STATE BANK OF PAKISTAN Taking Economic Recovery to the Next Level: Role of the Private Sector Presentation at Pakistan Stock Exchange Dr. Saeed Ahmed Chief Economic Advisor, SBP March 14, 2016 1
Outline Growing Role of the Private Sector International Perspective Pakistan s macroeconomic performance Historical Context - Policy Focus: Strengthening role of the private sector - Investment and Growth Booms and busts - Increasing investment rate key to sustainable development Where Do We Stand Today? From Stabilization to Growth - Pickup in public sector development spending - Marked improvement in business environment - Cost of borrowing is at decades low level - Investment-GDP ratio is very low It s time for the Private Sector to lead economic recovery - Infrastructure development (Public-Private Partnership) - Availability of Investable Surplus Concluding Remarks 2
Private Sector International Perspective At international level, there is a broad consensus - Private sector plays a fundamental role in advancing development agenda - Public sector to focus on creating an enabling environment to support economic activity Visible change in landscape of development finance - Donors have not only squeezed the aid budgets, but also diverted funds towards private sector - Development finance is increasingly channeled through the private sector Fiscal constraints pave the way for public private partnerships - A way to leverage private sector resources and expertise - Public sector to design institutional, organizational, and regulatory frameworks for smooth implementation of PPP projects 3
Pakistan s Macroeconomic Performance: Historical Context 4
Reform Process : Paradigm Shift Broad-based structural reforms initiated in 1990, have changed the landscape of Pakistan s economy (notably financial, telecom, and energy sectors) - A well-diversified financial sector predominantly owned by the private sector (80 percent of banking sector assets) - Development of capital markets - an important source of external funding (Listed capital: Rs 1.3 trillion as of 31 December 2015) - Shift to a market-based, sustainable financial services no directed lending schemes - Privatization of PSEs is an ongoing agenda - Increasing role of public-private-partnerships However, macroeconomic developments paint a mixed picture. 5
Selected Macroeconomic Indicators Mixed Trends FY80s FY90s FY00s FY10-15 Real GDP Growth (%) 6.5 4.6 4.7 3.7 CPI Inflation (%) 2.3 8.3 8.4 9.2 As percent of GDP Total Investment 18.7 18.3 17.9 15.0 Fixed Investment 17.0 16.6 16.4 13.4 Public Investment 9.2 7.5 4.6 3.6 Private Investment 7.8 9.1 11.8 9.8 National Savings 14.8 13.8 15.9 13.8 Domestic Savings 7.4 7.7 14.0 8.7 Fiscal Deficit 7.1 6.9 4.4 6.4 Exports 9.8 13.0 12.3 10.6 Current Account deficit 3.9 4.5 3.8 1.0 Source: Economic Survey 2014-15 6
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 percent percent Investment and GDP: Booms and Busts 10 Real GDP growth Investmetn to GDP ratio (rhs) 21 9 8 7 6 20 19 18 5 17 4 3 2 1 16 15 14 0 13 Source: Haver Analytics 7
Pakistan Sri Lanka Bangladesh India South Asia Developing Asia World Percent of GDP Pakistan Lags Behind the Regional Countries 50 Investment-to-GDP ratio 40 1980s 1990s 2000s 2010-15 30 20 10 0 Source: Haver Analytics/World Economic Outlook database 8
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Private Sector Investment Regional Comparison 35 30 Gross Fixed Capital Formation in Private Sector (% of GDP) South Asia Bangladesh India Pakistan 25 20 15 10 5 Source: Haver Analytics/World Development Indicators, World Bank 9
External Resources (%) Dependence on Foreign Resources 10 9 8 7 6 5 4 3 Economic Growth & Foreign Resources in Pakistan ------- Linear Trend 2 3 4 5 6 7 8 Real GDP Growth (%) External Resources= Grants, Loans and Remittances as percent of GDP Source: State Bank of Pakistan and Economic Survey 10
Why Pakistan Lagged Behind? Multiple factors Low domestic savings dependency on volatile external resources, leave the recipient country when they are needed the most - Low rate of returns - High inflation (erodes savings capacity) - Income level (low real GDP growth) Difficult business conditions dampened investment activity - Decline in public sector investment in social and physical infrastructure - Energy shortages, security concerns, low external demand etc. Industry stuck in low value-added products Lack of investment in human resources by both public and private sectors 11
Where do we stand today? 12
Pakistan on Road to Economic Recovery Real GDP grew by 4.2% in FY15 (highest since FY09). The manufacturing sector performing well: LSM recorded YoY growth of 3.9 % in H1-FY16, compared with 2.7% in H1-FY15. CPI Inflation in FY15 at decade s low; Headline CPI inflation averaged at 2.5% during Jul-Feb FY16, compared with 5.5% in corresponding period. Fiscal Deficit brought down to 5.3 % in FY15 from 8.2 % in FY13; targeted to 4.3 % in FY16. Substantial increase in Public sector spending despite contained budget deficit (40.3% YoY growth in PSDP in H1-FY16). Country s FX reserves crossed US$ 20 billion mark, reducing the economy s vulnerability to shocks. Remittances continue to grow USD18.5 billion in FY15; USD 12.7 billion in July-Feb FY16 (6.1% YoY growth). 13
Conducive environment for private sector investment Shift in policy focus from stabilization towards economic growth - Following the cut in SBP policy rate, cost of borrowing for the private sector has come down to only 7.2 percent: the lowest since 2005 - SBP has also reduced rates on Long Term Financing Facility, which are in the range of 3 to 4.5 percent (the end user rate at 6 percent) Strong domestic demand: growing needs of young population (63% under the age of 30 years) 7-8% GDP growth is required to encash demographic dividend Marked improvement in Security situation and general law and order Efforts to eliminate energy shortages (US$16 billion LNG import agreement with Qatar & US$ 46 billion investments under CPEC Slump in International Commodity prices - Lower cost of raw materials - Generous pass-through of fall in oil prices to domestic consumers 14
Billion Rupees billion Rupees Credit to Private Sector: Reflecting Investment Activity Credit to private sector expanded by Rs 318 billion during 1 st July to 26 th Feb 2016, compared with Rs 159 in the corresponding period. Within credit, loans to private businesses showing a marked improvement. Credit to Private Sector Businesses (Jul-Jan) Fixed investment Working capital Trade finance 300 Credit to construction related sectors (Jul-Jan)* 50 Fixed Investment Working Capital and Trade Finance 250 200 40 30 150 100 20 10 50 0 0-10 -50 FY10 FY11 FY12 FY13 FY14 FY15 FY16-20 FY10 FY11 FY12 FY13 FY14 FY15 FY16 * Includes construction, transport, storage, comm and real estate. 15
Role of the private Sector 16
Public Private Partnership for Infrastructure Sector-wise number of Projects reaching financial closure in Public Private Partnership (1990- June 2015) Airport Electricity Natural gas Railroads Roads Seaports Telecom Water and sewerage Total Sri Lanka 64 2 7 73 Pakistan 1 67 2 8 9 87 Bangladesh 1 47 1 2 2 12 65 India 7 361 5 8 386 39 37 14 857 Thailand 2 97 3 3 2 11 11 16 145 Philippines 3 88 1 1 8 11 10 6 128 Source: World Bank, http://ppi.worldbank.org/ 17
Investment Avenues (Few examples) Energy and Infrastructure CPEC Construction related industries Agriculture (21% of GDP) in a dire need of technological impetus - Potential: Pakistan is ranked 4 th biggest producer of cotton; 5 th for sugarcane; 7 th for wheat; 13 th for rice; and 20 th for maize - Lack of storage facilities: only 5 million tons for 45 million tons of grain and 14 million tons of fruits and vegetables produced annually. - Wastages of as much as 15-18% in grains and 25% in horticulture. Livestock got attention in the recent years - 3 rd largest milk producer; 57 million animals (Cattle & Buffalo) - Halal food processing (tax incentive) Industry needs technological up-gradation 18
Corporate Sector Potential to Invest Macro Numbers Balance sheet data of 76 non-financial listed companies (June 2015) - Total assets = Rs 4,176 Billions (68 % of all listed companies) - Includes 16 sectors: dominated by Oil & Gas (28.9% of total assets) - Next in line is power sector: 16.2% of total assets - Current assets stood at 44.8 percent of total assets Energy- related Companies (Oil & Gas, Power, Refinery, and Marketing Companies) - Share of energy sector is 54 percent of total assets in our sample. - have combined share of 22.9 percent in KSE 100 Index. - KSE 100 Index is currently dominated by Financial entities with a 26.5 share. 19
Oil and Gas Cement Autos Textile Power Refinery Pharma Misc Transport Food Paper Chemical Engineering Tech & Comm O & G Mrkt Fertilizer Billion Rs Investable Surplus (without additional borrowing) Current assets net of current liabilities Overall: Rs 446 billion; Excluding companies with negative surplus: Rs 487 billion Excluding energy sector- Rs 149 billion Oil and Gas sector accounts for 67 percent (Rs 279 billions) 279 70 60 58 50 30 23 21 10 13 11 7 6 5 2 1 0 0 (15) (25) -10-30 Source: Bloomberg/ SBP Calculation 20
Oil & Gas Cement Textile Autos Misc Fertilizer Tech & Comm Refinery Transport Food Pharma Chemical Paper Engineering Power O & G Mrkt Billion Rs Potential Investable Resources- I Scenario 1: Equity*2 total liabilities + short term investments + cash+ near cash Investable resources: Rs 2,496 billion (excluding negative sectors= Rs 2,581 Billions); Investable resources excluding energy sector: Rs. 1,394 billion 400 1,111 391 Leverage 320 240 160 242 197 172 140 80 0 76 75 61 38 35 25 10 8 (17) (67) -80 Data as of 30 June 2015, for some firms 30 June 2015 may represent Annual values 21
Oil & Gas Cement Textile Power Tech & Comm Fertilizer Autos Misc Refinery Food Transport Oil & Gas M Cos Pharma Chemical Paper Engineering Billion Rs Potential Investable Resources-II Scenario 2: Equity*2 total borrowing + short term investments +cash + near cash) Investable Resources: Rs 3,651 billion (Excluding energy sector: Rs 1,789 billion) 1,439 426 400 Scenario 2: Investable resources 320 240 274 247 236 222 209 191 160 119 80 0 71 61 57 39 37 13 11 Source: Bloomberg/ SBP Calculations 22
Concluding Remarks Overall, the country is on a high-growth trajectory. Government, donors, and regulators have geared up resource mobilization efforts to achieve inclusive growth. With the shift in policy focus from stabilization to growth, healthy corporate balance sheets along with historic low interest rates and marked improvement in security condition, offer a golden opportunity to promote investment in the country. The country has abundant human and capital resources which can be exploited by the private sector to achieve inclusive, sustainable, and equitable economic growth. The corporate sector is now well positioned to lead the economic recovery and take it to the next level. 23
Thank you! 24