Business outlook for 2013

Like everyone in Pakistan as well as many sitting thousands of miles away, the business community too is waiting to exhale. And so, all that’s visible in the run up to the precise moment – General Elections 2013 – are lots of breathlessly red faces.

Generally, election year produces diametrically opposing reactions within the public and private sectors. While the incumbent seeks to woo fickle voters through last ditch spending (think: poverty alleviation, development projects, etc.), the private sector often buries its head and its wallet in the sand until the storm of unpredictability has passed. Consequently, the business outlook for 2013 will remain depressingly unexciting until the new government settles down.

Question is, will it pick up once the honeymoon is over?

Not if things continue to look as they do at present. The global recession isn’t going away anytime soon and the IMF recently cut global growth forecasts for the next year to 3.6%, down from its earlier estimate of 3.9%. Although the Pakistani Government is doing its best to convince anyone who will listen that it is going to manage ‘four’ percent growth in the coming year, nobody is really convinced.

For one, the Government doesn’t really have the money to spend. Public revenues – proposed tax amnesty schemes notwithstanding – are low; the fiscal deficit is 8.2% and, to make ends meet, the Government is borrowing heavily from the banking sector. For decent growth, the Government needs a tax-to-GDP ratio in the vicinity of 16%; all it can muster at present is 9.1%. To top it all off, most of the public spending is being funneled into non-productive, vote generating expenditure.

While inflation has finally been brought into the single digit realm, few are deluded enough to imagine it will last. First, global commodity prices (particularly oil) are still heading upwards. Second, with just enough forex reserves left for three months of imports and no bilateral or multilateral donor rushing to save Pakistan from Islamabad, the rupee is poised to come under serious pressure. (In November alone, Pakistan needs to repay a staggering $616 million to the IMF.) Third, the Government has the State Bank printing Rs 1.5 billion a day. All inflationary enough on their own, the combined effect of these three will make for a very painful and prolonged hangover.

Further, savings are low and the cash flush banks are too busy throwing rupees at the Government to bother with the few businesses that would be willing to invest in Pakistan prior to elections. Simply put, banks would much rather bolster their profits by lending to an insatiable but dependable Government than lend to the brilliant but risky private sector.

Significantly, while the Central Bank has now cut its policy rate by a cumulative 200 basis points since August, its critics are still unhappy with the decision. Their first bone of contention is that the temporarily low inflation numbers do not merit monetary easing and the State Bank is just making it cheaper for the Government to borrow more rather than hauling it up for doing so. Further, they cite data on private sector credit offtake that shows that the same actually declined after the deep cut in August (150 basis points) while Government borrowing increased. As such, they argue, it makes little sense to continue with a policy prescription that is clearly not having the desired effect.

Businesses, on the other hand, say that interest rates are still too high to consider investing. (Foreign investment, of course, requires a climate unavailable in a frontline state in the war against terrorism.) While the specific merits of this allegation can be argued over, the business environment in the country presents a series of uncontroverted and inescapable realities that dilute the impact of the high cost of borrowing.

There are obviously those who cry about energy shortages, the unpredictability of supply and the fear that the dollar-rupee exchange rate will cross Rs 100 by June 2013. There are others who moan about the law and order situation and the fact that extortion levels jump up dramatically in the run-up to an election as political parties gather funds for electioneering. But first and foremost is the fact that the entire country is in a state of political flux and the economy is teetering on the brink of a full blown crisis.

Typically, investment – be it the setting up of large projects or just the import of new machines for spinning – has a significant gestation period. An investor who can’t predict whether his deals with the current Government will be honoured by the next or what the duty structure will look like by the time his machines come in, is generally wary and prefers to sit on the sidelines until he gets more clarity. If even the IMF insists it will only negotiate a bailout package with the new government, why would businesses want to deal with people who are nearing the tail end of their tenures?

Take the example of the energy sector. The long, sizzling summer of 2012 and the frequency of power riots across the country clearly showed that Pakistan has graduated from being an energy insecure to an energy crisis state. Throughout this period, the Government and its ministers frequently spoke of the need for more energy related projects, alternative energy and what not at much touted ‘energy conferences’.

At various points during the year, the import of energy from even Iran and India were discussed. Clearly, there is significant unmet demand and correspondingly, great returns in the business.

Theoretically then, given that energy infrastructure projects take ages to mobilise, investors should be queuing up to begin these before the summer of 2013. But while a few canny, deep pocketed investors are making ambitious plans, even they are not committing money to these projects just yet. Clearly, the top priority, for even those investors who are mostly immune to political persecution because of their wealth and/or influence, is political stability.

This stability, however, refers not only to the political parties that form governments but also the nature of the economic policies they pursue. If an investor raises $200 million to set up an LNG import business, for example, he needs to know what the returns will be and how long the government intends to buy the product for.

And in the absence of this certainty, no one will cough up the cash.