New Market Report Now Available: Pakistan Shipping Report Q1 2014

Short Term Growth Forecast Reduced

We were expecting the State Bank of Pakistan (SBP) to turn hawkish at some point this year, but it did so suddenly and caught us (and many other analysts) a little bit by surprise in September when it increased its benchmark interest rate by 50 basis points (bps) to 9.5%. Given ongoing concerns over inflation, we expect another 50bps worth of tightening is in the offing. The government's recently-approved Extended Fund Facility (EFF) agreement with the IMF also points to tightening conditions. The EFF requires Pakistan to rebuild its foreign currency reserves. As the country goes about buying dollars, the short-term effect is to weaken the value of the rupee (down 7.5% against the US dollar in the four months to mid-October) and reduce domestic demand. Consistent with the EFF, the recently elected Pakistan Muslim League-Nawaz (PML-N) government is tackling its large inherited fiscal deficit. The deficit was 8.0% of GDP last year and the government is seeking a reduction to 6.8% of GDP this year. As a first step the goods and service tax (GST) has already been increased, and energy subsidies have been reduced.

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Taken together, in BMI's view what has emerged in recent months is a monetary and fiscal squeeze which is painful but needed to tackle some of the imbalances in the Pakistani economy. We believe it will reduce domestic consumption and gross fixed investment on the short term, something that will be only partially offset by a recovery in net exports as the eurozone and the US economies strengthen into 2014. As a result we are cutting our GDP growth outlook for the 2013/14 fiscal year (ending June 2014) to 3.4% (down from 4.0% previously). However we are holding our prediction of 4.0% growth in 2014/15.

Given the reduction in our GDP growth forecast for 2013/14, we have trimmed back the levels of activity we expect in Pakistan's main ports. That said, however, it needs to be noted that cargo handling will still be a little busier than in the preceding year. While GDP growth will be 0.4 percentage points lower in 2013/14 compared to the preceding year, in our predictions foreign trade growth will be up sharply to 11.0%, compared to 4.9% in the preceding year. This helps explain why the port of Karachi will be busier in 2013/14 than it was in 2012/13. Port Qasim will see slightly lower bulk tonnage, but stronger box traffic.

Headline Industry Data

* 2013/14-tonnage throughput at the Port of Karachi is forecast by BMI to grow by 2.4% to 39.444mn tonnes.
* 2013/14 container throughput growth at the Port of Karachi forecast to increase by 2.4% to 1.566mn twenty-foot equivalent units (TEUs).
* 2013/14 tonnage throughput at the Port of Muhammad Bin Qasim forecast to grow by 2.4% to 25.456mn tonnes.
* 2013/14 container throughput at the Port of Muhammad Bin Qasim forecast to grow by 21.3% to 731,386TEUs.

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