July 5, 2012 -
PRLog -- Core Views After a difficult year in 2011, the Pakistan People's Party-led government will find no respite in 2012. Fragile US-Pakistani relations, the spectre of military interference, the Pakistani Taliban, and a floundering economy will continue to put pressure on the current administration. We are projecting below-consensus slowdown to 2.2% real GDP growth for FY2011/12 (July-June) from the slowdown recorded in the previous fiscal year, when real GDP growth was 2.4%. Private consumption looks set to outperform while investment activity remains weak. Net exports represents the largest drag on the headline growth figure. The country's long-running energy crisis should limit the country's growth potential. With the government's budget deficit expected to remain elevated (at 6.2% of GDP this fiscal year), the economy should continue to suffer from the excessive state of budgetary borrowings. We expect the State Bank of Pakistan (SBP) to start cutting its policy rates again this year as disinflation continues on the back of falling commodity prices and benign money supply growth. We see at least 100 basis points worth of cuts, taking the SBP's reverse repo rate to 11.00%. Pakistan's current account balance will head back into deficit territory as export earnings growth continues to fall on the back of weakening external demand and subdued cotton prices, and as the support of remittances continues to wane. Major Forecast Changes We downgraded our real GDP growth projection for the current fiscal year from 3.8% to 2.2%. Despite improvements in the domestic macroeconomic environment, activity continues to be lacklustre. We revised our end-FY2011/12 current account forecast downwards to US$2.7bn (equivalent to 1.2% of GDP), from US$0.5bn previously. 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. Downside Risks To Growth: On a related note, should government borrowings from the banking system intensify, businesses' struggle with tight credit conditions could worsen. Business
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