview
- Laos
- neighbouring Economies the key to Growth
- Laos's GDP growth has been boosted in recent years as neighbours China, Thailand and Vietnam compete for
- its natural resources
- Yemen
- Huge Potential, But Don't Bank On GCC Membership
- Markets do not come much more frontier than Yemen, and, as would be expected, there is huge potential for
- development, with the prospect of eventual GCC membership likely to act a key investment pull
- table: Yemen - Economic activity32
- Democratic Republic Of the Congo
- Mining industry to Drive Growth
- The Democratic Republic of the Congo's mining industry will be a key driver of growth and is likely to attract
- significant levels of FDI, with our real GDP forecasts standing at 8.3% and 7.9% in 2008 and 2009, respectively
- table: Democratic Republic Of the Congo - Economic activity34
- Cuba
- investment Prospects after Fidel
- The accession of a new leadership structure in Cuba has sparked excitement that the 45-year-old trade embargo
- with the US may be lifted and Cuba may move toward market liberalisation
- table: Cuba Macroeconomic Data and Forecasts38
- Mongolia
- Minerals to Drive Economic Boom
- Mongolia is in the midst of a massive resource-led economic boom that should lift GDP growth into the double
- digits and underpin robust increases in exports and inflows of foreign investment capital over the long term
- table: Mongolia - Economic activity
Chapter 4: Business Environment41
- sWOt analysis41
- BMi Business Environment Risk Ratings42
- Business Environment Outlook
- table: BMi Business and Operational Risk Ratings
- institutions
- table: BMi Legal Framework Ratings45
- infrastructure
- Market Orientation
- Table: Asia, FDI Inflows
- table: BMi trade Ratings52
- table: Pakistan top Export Destinations
- Operational Risk
Chapter 5: key sectors56
- Power
- table: Pakistan Power - Historic Data & Forecasts
- Oil & Gas
- table: Pakistan Oil & Gas - Historical Data & Forecasts