Pakistan: Risk Assessment
Country Risk Rating
|D||A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high.|
Business Climate Rating
|D||The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.|
Gradual recovery hampered by the persistent infrastructure gap
Activity has gradually increased since Q2 2013 with the signing of an arrangement for a $6.2 billion credit facility with the IMF.
Agriculture is expected to continue to post modest growth in 2016 because of low productivity and a lack of infrastructure. The sector, which contributes significantly to GDP (25% in 2014), also depends heavily on weather conditions, which oscillate between drought and floods, and suffers moreover from problems with irrigation and water supply. Although growth in industrial manufacturing activity is still hindered by frequent electricity cuts, the construction of electricity stations in the country by China could increase activity in the sector. Despite its low labor costs, the textile industry’s competitive advantage has declined in the face of regional competition because of its low productivity and activity will remain sluggish in 2016.
Private investment is expected to continue to grow with private investor confidence returning since the implementation of the IMF program and the launch of the privatization policy. By contrast, public investment will remain weak due to insufficient government revenue. Activity is likely to be driven principally by household consumption, which will be boosted by significant remittances by expatriate workers. This robust consumption will above all benefit services and construction.
Following the fall in oil and agricultural prices, inflation dropped to 1.6% in October 2015. It is expected to edge upwards in 2016 as electricity and gas prices recover.
The budget deficit will reduce and the current account balance is expected to benefit from the lower oil prices
In the context of the three-year program agreed with the IMF, the budget deficit has been falling steadily since 2013 thanks to fiscal consolidation measures. Revenues, although weak, will rise slightly on the back of improved tax collection and livelier activity while spending will reduce due to sharp cuts in subsidies enabled by lower hydrocarbon prices and higher electricity prices. However, public debt, which is primarily domestic and denominated in the local currency, is expected to remain high in 2016. If the program is carried out as planned, the deficit should fall, debt will stabilize and become cheaper. The current account balance is set to recover in 2016 due to the lower oil and food bill and thanks to the increase in expatriate workers' remittances.
Persistent climate of insecurity
The political situation in Pakistan remains fragile. Civilian government returned only in 2008 and has to share power with the army. The Prime Minister, Nawaz Sharif, in power since 2013 and set to stay until 2018, installed his own candidates at the head of the army and the judiciary, sparking large protests by the opposition. Moreover, the authorities are confronted by Islamist fundamentalists (Pakistani Taliban) and their frequent terrorist attacks.
Pakistan is situated in a very difficult external security environment. Relations with India are very tense, especially around Kashmir where the two armies face each other. In the west, relations with Afghanistan are marked by the issue of the Taliban which each country accuses the other of supporting in order to harm its neighbor. Relations with their traditional US ally have been affected by reciprocal suspicions in the fight against Al Qaeda and the Taliban. At the same time, Pakistan is moving closer to China by establishing agreements over the economy and defense. Finally, the renewed democracy has weak governance marked, in particular, by corruption.
The business climate thus remains very degraded in a context of political instability, violence and terrorism. On top of the serious issue of corruption there are the difficulty of getting one's rights recognized in the courts, red tape and slow granting of planning permission. Insolvency procedures are currently being reformed.