OICCI January 2019 Business Confidence Index Survey Wave 17: Highlights

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1 OICCI January 2019 Business Confidence Index Survey Wave 17: Highlights OICCI announced the results of the Business Confidence Index Survey (BCI) - Wave 17 - conducted throughout the country in December The overall Business Confidence Score (BCS), has dropped significantly by 26%, from 14% positive in Wave 16 Survey (May 2018) to 12% negative in Wave 17. Although this drop in Business confidence is a matter of concern, but was largely anticipated in view of many corrective actions taken by the government in the past six months to streamline the economic parameters, like the massive devaluation of the Pak Rupee and increase in SBP discount rate to 10% which, together with oil price increases, added to the accelerated inflation in the country. The survey results were largely influenced by the pessimism in the services sector and partially in the retail and wholesale trade sector. The Business confidence of services sector, which represents about 30% of the respondents, declined by a whopping 52% over the past six months and was 29% negative compared to 23% positive in Wave 16. The BCS of retail and wholesale trade declined to 5% negative compared 6% positive in Wave 16. The BCS of the manufacturing sector, representing 40% of the survey respondents went down to 4% negative, which was 19% worse that in Wave 16. OICCI BCI Survey conducted every six month is a comprehensive review of the perception of business leadership in Pakistan covering business environment at regional, national, sectorial and own business entity levels. The assessment takes into account the business environment in the past six months, as well as seeking respondents feedback on the anticipated business and investment environment in the next six months. Although the sentiments of the leading foreign investors, represented by some OICCI members, who were randomly included in the survey, has also recorded a sharp decline of 27%, as compared to Wave 16 Survey, they continue to maintain a more positive stance, in stark contrast with that of the respondents who are not OICCI members, reflecting the trends of all previous surveys. The OICCI members BCS of 11% positive in Wave 17, against 14% negative of non-members, is a positive sign for future FDI inflow. Business Confidence Score Overall OICCI Members Page 1 of 5

2 The key factors impacting the current BCS results comprise of the following indicators: Perception of City Business situation in the Past Six Months (P6M) declined the most (-63%), followed by Pakistan Business situation (-54%), Company Business situation (-47%), and Industry Business Situation (-45%). Although there is some optimism for the Next Six Months (N6M), as compared to last 6 months situation, a steady decline is noted over last 3 waves in confidence with respect to the Global, Country, City, Industry and Own Company business situation, leading to a perception of expected drop in ROI (-13%), Profit (-20%) and new employment (-10%). The BCS of the Services sector has recorded the highest negative sentiments in all aspects, but a small silver lining is that the negativity about the future is less than the negative sentiments conveyed for the P6M. Nevertheless overall responses on growth in sales, profitability, as well as new investments and employment, show a net negative BCS, whereas in Wave 16 all these elements recorded a net positive score. Among Services sector, Confidence scores significantly decreased for business entities involved in Finance (-70%), Community, Social and Personal sectors (-53%) and Transport and Communication (-51%). As mentioned above, the overall Manufacturing sector BCS declined to 4% negative, showing a decline of 19% from the last survey. Within the manufacturing sector, the following subsectors recorded the biggest decline; Motor Vehicles (-49%), Non-metallic (-44%), Tobacco (- 39%), Chemicals/Cement (-28%), Petroleum/Oil & Gas (-29%). Substantial increase in Tobacco prices, increase in oil price during the year, rapid fall in Pak Rupee value versus the major currencies, negatively impacting cost of raw materials, could be the major reasons for this decline. Circular debt (61%) is the most pressing issue negatively impacting BCS of not only the power and oil sector but also their business partners, followed by lack of Interprovincial coordination on tax matters (50%) causing jurisdiction confusion for business entities, substantial delays in Tax refunds (50%) and continuation of Super Tax, for the last three years despite a commitment to end it within one year. Most of the respondents (44%) believe that debt burden on Pakistan, as well as the changing economic policies (32%), at federal and provincial levels are negatively impacting their business also. Majority of the respondents believe that the abolition of the Regulatory Duty would be beneficial for boosting exports, as well as the overall manufacturing industry. Survey respondents suggested that exporters should improve the quality of their brands, promote new products with unique designs, explore new markets and improve the quality of their services at international level in order to boost exports, besides building trust/ collaborating with international brand leaders, and competitive pricing thorough productivity and efficiency gains. Respondents also suggested that in order to increase exports the government should create a Ministry of Exports for 3 years with full focus on export promotion only, engage with international consultants with experience in transforming export of a country and reduce energy cost. Majority of the respondents (65%) believe that Pakistan s commitment towards FATF will reduce corruption and help in tightening other financial malpractices in the country. An overwhelming majority believes that inflation will increase in the coming six months. Around 76% business entities believed that Law and Order situation in Pakistan has improved. A significantly lower number of respondents mentioned Security as an issue (only 24% vs. 58% in Wave 16) in the past six months and a similar response has been given for the next months. However, the business respondents still see many Law and Order issues, like growing number of Strikes/Sit-ins, as major impediments affecting their business and contributing to negative perception of the country. Page 2 of 5

3 More than half of the respondents believe that labor costs will increase in next six months. However on the flip side much lesser number of respondents, only 17% expect decrease in productivity, as compared to 29% in Wave 16. High Energy cost (74%) and Exchange rate (70%) have been indicated as the major threats for growth of business entities, closely followed by Bribery and corruption (69%) and a shift in consumer spending and behavior (68%). Only 19% of the respondents believe that an increasing trend of online shopping has affected the small/traditional retail shops. The BCS in Metros has declined significantly from 14% positive in Wave 16 to 20% negative in Wave 17. Business community operating from Karachi had negative BCS in Wave 16 (-8%), which further declined in Wave 17 (-17%). However, BCS in Lahore and Rawalpindi/Islamabad has turned from positive to negative, declining from 48% positive to 12% negative and from 33% positive to 50% negative, respectively. Respondents who are pessimistic Overall 40% of the survey respondents throughout the country were negative, of which about two third were negative on the Country, City business environment and more or less the same number were concerned about their Industry and Own business situation in the past six months. However, most of the business respondents were relatively less pessimistic about the next six months. Given below is a table enumerating reasons provided by the Wave 17 respondents who were not happy with the business situation in P6M and were also not optimistic about N6M: Reasons for Decline among OICCI members Leading foreign investors/oicci members, who were randomly included in the survey, have identified that the main reasons for the business confidence decline in past 6 months include; Unstable Political Condition, Inflation, Concern on Security Situation, Energy crisis, Bad Infrastructure, Conditions of import and export, as well as Unhealthy relations with neighboring countries. The OICCI members perception on Global, Pakistan and Industry business situation has improved by 3%, 2% and 20%, respectively and the perception on Company business situation has declined by 9%, over Wave 16. In respect of Sales volume (+47%), Expansion of business (+41%), Employees (17%) and ROI (17%), OICCI members have a positive outlook whereas for Capital Investment (-18%) OICCI members have negative outlook. Page 3 of 5

4 Respondents who are optimistic Wave 17 results showed that 28% of the respondents remained positive about the business environment. The following reasons were given by the respondents, who were positive about the business environment in the P6M and also optimistic about the business environment in the N6M: New Orders, Investment and Jobs Indices 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 46% 26% 24% 24% 26% 24% 12% 9% 9% 13% -22% -39% 2% -7% -22% Mar'10 Jun'10 Nov'10 Feb'11 Nov'11Aug 12 Jul'13 Feb'14 Sep'14 Mar'15 Nov'15 Apr'16 Oct'16 Apr 17 Oct 17 Apr 18 Dec 18 New Orders Index New Jobs Index New Investment Index 7% -7% -26% Future Business Outlook Expansion: Overall confidence index in respect of expansion plans of businesses in next six months has declined significantly by 17%. New investment: During the BCI Wave 17 Survey, 24% respondents indicated plans to make capital investment over the next six months (27% in Wave 16). Among respondents who have capital investment plans in the next six months, BCS has declined by 43% in the services sector and 2% in the retail and wholesale trade sector. Page 4 of 5

5 Expectations about Investments Only 23% businesses expect increase in investment in Pakistan in the upcoming months. Manufacturing (51%) and CPEC (33%) followed by Energy (26%) are the major areas where investment is expected. Local investment (53%) is considered as the main source of investment as opposed to FDI (47%). Business entities consider Falling commodity prices (88%), Lower financing costs (76%), Financial/Tax Incentives (72%) and Rising market demands (66%) as the key drivers of growth. The top five reasons for the decline in local investment and FDI are Energy Shortage; Political Instability; Security Concerns; High Cost of Doing Business and Poor Perception of Pakistan. New Jobs: During the BCI Wave 17, the BCS for growth in Total Employees is 7% negative, a sharp decline from 2% positive recorded in Wave 16. Moreover, only 12% of the respondents were of the view that there may be job opportunities for absorbing some of the additional 2 million persons per annum entering the job market every year ( 21% in Wave 16), 38% of the same respondents opined that only 10% of these 2 million will be absorbed by the job market while 28% believed that job market will only absorb up to 25% of the these 2 million individuals and 2% believed that more than 50% of the additional workforce will be absorbed by the job market. As per the respondents, GOP must form new institutions/businesses/industries and create more job opportunities in order to absorb the growing number of unemployed youth. Other suggestions included, ensuring good governance, improving the education system and encouraging selfemployment. About the Survey BCI is based on a comprehensive face to face feedback from Businesses across the country on a number of operating parameters divided into (i) business environment in the past six months and (ii) the expected business environment in the next six months taking into account global business situation, and situation in the country, in the city, in the industry and own enterprise of the respondent. The survey roughly reflects views of the 80% of the GDP participants comprising of manufacturing, services and retail trade sectors. About OICCI The OICCI is the collective voice of major foreign investors in Pakistan. The nearly 200 OICCI members, from 35 different countries, have a presence in 14 sectors of the economy and contribute over one-third of Pakistan s total tax revenue, besides facilitating transfer of technology and skills and providing employment to a sizeable number of people. 57 OICCI member companies are listed on the Pakistan Stock Exchange and 50 members are associates of the 2016 Global Fortune 500 companies. Besides their business operations the OICCI members realize their corporate social responsibilities and are major contributors to various CSR activities. Page 5 of 5