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2014

www.businessmonitor.com

PAKISTAN
FREIGHT TRANSPORT REPORT
INCLUDES 5-YEAR FORECASTS TO 2018

ISSN 1752-606X
Published by:Business Monitor International

Pakistan Freight Transport Report


2014
INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMIs Industry Report & Forecasts Series


Published by: Business Monitor International
Copy deadline: November 2013

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2013 Business Monitor International


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Pakistan Freight Transport Report 2014

CONTENTS
BMI Industry View ............................................................................................................... 7
SWOT .................................................................................................................................. 10
Freight Transport .................................................................................................................................... 10
Political ................................................................................................................................................. 12
Economic ............................................................................................................................................... 14
Business Environment .............................................................................................................................. 15

Industry Forecast .............................................................................................................. 16


Table: Table 1: Air Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Table: Maritime Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Table: Rail Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Table: Trade Overview, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Table: Key Trade Indicators, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table: Top Import Destinations, 2004-2011, US$mn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Table: Top Export Destinations, 2004-2011, US$mn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Market Overview ............................................................................................................... 23


Industry Trends And Developments ................................................................................ 29
Company Profile ................................................................................................................ 33
Pakistan Railways (PR) ............................................................................................................................
Mercury Logistics Pakistan (MLP) ..............................................................................................................
Pakistan International Airlines Cargo (PIA Cargo) ........................................................................................
Pakistan National Shipping Corporation (PNSC) ...........................................................................................

33
36
38
40

Political Outlook ................................................................................................................ 42


Political Risk Analysis .............................................................................................................................. 42
Table: Pakistan Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Long-Term Political Outlook ..................................................................................................................... 45


Table: Scenario Matrix: Evolution Of State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Table: Scenario Matrix: Centrifugal Versus Centripetal Forces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Oil Price Outlook ............................................................................................................... 51


Global Oil Products Price Outlook ............................................................................................................. 51
Methodology ......................................................................................................................................... 51
Crude Price Forecasts ............................................................................................................................ 51
Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Variance Across Product Markets .............................................................................................................


Narrower US Market Crude-Product Spreads ..............................................................................................
Weak Demand Persists ............................................................................................................................
Risks To Outlook ....................................................................................................................................

Business Monitor International

52
55
56
57

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Pakistan Freight Transport Report 2014


Table: BMI's Refined Products Forecasts, US$/bbl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Supply: Supported By Global Refining Capacity ...........................................................................................


Naphtha: US Gas Hits Demand ................................................................................................................
Gasoline And Gasoil/Diesel: Subsidies & Fuel Efficiency Cap Upward Movement .............................................
Jet Fuel: Limited Upward Movement .........................................................................................................

58
62
64
66

Table: Total Air Freight And Passenger Volumes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Bunker Fuels: Sulphur Control To Hit Rotterdam Hardest ............................................................................. 68

Macroeconomic Forecasts ............................................................................................... 72


Economic Activity .................................................................................................................................... 72
Table: Pakistan - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Demographic Forecast ..................................................................................................... 78


Table: Pakistan's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Table: Pakistan's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Table: Pakistan's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Table: Pakistan's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Methodology ...................................................................................................................... 82
Industry Forecast Methodology ................................................................................................................ 82
Sector-Specific Methodology .................................................................................................................... 83
Sources ................................................................................................................................................ 84

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Pakistan Freight Transport Report 2014

BMI Industry View


We have downgraded our full-year real GDP growth forecast for Pakistan for the current fiscal year
(FY2013/14 [July-June]) to 3.4% from 4.0% previously, as the macroeconomic environment readjusts
painfully due to a general tightening in fiscal and monetary policy. We continue to believe that this
tightening in policy is necessary in order to correct the significant structural imbalances in the economy,
which should eventually put the economy on a much stronger footing and thus higher growth trajectory over
the medium-to-long term. As such, while we have revised our near-term growth expectations, we have kept
our FY2014/15 growth forecast at 4.0%, which implies a strong bounce in economic activity following this
year of transition.

Our recent downgrades centre on lowering our growth expectations for domestic private demand, namely
private consumption and gross fixed capital formation growth. While the revisions made were fairly
marginal, they have had a notable impact on the headline rate of growth as domestic demand makes up the
lion's share of the Pakistani economy, equivalent to approximately 111% of GDP over the past five years.
We have lowered our projections for private consumption and gross fixed-capital formation growth to 2.0%
and 1.5%, from 2.8% and 2.0%, respectively. The consequent downward revision in our import growth
forecast as domestic demand weakens, however, provided a slight statistical cushion for headline growth.

While these economic headwinds continue to circle at present, the impact on Pakistan's freight industry will
be that growth is set to be muted during 2014 across all modes. The outperformer in terms of annual
tonnage growth will be maritime, with both the ports of Karachi and Muhammad Bin Qasim expected to
witness 2.40% year-on-year (y-o-y) increases this year.

Headline Industry Data

2014 tonnage throughput at the Port of Karachi is forecast to grow by 2.40% to 39.44mn tonnes.

2014 tonnage throughput growth at the Port of Muhammad Bin Qasim is forecast to increase by 2.40% to
25.46mn tonnes.

2014 air freight tonnage forecast to grow by 2.30% to reach 320,000 tonnes.

2014 rail freight tonnage forecast to increase by 2.00% to hit 2.79mn tonnes.

2014 total trade (real terms) forecast to rise 11.00%.

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Pakistan Freight Transport Report 2014

Key Industry Trends

Railways Ministry Places Order To CSR Ziyang For 50 Locomotives

Chinese company CSR Ziyang has received of letters of credit, which calls the company to commence the
construction of 50 passenger and freight locomotives for an order placed by Pakistan's Ministry of
Railways. The diesel locomotives are to be constructed at the cost of CNY640mn (US$101.7mn). Of the
total locomotives, half will be rated at 2,000 to 2,500hp with a maximum top speed of 120km/h, while
leftover are to be of 3,000 to 3,500hp with a top speed of 140km/h. These locomotives can be used in harsh
and dusty environments with temperatures up to 55C. The company has also stated that the first 10
locomotives are likely to be delivered by end-2013, while the rest will be supplied by end-May 2014.

State Plans 'To Benefit Trade, Multimodal Transport System'

Jawaid A Siddiqui, CEO of Marine Logistics, has said that the Pakistani government's plans to use public
private partnerships (PPP) to increase investment and efficiency levels in the country's rail network will
benefit trade and multimodal transport systems. The government has offered nine routes to private sectors,
and the companies will be allowed to operate their own freight trains. Marine Logistics plans to operate
dedicated coal and container trains between Karachi and Gwadar and Kashigar ports by end-2014. The
company also intends to operate 1,200 trains a year. More than 96% of freight in the country is transported
through road, while rail represents only 0.3% by volume.

Fruit Exporters Hit By Reefer Rise

A number of container-shipping companies introduced considerable rate increases on their reefer containers
at the start of 2013. BMI notes that this is already being felt by shippers, with Pakistani fruit growers
looking to the government for subsidies in order to cope with the extra cost. How long the rate hikes hold at
this level is open to question given how recent rate increases in the container-shipping sector have fared.
However, it seems likely that they will stabilise at a higher level than they had been in 2012 given capacitycurbing actions being taken by the firms.

Key Risks To Outlook

Pakistan is a pivotal country for global security, owing to its large population, Muslim identity, links with
Islamist terrorism, adjacency to Afghanistan, and its nuclear arsenal. Therefore, international concerns

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Pakistan Freight Transport Report 2014

about Pakistan's future are wholly warranted. Although Pakistan returned to democracy in early 2008 after
almost a decade of military rule, the country remains wracked by violence, with no end in sight to the
conflict. Islamist militant activity, hitherto largely confined to the regions bordering Afghanistan, is
spreading to the central parts of Pakistan. If the government fails to curb this militancy, then the coming
decade (2013-2022) could be far more turbulent than the last. However, even without Islamist attacks,
governance will remain weak, thus constraining economic development.

The rupee has been on a sustained depreciatory path since mid-June 2013, continuously hitting fresh lows.
The local currency's weakness should help to balance the country's trade deficit as export competitiveness
improves and as the cost of imports rise. We note that, on a real effective exchange rate (REER) basis, the
rupee has cheapened by about 6.5% since April 2012, when the JP Morgan Index peaked at 137.2. The
index stood at 128.2 as of August.

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Pakistan Freight Transport Report 2014

SWOT
Freight Transport

SWOT Analysis

Strengths

Pakistan's position on the Arabian Sea allows it access to the major East-West
shipping routes. It is also well positioned to engage in trade with countries in the
Middle East, including one of its main trade partners, the UAE.

Pakistan's ports feature as ports of call on Maersk Line, APL, Evergreen and Hanjin
services.

The port of Karachi managed to weather the 2009 global economic downturn and is
set to maintain steady medium-term growth.

Weaknesses

Shore-side infrastructure is poor by international standards.

Pakistan suffers from chronic energy shortages and poor infrastructure.

At the start of 2013, a number of container-shipping companies introduced


considerable rate increases on their reefer containers. BMI notes that this is already
being felt by shippers, with Pakistani fruit growers looking to the government for
subsidies in order to cope with the extra cost.

Opportunities

Work has been completed on the Second Container Terminal, and the Grain and
Fertiliser Terminal at Port Qasim.

A PKR4bn (US$80mn) bailout package for state-owned rail company PR was


announced in October 2011 by the Pakistan government and will be used in part to
improve infrastructure, as well as procure new locomotives.

The Port Qasim Authority has negotiated an agreement to build a new coal, clinker
and cement terminal at the port.

Dredging work at the port of Karachi will enable larger vessels to berth.

The Pakistan National Shipping Corporation plans to expand its fleet.

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Pakistan Freight Transport Report 2014

SWOT Analysis - Continued

The country needs major rebuilding following the devastating floods of 2010, so ports
will benefit from the increase in goods needed for reconstruction work.

A Chinese naval presence in Gwadar, Pakistan, would greatly enhance Beijing's


ability to project power into the Persian Gulf for the first time in the modern era, and
would allow it to guard the western part of its crucial energy supply chain.

The Gwadar Port is set to be integral to the planned China-Pakistan economic


corridor, which will strengthen economic ties between the two countries. The Special
Secretary for Asia-Pacific affairs at Pakistan's Ministry of Foreign Affairs, Noor
Muhammad Jadmani said: 'Clearly, the Pakistan-China relationship needs to be
further enhanced for mutual benefit, and this is a project that would help us out.'

Threats

Pakistan's ports are reported to be among the most expensive in the world.

Container-scanning delays at the port of Karachi threaten Pakistan-US Trade and the
port's prospective growth in throughput of exports.

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Pakistan Freight Transport Report 2014

Political

SWOT Analysis

Strengths

Pakistan has been labelled a 'major non-NATO ally' by the US, thanks to its leading
role in the US-led war on terror. Pakistan's strategic importance ensures that the
West maintains an active interest in safeguarding its stability, as reflected in
continued pledges of financial support from the 'Friends of Pakistan' group of
countries.

Pakistan has a strong relationship with China, a geopolitical and economic anchor
that provides it an alternative to the Western world.

The Pakistan Muslim League-Nawaz (PML-N)'s strong showing in the 2013 general
elections suggests to us a more stable government setup over the next five years,
and one that will have more legislative freedom to enact its agenda.

Weaknesses

Political parties tend to be dominated by personalities, families, or patronage groups


rather than being defined by policies.

Although improving, relations with India are still tense. The border dispute between
the two nuclear-armed neighbours, which have gone to war three times since they
were 'partitioned' after independence, still looks intractable. November 2008 attacks
in Mumbai, which are thought to have been orchestrated by Pakistani militant groups,
complicating relations further.

Opportunities

Pakistan's 18th Constitutional Amendment transferred powers away from the


presidency, and placed them in the hands of the prime minister. This should
strengthen civilian rule over the medium term. There have also been positive
indications from army chief Ashfaq Parvez Kayani that the military will become less
involved in politics, but any sabre-rattling with India could once again strengthen the
hand of the army.

The resumption of peace talks with India provides Pakistan's leaders with an
opportunity to ease tensions in one of the world's most dangerous nuclear
flashpoints.

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Pakistan Freight Transport Report 2014

SWOT Analysis - Continued

Threats

Escalating violence by militants opposed to Pakistan's participation in the US-led war


on terror poses a key risk to stability. The government will have to balance the
country's dependence on financial and military aid from Washington against the risk
of rousing the wrath of the population if he appears too accommodating to US
demands.

Militants from neighbouring Afghanistan tend to use Pakistan as a safe haven. This
has led the US to target militants on Pakistani soil via airstrikes by pilotless drones,
and there has been talk of more aggressive action in future.

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Pakistan Freight Transport Report 2014

Economic
SWOT Analysis

Strengths

Pakistan's rapid economic expansion and healthy foreign direct investment inflows
during the presidency of General Pervez Musharraf highlights the country's high
growth potential.

Pakistan's vast population means once the purchasing power of people improves,
there is potential for a sizeable market for consumer-oriented businesses.

Weaknesses

Pakistan suffers from chronic current account and fiscal deficits. This leaves the
economy vulnerable to external shocks and dependent on aid and loans from
multilateral institutions and bilateral partners.

Despite rapid economic growth in recent years, Pakistan's population remains poor.
Incomes are around US$1,200 per capita.

Opportunities

Rising rates of urbanisation - with the UN forecasting the proportion of city dwellers
climbing from 36.8% of the population in 2010 to more than 60% by 2050 - should
continue to serve as a key driver of economic growth.

Pakistan's close geopolitical ties with China should ensure that it benefits from the
latter's rise through growing trade and investment.

Threats

Public discontent with the government lingers, posing a threat to the position of
president Asif Ali Zardari. This could jeopardise already fragile economic stability.

Pakistan's balance of payments remains vulnerable to a spike in oil prices, as vividly


illustrated by the ballooning import bill in 2008. Pakistan imports more than 50mn
barrels of oil a year to satisfy local demand for fuel products and record-high prices in
2008 led to a widening of the trade deficit.

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Pakistan Freight Transport Report 2014

Business Environment
SWOT Analysis

Strengths

Pakistan has one of the most liberal foreign investment regimes in South Asia. Onehundred percent foreign equity is permitted in the manufacturing and infrastructure
sectors.

Ongoing reform of Pakistan's trade regime is reducing tariff barriers. Duty on capital
goods, plants and machinery not manufactured locally is now just 5%, having earlier
been between 5% and 25%.

Weaknesses

Failing infrastructure, bureaucratic delays and widespread corruption are key


concerns for investors looking to do business.

Intellectual property rights are poorly enforced. Pakistan, a leading producer of


counterfeit goods, remains on the Office of the US Trade Representative's Priority
301 Watch List.

Opportunities

A pro-privatisation climate has been engendered, making further sell-offs of state


firms possible, although we expect the rate of privatisations to be slow and
inconsistent.

Pakistan is seeking to attract more investment from the Gulf region, benefiting from
its surging oil wealth and access to the burgeoning Islamic finance market.

Threats

Anti-Western militants have been known to target foreign workers and businesses,
with recent reports suggesting extortion of multinational companies could be on the
rise.

Pakistan's uncertain security environment makes it a high-risk destination in the eyes


of investors.

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Pakistan Freight Transport Report 2014

Industry Forecast
Macroeconomic Outlook

Given the country's high reliance on textile exports and oil imports, global cotton and oil imports are a key
determinant of its trade balance. Encouragingly, our Commodities team sees average cotton prices rising
from their lows in 2012, with prices expected to rise by an average of 6% over the next three years
(2013-2015). Simultaneously, average oil prices are projected to moderate, decreasing at an average annual
clip of 3% through the same period. The increasing ratio between the two in cotton's favour bodes well for
Pakistan's terms of trade.

In 2013, we also noticed a marked pick up in foreign direct investment (FDI) into the country, albeit from a
very low base. As seen in the accompanying chart, the six-month moving average of net inflows has
increased fourfold from its low in July 2012 to US$165mn as of July. The strong election of the more
economically conservative Pakistan Muslim League-Nawaz (PML-N) has given a significant boost to
investor confidence, given that the government's fiscal stability is one of the main concerns of businesses
following the mismanagement of the previous administration. Furthermore, the financial backstop and
policy anchor provided by the recent approval of the IMF deal should guarantee a better semblance of
economic stability.

Air Freight

In 2014, the air freight sector is pencilled in to enjoy steady annual growth of 2.30%, (down from last year's
2.60%), a figure we believe will rise over the forecast period to average 3.16%. Should this scenario play
out, tonnage handled will rise from 2014's 320,000 tonnes to 365,500 by the end of 2018.

Table: Table 1: Air Freight, 2011-2018

2011

2012e

2013f

2014f

2015f

2016f

2017f

2018f

Air Freight Tonnes (000)

294.6

304.9

312.8

320.0

330.6

341.8

353.4

365.5

Air Freight Tonnes % Change y-o-y

-1.49

3.52

2.60

2.30

3.31

3.38

3.40

3.42

e/f = BMI estimate/ forecast. Source: Statpak

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Pakistan Freight Transport Report 2014

Maritime Freight

As previously mentioned, the domestic economy is picking up a little momentum, and we believe that, as a
result, the ports of Karachi and Muhammad Bin Qasim will put the poor 12 months of 2012 behind them
going forward.

The Port of Karachi is predicted to enjoy a slightly better year in 2014 compared with 2013 (y-o-y tonnage
growth of 2.40% and 1.70% respectively). Over the forecast period, we expect tonnage growth to average a
steady if unimpressive 3.16% to reach 45mn tonnes by the end of 2018.

Meanwhile, at the country's other main port, the Port of Muhammad Bin Qasim, growth is also set to follow
a similar path to Karachi with 2014's forecast being 2.40%, while over the midterm we anticipate average
annual growth of 3.28%.

Table: Maritime Freight, 2011-2018

2011

2012e

2013f

2014f

2015f

2016f

2017f

2018f

Port of
Karachi
throughput,
tonnes '000

41,431

37,875

38,519

39,444

40,588

41,805

43,269

44,999

Port of
Karachi
throughput,
tonnes, %
y-o-y

-0.52

-8.58

1.70

2.40

2.90

3.00

3.50

4.00

Port of
Muhammad
Bin Qasim
throughput,
tonnes '000

26,168

24,025

24,859

25,456

26,224

27,115

28,119

29,215

Port of
Muhammad
Bin Qasim
throughput,
tonnes, %
y-o-y

2.19

-8.19

3.47

2.40

3.02

3.40

3.70

3.90

Source: Port Authority, BMI. e/f = BMI estimates/forecasts

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Rail Freight

Pakistan's railway system experienced three years of contraction, coinciding with the global recession, with
negative annual tonnage growth of 4.11% and 15.87% in 2009 and 2010 respectively and a huge contraction
of 55% in 2011. While we expect the sector to record a full recovery from those tumultuous years, the
sector is still only set for small amounts of annual growth over the medium term to 2018. In 2014, tonnage
carried is set to reach 2.79mn tonnes, representing year-on-year growth of 2.0%, while over the forecast
period, we expect average growth to be 2.61%. This will see tonnage come in at just over 3mn tonnes by the
end of 2018.

Table: Rail Freight, 2011-2018

Rail Freight Tonnes (000)


Rail Freight Tonnes % Change y-o-y

Rail Freight Tonnes-km (mn)


Rail Freight Tonnes % Change y-o-y

2011

2012e

2013f

2014f

2015f

2016f

2017f

2018f

2,616

2,679

2,738

2,792

2,868

2,946

3,029

3,114

-55.17

2.40

2.20

2.00

2.70

2.74

2.79

2.84

1,757

1,804

1,814

1,821

1,839

1,859

1,879

1,901

-63.74

2.65

0.54

0.40

1.02

1.07

1.10

1.13

e/f = BMI estimate/ forecast. Source: Statpak

Trade

In real terms, Pakistani trade slumped by 9.63% in recession-dominated 2009, had a strong recovery in 2010
(estimated growth of 10.03%) and made slight gains in 2011. In 2012, total trade growth is estimated to
have contracted by 9.42%, which we expect to see reversed in 2013 with growth of 4.91% estimated. This is
set to rise to 11.00% in 2014. Exports will beat imports in terms of year-on-year real growth over the
medium term.

Table: Trade Overview, 2011-2018

2011

2012

2013

2014f

2015f

2016f

2017f

2018f

Imports, real growth, % y-o-y

-0.12

-3.58

-2.41

9.50

2.00

2.00

2.00

2.00

Exports, real growth, % y-o-y

2.37

-15.26

12.22

12.50

2.50

2.50

2.50

2.50

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Trade Overview, 2011-2018 - Continued

2011

2012

2013

2014f

2015f

2016f

2017f

2018f

1.13

-9.42

4.91

11.00

2.25

2.25

2.25

2.25

Imports, US$bn

40.48

45.32

44.43

51.05

55.43

59.32

63.18

67.29

Import growth, % y-o-y

18.42

11.96

-1.97

14.92

8.57

7.02

6.50

6.50

Exports, US$bn

29.80

27.58

30.08

35.52

38.75

41.67

44.60

47.73

Export growth, % y-o-y

24.82

-7.43

9.06

18.07

9.11

7.55

7.02

7.02

Total trade, US$bn

70.27

72.90

74.51

86.57

94.18

101.00

107.78

115.02

Total trade growth, % y-o-y

21.05

3.74

2.20

16.19

8.79

7.24

6.72

6.72

Total Trade, real growth, % y-o-y

Source: National statistical authority, BMI. e/f = BMI estimates/forecasts

Table: Key Trade Indicators, 2011-2018

Key Trade Indicators

2011e

2012e

2013e

2014f

2015f

2016f

2017f

2018f

Agricultural raw materials, imports, US$mn

1,973

2,206

2,163

2,483

2,694

2,882

3,068

3,266

Agricultural raw materials, imports, % y-o-y

7.03

11.84

-1.95

14.78

8.50

6.97

6.45

6.46

Agricultural raw materials, exports, US$mn

416

385

425

503

550

593

635

702

Agricultural raw materials, exports, % y-o-y

1.83

-7.54

10.52

18.23

9.40

7.75

7.18

10.60

Ores and metals, exports, US$mn

408

400

464

562

619

674

730

789

Ores and metals, exports, % y-o-y

23.15

-1.96

16.25

21.02

10.04

8.98

8.27

8.11

Ores and metals, imports, US$mn

1,372

1,537

1,476

1,730

1,900

2,047

2,192

2,346

Ores and metals, imports, % y-o-y

24.49

11.97

-3.92

17.19

9.82

7.71

7.08

7.06

Iron and steel, exports, US$mn

144

128

147

185

209

230

250

276

Iron and steel, exports, % y-o-y

45.18

-10.90

14.33

26.32

12.48

10.03

9.11

10.09

Iron and steel, imports, US$mn

1,896

1,689

1,931

2,440

2,744

3,019

3,295

3,627

Iron and steel, imports, % y-o-y

45.18

-10.90

14.33

26.32

12.48

10.03

9.11

10.09

Manufactured goods, exports, US$mn


Manufactured goods, exports, % y-o-y
Manufactured goods, imports, US$mn

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19,863 18,526 20,035 23,316 25,269 27,035 28,802 30,692


24.62

-6.73

8.14

16.38

8.37

6.99

6.54

6.57

21,758 24,268 23,805 27,241 29,511 31,529 33,528 35,657

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Key Trade Indicators, 2011-2018 - Continued

Key Trade Indicators

2011e

2012e

2013e

2014f

2015f

2016f

2017f

2018f

Manufactured goods, imports, % y-o-y

19.74

11.54

-1.91

14.43

8.33

6.84

2017f

6.35

Fuels, exports, US$mn

1,863

1,643

1,891

2,431

2,752

3,042

3,332

3,643

Fuels, exports, % y-o-y

55.34

-11.79

15.10

28.53

13.21

10.55

9.55

9.33

Fuels, imports, US$mn

12,946 14,776 14,438 16,942 18,595 20,065 21,522 23,073

Fuels, imports, % y-o-y

13.58

14.13

-2.28

17.34

9.76

7.91

7.26

7.21

Source: National statistical authority, BMI. e/f = BMI estimates/forecasts

Table: Top Import Destinations, 2004-2011, US$mn

2004

2005

2006

2007

2008

2009

2010

2011

China,
Mainland,
US$mn

1,499

2,349

4,665

6,363

6,591

3,774

7,629

9,282

China,
Mainland,
US$mn, %
of total

8.44

9.24

13.64

15.92

14.18

11.92

17.45

18.20

Saudi
Arabia, US
$mn

2,067

2,819

3,545

4,276

5,621

3,488

4,570

5,804

Saudi
Arabia, US
$mn, % of
total

11.64

11.09

10.36

10.70

12.09

11.02

10.45

11.38

United Arab
Emirates,
US$mn

1,773

2,620

3,294

3,974

5,223

3,454

4,525

5,747

United Arab
Emirates,
US$mn, %
of total

9.98

10.31

9.63

9.94

11.24

10.91

10.35

11.27

Kuwait, US
$mn

1,000

1,264

1,589

1,917

2,519

1,798

2,356

2,992

Kuwait, US
$mn, % of
total

5.63

4.97

4.64

4.80

5.42

5.68

5.39

5.87

Malaysia,
US$mn

634

732

927

1,383

1,906

1,606

2,514

2,811

Malaysia,
US$mn, %
of total

3.57

2.88

2.71

3.46

4.10

5.07

5.75

5.51

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Top Import Destinations, 2004-2011, US$mn - Continued

2004

2005

2006

2007

2008

2009

2010

2011

17,758

25,413

34,210

39,965

46,485

31,649

43,727

51,003

TOTAL, top
5 countries,
US$m

6,973

9,784

14,019

17,913

21,859

14,121

21,593

26,635

% from top
5 trade
partners

39.27

38.50

40.98

44.82

47.02

44.62

49.38

52.22

TOTAL

Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with
data used elsewhere in this report

Table: Top Export Destinations, 2004-2011, US$mn

2004

2005

2006

2007

2008

2009

2010

2011

United
States, US
$mn

3,119

3,979

3,604

3,482

3,480

3,178

3,389

3,658

United
States, US
$mn, % of
total

23.47

24.78

21.76

18.44

16.01

18.14

15.78

14.27

United Arab
Emirates,
US$mn

982

1,256

1,551

2,009

2,538

1,478

1,699

1,954

United Arab
Emirates,
US$mn, %
of total

7.39

7.82

9.36

10.64

11.67

8.43

7.91

7.62

Afghanistan,
I.R. Of, US
$mn

465

1,065

1,316

1,634

1,865

1,358

1,724

1,931

Afghanistan,
I.R. Of, US
$mn, % of
total

3.50

6.63

7.95

8.65

8.58

7.75

8.03

7.53

China,
Mainland,
US$mn

300

436

916

1,005

916

974

1,573

1,930

China,
Mainland,
US$mn, %
of total

2.26

2.71

5.53

5.32

4.21

5.56

7.32

7.53

Germany,
US$mn

664

725

639

729

827

706

898

1,284

Germany,
US$mn, %
of total

5.00

4.51

3.86

3.86

3.80

4.03

4.18

5.01

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Top Export Destinations, 2004-2011, US$mn - Continued

2004

2005

2006

2007

2008

2009

2010

2011

13,288

16,056

16,561

18,885

21,740

17,523

21,480

25,635

TOTAL, top
5 countries,
US$m

5,530

7,460

8,026

8,859

9,625

7,693

9,283

10,757

% from top
5 trade
partners

41.62

46.46

48.46

46.91

44.27

43.90

43.22

41.96

TOTAL

Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with
data used elsewhere in this report

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Market Overview
External Demand Outlook Provides A Relief

As the Pakistani economy goes through an adjustment period domestically, the silver lining for the country
this fiscal year is the improving prospects of its key exports markets, which are the EU and the US. As we
wrote recently (see 'Rupee Weakness Due To Conditionality, External Accounts Are Sound', September
26), the EU and the US account for close to 40% of the nation's total outbound shipments and both are
projected to witness a resurgence in real GDP growth in 2014.

EU real GDP growth is forecasted to rise from -0.1% this year to 1.2% in 2014, while US growth is
projected to bounce back up to 2.8% next year from an expected slowdown to 1.8% this year. The ongoing
structural slowdown in China could limit the potential upside in overall export growth as Asia's largest
economy is slowly becoming a key destination for Pakistani exports. Indeed, shipments to China now
constitute about 10% of the total, double the amount just three years ago.

Developed Market Recovery To Aid Demand

Pakistan's two main export markets are the EU and the US, which together account for close to 40% of the
nation's total outbound shipments. Our global team sees both developed markets witnessing resurgence in
real GDP growth. Favourably, we have already started to see export growth to these two markets recovery
from their lull in recent years.

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Steady Growth Ahead


Real GDP, % change, year-on-year
10

7.5

2.5

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014f
2015f
2016f
2017f
2018f

-2.5

Sources: Pakistan Bureau of Statistics/BMI

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Growth Back On Track

e/f = BMI estimate/ forecast. Source: Pakistan Bureau of Statistics

Freight Network Low Scoring, But Investment Planned

The government has taken active steps of late to boost transport infrastructure in Pakistan through the
introduction of build, operate and transfer (BOT) projects in the country. In September 2011, Pakistani
finance minister Abdul Hafeez Shaikh established a coordination committee, which will be responsible for
accelerating the implementation of BOT projects. The committee will also work to attract local and
international companies to take part in such projects, with a particular focus on the construction of a
motorway between Karachi, Pakistan and Hyderabad, India.

BMI does not have data for Pakistan's road haulage volumes, but it would probably make up the bulk of the
country's domestic freight transport mix. There are 260,760km of roads in Pakistan according to the CIA
World Factbook, making it the 20th largest in the world. Of these, 69.4% (180,910km) are paved, including
just 711km of expressways. In the World Economic Forum's Global Competitiveness Index 2011-2012,
Pakistan's road network scores poorly, coming 79th out of a global 142 countries rated. When compared
with BMI's peer group of 13 Asian countries, Pakistan is placed ninth.

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In 2010, 5.84mn tonnes were transported on Pakistan's rail network, which is 7,791km long, the 27th largest
in the world. It runs primarily on a broad 1.676m gauge (7,479km), with 312km operating on a narrow 1.0m
gauge. The rail network has a similar score to the road network on the Global Competitiveness Index,
scoring 59th out of a global 123 and 10th from the peer group of 13. We note that rail freight volumes
declined in 2009 and 2010.

Rail Leads The Freight Pack

Source: Statpak

However, with Pakistan Railways having secured a bailout package for investments in Q411, there is a
chance that volumes could start to rise once again over the medium term. Freight will be transported by rail
from the port of Karachi to the rest of Pakistan, with a number of previously suspended services being
reintroduced.

Further to the internal distribution of freight by rail, BMI notes there is also talk of a direct rail link with
China, which will link Pakistan to the Asian dragon, Central Asian states and Russia. Should these new
links be developed fully, they have the potential to increase trade in the region dramatically. In order for this
to come to fruition, there needs to be continued investment in repairing Pakistan's rail stock. Out of 500
locomotives, PR has only 180 running on the tracks. Pakistan already makes the most of its geographical

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location. The country's freight transport sector, particularly ports and roads, benefits from supplying US
army operations in Afghanistan.

Plenty Of Room For Improvement

* Rail infrastructure is measured out of 123.Source: Global Economic Forums Competitiveness Index

Pakistan's two primary maritime facilities are the ports of Karachi and Muhammad bin Qasim, also located
at Karachi. Pakistan's ports are, like its road and rail networks, also low scorers on the Global
Competitiveness Index. Out of the peer group of 13 countries, they scored ninth, but only 72nd globally.

The Pakistani government has decided to hand over the operations of the Gwadar Port on the Arabian Sea
from PSA International to Chinese Overseas Port Holdings Limited, reported Reuters. This was revealed by
Information Minister Qamar Zaman Kaira on January 31 2013. The transfer of the port operations was
sanctioned by the cabinet on January 30 2013, with Chinese Overseas due to invest in the port's operations.
The Chinese government has provided more than 80% of the US$248mn development cost of the port.

In terms of air freight, Pakistan had 148 airports as of 2010. Of these, 101 (68.2%) were paved. Pakistan
also has 20 heliports. Providing upside risk to this sector comes the news that the Benazir Bhutto

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International Airport (BBIA) in the Pakistani city of Islamabad is scheduled to become operational in 2014,
according to BBIA Project Director VS Sodha.

Investment And Development Outlook

In terms of future investment in Pakistan's freight transport network, which could benefit the country's
freight transport operations, BMI highlights that according to our Infrastructure Key Projects Database, US
$3.34bn is set to be invested in the medium term. This is fairly evenly distributed between roads and
bridges, airports, rail development and airports, suggesting that there should be developments in all of
Pakistan's freight transport sector in future.

We reported back in February 2012 that the Asian Development Bank had announced loans of US$650mn
for transport infrastructure rebuilding work in Pakistan. The loan is intended to fund the reconstruction of
790km of highway and 800km of provincial roads after they were damaged by severe flooding last year.
The bank will also lend US$100mn to China for agricultural investment.

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Industry Trends And Developments


Rail

Railways Ministry Places Order To CSR Ziyang For 50 Locomotives

Chinese company CSR Ziyang has received of letters of credit, which calls the company to commence the
construction of 50 passenger and freight locomotives for an order placed by Pakistan's Ministry of
Railways. The diesel locomotives are to be constructed at the cost of CNY640mn (US$101.7mn). Of the
total locomotives, half will be rated at 2,000 to 2,500hp with a maximum top speed of 120km/h, while
leftover are to be of 3,000 to 3,500hp with a top speed of 140km/h. These locomotives can be used in harsh
and dusty environments with temperatures up to 55C. The company has also stated that the first 10
locomotives are likely to be delivered by end-2013, while the rest will be supplied by end-May 2014.

Pakistan To Join International Rail Convention

Pakistan is expected to join the Intergovernmental Organisation for International Carriage by Rail,
according to the Railway Gazette in March 2013. The organisation has confirmed that it expects to have
formally welcomed the nation into its ranks by September 2013. Upon entry, Pakistan will become the 49th
state to have joined the organisation. The organisation works to organise and maintain an international legal
framework to govern rail transport operations. Pakistan submitted a formal application to join the
organisation's convention in February 2013.

Multimodal

State Plans 'To Benefit Trade, Multimodal Transport System'

Jawaid A Siddiqui, CEO of Marine Logistics, has said that the Pakistani government's plans to use public
private partnerships (PPP) to increase investment and efficiency levels in the country's rail network will
benefit trade and multimodal transport systems. The government has offered nine routes to private sectors,
and the companies will be allowed to operate their own freight trains. Marine Logistics plans to operate
dedicated coal and container trains between Karachi and Gwadar and Kashigar ports by end-2014. The
company also intends to operate 1,200 trains a year. More than 96% of freight in the country is transported
through road, while rail represents only 0.3% by volume.

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Air

Mango Shippers Raise Concerns

Angry mango shippers were critical of the cargo division of Pakistan International Airlines (PIA) in May
2013 due to concerns over the amount of capacity on the Asian carrier's fleet. In a bid to appease the mango
shippers, the airline agreed to carry more stocks of the exotic fruit in the future, following discussions
between PIA and the Pakistan Fruit and Vegetable Exporters, Importers and Merchant Association (PFVA).

With demand growing for mangoes across the world, there had been concerns from within the industry that
there was a lack of facilities for perishable items on PIA's aircraft and cargo tariffs were also criticised.

Earlier in the year, Pakistani fruit exporters appealed for freight subsidies from the state to be granted after
reefer rates rose on exports of kinnow (an orange-like fruit). Karachi's News International reported in
February 2013 that reefer rates had risen to US$1,500 per FEU. Harvest Tradings' CEO Ahmad Jawad was
reported as saying: 'The Ministry of Commerce should grant a subsidy on exports of kinnow after shipping
companies are to increase freight charges, keeping in view the abnormal growth in costs.'

He added: 'The increase in freight charges will prove another suffering for kinnow exports.' More on this
follows in the next article.

Maritime

Fruit Exporters Hit By Reefer Rise

As they stated they would in 2012, a number of container-shipping companies have introduced considerable
rate increases on their reefer containers at the start of 2013. BMI notes that this is already being felt by
shippers, with Pakistani fruit growers looking to the government for subsidies in order to cope with the
extra cost. How long the rate hikes hold at this level is open to question given how recent rate increases in
the container-shipping sector have fared. However, it seems likely that they will stabilise at a higher level
than they had been in 2012 given capacity-curbing actions being taken by the firms.

In Q4 2012, market-leading container shipping company Maersk Line came out and stated that it was
planning on introducing a US$1,500 rate hike on its forty-foot refrigerated containers (reefers) from January

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1 2013, an increase of 30%. Maersk Line CEO Sren Skou said in September that the rate hike was
essential to fund investment as the sector has not kept pace with inflation and bunker costs.

Over the past seven years, reefer rates have increased an average by 2% per annum, while inflation over this
period has ticked up by 4% and bunker costs by 18%. Skou added: 'During the last seven years, our reefer
rates have not even covered the rate of inflation.' As is often the case, Maersk Line was followed by a
number of other leading shipping companies: the world's number two and number three, Mediterranean
Shipping Company (MSC) and CMA CGM, have also introduced rate hikes of US$1,500 per reefer, as
have COSCON and APL.

The effect of this is already being felt by shippers: in Pakistan, exporters of the kinnow fruit (a US$40mn to
US$50mn business in the country) are appealing to the Pakistani government for aid as they feel the impact
of the rate rises. Freight from Pakistan to Malaysia has risen to US$3,400 per forty-foot reefer with the US
$1,500 increase; freight to Jeddah has risen to US$3,600. CEO of Pakistani fruit-exporting company
Harvest Tradings, Ahmad Jawad, said: 'The Ministry of Commerce should grant a subsidy on exports of
kinnow after shipping companies are to increase freight charges, keeping in view the abnormal growth in
costs. The increase in freight charges will prove another suffering for kinnow exports.' The industry had
already been hit by increased charges on exports to Russia and by a recent 11-day truckers' strike which
disrupted supply lines.

Should the rate increase remain at this high level then it is likely we will be seeing many more shippers of
fruit and other commodities that require refrigerated transport seeking assistance from subsidies as they
struggle to cope with the 30% hike. However, there is some cause for hope for the shippers. Throughout
2012 we followed rate hikes and surcharges implemented en masse on the same date by container-shipping
companies looking to improve their bottom lines and return to the black - container shipping rates have been
at challengingly low levels since the global economic crisis as the growth of the global fleet has exceeded
demand growth - and the likelihood is that there will be come retrenchment of this rise in the coming weeks
(see our online service, December 24 2012, 'No Christmas Present On Asia-Europe', for our most recent
examination of this trend).

Nevertheless, we do expect some proportion of the rate hike on reefers to stick given the actions being taken
by Maersk Line and other companies to control the capacity in the market. Maersk Line stated in September
2012 that by the end of the year it would have scrapped 25,000TEUs' worth of reefers, more than 10% of
the company's existing reefer capacity. Hynndai Merchant Marine announced that from January 1 2013 it

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would halt its reefer service connecting the US East Coast with Asia. With a tighter market it seems that
shippers will have to get used to paying more for their refrigerated cargos.

Gwadar Port To Be Complete In Q1 2014

Pankistan's Gwadar port is to become fully functional by the end of Q1 2014, according to Dawn. As of
October 2013 around 60% of the site's development work has been completed, as was confirmed by Indian
shipping minister Kamran Michael at the 2013 International Conference and Exhibition on Shipping,
Logistics and Supply Chain Management. Michael has stated that the completion of the port will provide a
significant boost to the country's immediate economic growth prospects.

According to UK-based Drewry Maritime Research, China Overseas Port Holding Company's
(COPHC) takeover of container terminal concession at Gwadar, Pakistan, will be beneficial for India,
reported Transport Weekly in April 2013. The move, which comes after Singapore's PSA International's
withdrawal, lets COPHC gain an ideal geographical location just 70 kms east of the Pakistan-Iran border,
therefore eliminating any Middle-East/Gulf conflict and blockage disrupting operations. The terminal will
have three to four berths which makes it an ideal transhipment in the Middle East and the Indian
subcontinent.

Pakistan To Buy Two Double-Hull Tankers For US$45mn

Pakistan National Shipping Corporation (PNSC) plans to purchase two double-hull tankers in a deal
worth US$45mn as it upgrades its nine-vessel shipping fleet, reported Hellenic Shipping News at the end of
October, 2013. PNSC, which the government has short-listed for privatisation, received an approval from its
shareholders at the annual general meeting for the acquisition of one Aframax oil tanker and one LR-1
product tanker that would increase the fleet to 11.

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Company Profile

Pakistan Railways (PR)


SWOT Analysis

Strengths

PR is Pakistan's second largest employer after the armed forces.

Weaknesses

The number of cargo wagons owned by PR is in a steady decline.

The company's earnings declined from cargo declined by 4.8% in the financial year
2009-2010.

Widespread theft and corruption were uncovered during an audit of financial year
2010-2011.

Opportunities

The transport by rail of containerised goods to Istanbul could become an alternative


to using a container ship.

Jawaid A Siddiqui, CEO of Marine Logistics, has said that the Pakistani government's
plans to use public private partnerships (PPP) to increase investment and efficiency
levels in the country's rail network will benefit trade and multimodal transport
systems.

Threats

The transport by rail of containerised goods to Istanbul could become an alternative


to using a container ship.

Company Overview

Pakistan Railways (PR) is the state-owned railway operator in Pakistan, with


headquarters in Lahore. According to the company's website, it is the 'lifeline of the
country', not only contributing to 'its economic growth but also promoting national
integration.' The company is one of the largest employers in Pakistan, second only to
the armed forces.

Strategy

Privatisation
PR has privatised much of its cargo shipment operations in a move that has drawn
criticism for the loss of potential revenue and the higher costs endured by shippers as a
result. One such company operating private rail cargo operations on PR's trains is the
Lasani Group. The firm states on its website that: 'Pakistan Railway is handling its cargo

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through the private sector on a contract basis. To handle this business, we have
deputed our own staff at all stations. We control a luggage van which is attached to a
train by our own guard. We are responsible to load/unload the luggage van. We
delivered cargo within 17 hours from Lahore to Karachi and from Karachi to Lahore.'
The whole luggage body of two trains has been given over to private companies,
according to local newspaper Pakistan Today, and 50% of the wagons on the
remaining trains. PR's only three freight depots are at Faisalabad, Peshawar and
Multan, with the rest under the control of private companies. As a result of this
privatisation, PR's earnings from freight transport are less than those from passenger
trains, the opposite of the case of Indian Railways.
Operations
PR owned 16,499 freight wagons at the end of financial year 2009-2010. Of these,
5,184 were covered wagons, 6,089 were open wagons, 4,146 were specialised wagons
for transporting cargos such as explosives, livestock and timber and 651 were
departmental wagons. Further, there were 451 brake-vans. The majority of these
wagons (11,737) were four-wheeled, while of the remainder, most were eight-wheeled.
The number of freight wagons owned by PR has declined steadily since the 1980s,
when it owned an average of around 30,000 freight wagons. Even during the financial
year 2005-2006, when the number of freight wagons owned was 20,809, this has
declined by 20.7%.
This decline in the number of wagons owned by PR is reflected in the number of wagon
loadings undertaken by the company in 2009-2010. This was 295,249, the lowest figure
recorded since the records begin in the 1950s. The total tonnage carried was 5.84mn,
down 15.9% on the previous year.
Of the goods transported by PR, miscellaneous goods make up the biggest load, at
30.6% of the total 5.84mn in 2009-2010. This is followed by furnace oil, which with
1.25mn tonnes carried in 2009-2010, made up 21.5% of the total. Cement made up
13.6%, railway material and stores 11.7%, containers 10.1% and diesel oil 3.3%.
Containerisation
In 2009-2010, containerised goods accounted for just 10.1% of goods transported by
PR, at 587,000 tonnes. However, there is the prospect that this could grow if a
landbridge between Pakistan and Istanbul becomes a viable alternative to going by sea.
In 2009, a train carried 20 containers on this route in a trial run. However, BMI believes
that railway options will have to offer a much more rapid alternative than they currently
do, to compete with the massive economies of scale offered by container vessels.
Recent
Developments

Latest Activity
Pakistan To Join International Rail Convention

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Pakistan is expected to join the Intergovernmental Organisation for International


Carriage by Rail, according to the Railway Gazette in March 2013. The organisation has
confirmed that it expected to have formally welcomed the nation into its ranks by
September 2013. Upon entry, Pakistan will become the 49th state to have joined the
organisation. The organisation works to organise and maintain an international legal
framework to govern rail transport operations. Pakistan submitted a formal application
to join the organisation's convention in February 2013.
Financial Data

Financial Results
2011-2012
PR's total earnings amounted to PKR15.44bn, with PR's freight division comprising
PKR1.02bn from the company's freight division.
The Pakistan government granted another bailout package for PR of PKR4bn (US
$80mn) in October 2011. The government had previously approved a PKR6bn (US
$120mn) package for the repair and purchase of trains and over the past 10 years, the
company has received more than PKR200bn (US$4bn) in loans and grants from the
government.

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Mercury Logistics Pakistan (MLP)


SWOT Analysis

Strengths

Established in 2000, the company has grown rapidly and now operates out of three
offices in Pakistan.

MLP offers a number of logistics solutions and support services.

Weaknesses

MLP relies on other companies to transport its customers' cargoes.

Opportunities

MLP's service of Afghanistan transit cargo makes it well placed to benefit should the
Afghan security situation improve and the economy develops.

Pakistan's two main export markets are the EU and the US, which together account
for close to 40% of the nation's total outbound shipments. Our global team sees both
developed markets witnessing resurgence in real GDP growth in 2014.

Threats

Should the security situation in Pakistan worsen, supply chains and MLP's business
could be affected.

Company Overview

Mercury Logistics Pakistan (MLP) was established in 2000 and with headquarters in
Karachi, Pakistan and is a provider of logistics services connecting Pakistan with the
rest of the world. The company provides a range of different air and sea solutions
through its range of international freight transport associates.

Strategy

MLP offers logistics solutions to deliver all over the world. The company operates out of
three different offices in Pakistan. The Karachi office, where the firm began, remains the
company headquarters, while the Lahore office provides support to central and northern
Pakistan and the Islamabad office supports the capital and adjacent areas. MLP's
affiliates and customers include a number of global brands including Apple Macintosh,
Sony, HP and Philips, through its two key services, Global Air and Global Ocean.
MLP's Global Air service handles the company's air forwarding business and can carry
all types of cargo including perishables and dangerous goods. The company offers
tracking and tracing and packing and crating, and it offers timely deliveries through
close partnership with airlines. These include such global players as Emirates, Cathay
Pacific, Malaysian Airlines and Cargolux.

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The Global Ocean Service includes less-than-container load consolidation services,


sea/air and air/sea movements, and pick-up and delivery. According to the company's
website, this is coordinated by a team of experienced staff who can guide customers
through the complexities of global shipping. The company has a close relationship with
carriers on all the major trade lines.
These two major logistics divisions are supported by customs brokerage services,
which make sure that goods comply with government regulations, and marine insurance
services. Further to this, MLP offers inland transportation services.
One niche area, where MLP has secured a business for itself in, is Afghanistan transit
cargo. The company offers handling of equipment from Karachi to all major areas in the
country including Kabul and Mazar-e-Sharif.
Recent
Developments

Latest Activity
Cabinet Approves Transfer Of Gwadar Port Operation
The Pakistani government has decided to hand over the operations of the Gwadar Port
on the Arabian Sea from PSA International to Chinese Overseas Port Holdings
Limited, reported Reuters in February 2013. This was revealed by Information Minister
Qamar Zaman Kaira on January 31 2013 and the news may be of interest to Mercury
who may wish to up their involvement at the port due to the incoming investment. The
transfer of the port operations was sanctioned by the cabinet on January 30 2013, with
Chinese Overseas due to invest in the port's operations. The Chinese government has
provided more than 80% of the US$248mn development cost of the port.

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Pakistan International Airlines Cargo (PIA Cargo)


SWOT Analysis

Strengths

PIA Cargo has a powerful financial backer in the government of Pakistan, 87%
shareholder.

Weaknesses

PIA is Pakistan's national flag carrier.

PIA Cargo does not have any dedicated freighter aircraft.

The company has operated at a loss for two years running.

Some 187 flights were cancelled, as well as 765 delayed in September 2012,
according to the company's Punctuality Report. The national flag carrier achieved
only 82% punctuality in September.

According to a top official at the Finance Ministry and reported by The International
News, state-owned enterprises, especially PIA, are facing huge losses on an annual
basis.

Opportunities

PIA is expanding its network of destinations.

Pakistan's Prime Minister Raja Pervez Ashraf asked the ministry of finance in August
2012 to release US$4.5mn to PIA on a priority basis in order for it to acquire more
aircraft on a lease basis.

Threats

Company Overview

Elevated oil prices will threaten airfreight companies' profit margins.

PIA Cargo is the cargo division of Pakistan International Airlines (PIA), the national
carrier of Pakistan. The company is 57.7% state-owned, 26.3% owned by state-run
institutions and 16% owned by private individuals. PIA Cargo was formed in 1974 and
offers a range of cargo options in the belly-hold of PIA's passenger aircraft. The airline's
hub airport is the Jinna International Airport at Karachi, with secondary hubs at the
airports of Lahore and Islamabad.

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Strategy

PIA Cargo has previously operated dedicated freighter planes, but not since 2007. The
carrier transports cargo in the belly-hold of PIA's passenger aircraft. In 2010, PIA Cargo
accounted for 6% of the total revenues taken by PIA. The parent company's fleet totals
39 planes, comprising 12 Airbus A310-300, 7 ATR 42-500s and 20 Boeing aircraft. In
addition to 27 domestic destinations, these planes connect over 40 international
destinations in 25 different countries around the world. Further, when required, PIA
Cargo also leases freighter planes on a chartered basis for deliveries of livestock and
relief goods within Pakistan and elsewhere.
PIA Cargo offers a range of different shipping services. These include Maxload, for the
transportation of high-density cargos and Premium Freight, a time-definite delivery
service of the highest priority. In addition to the relief goods PIA Cargo transports, it is
also a large freighter of flowers, fruit and vegetables, textiles, paper products and even
human remains.
It was reported in November 2013 by the International News that the International
Monetary Fund (IMF) was pressing ahead to get PIA privatised by the end of 2014. To
kick start the process, the IMF wants a financial adviser in place by March 2014.

Recent
Developments

Latest Activity
IMF Pushes For Privatisation
The Pakistan government is being pushed by the IMF to privatise PIA. A financial
adviser will be appointed by March 2014 with December 2014 earmarked for the
privatisation. According to the International News, 'this was part of a condition
accepted by Pakistan under the US$6.67bn Extended Fund Facility (EFF), it is learnt'.
It had been previously been agreed that 26% worth of shares in PIA would be privatised
by June 2014 but this has now been extended to the end of the year.

Financial Data

2011
Expenditure at PIA stood at PKR65.95bn in H111, with total revenues standing at
PKR55.83bn. A proposed bailout of PKR20bn was rejected by the government in 2011,
and the national carrier is now expected to carry out financial restructuring.
The losses of PIA have soared by more than 100% over the past five years, according
to a report by the Ministry of Finance. Business Recorder stated in February 2013:
'According to the annual report of the Finance Division, the national flag carrier has
been facing liquidity crises for the past several years. PIA losses have surged to
PKR26.8bn in December 2011 from PKR13.4bn in 2007.'

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Pakistan National Shipping Corporation (PNSC)


SWOT Analysis

Strengths

Pakistan National Shipping Company (PNSC) is well diversified, operating in the


general cargo and dry and liquid bulk sectors.

Weaknesses

PNSC's fleet of 11 vessels is small by global standards.

Opportunities

The company is expanding its fleet and announced in October 2011 that it was to
purchase four new vessels within 12 months.

Reconstruction efforts following 2010's floods will see a continued need for dry bulk
imports.
Threats

Elevated bunker costs will impinge on shipping companies' profit margins.

India's state shipping line Shipping Corporation of India (SCI) has extended its global
network by adding Pakistan to its portfolio.

Company Overview

The Pakistan National Shipping Corporation (PNSC) is the country's flag carrier.
Headquartered in Karachi, the company has been listed on the Karachi Stock Exchange
since 1980. It is an autonomous corporation operating under the control of the Ministry
of Ports and Shipping. The company is diversified, operating general purpose cargo
ships, dry bulk carriers and tankers around the world. It also operates the PNSC
Workshop at the Port of Karachi, which provides repairs and maintenance to the PNSC
fleet and foreign vessels. In 2013 the newly elected Pakistan Muslim League-Nawaz
(PML-N) government included PNSC on a list of state-owned companies being readied
for privatisation.

Strategy

PNSC operates a total of 11 vessels. These include three multi-purpose cargo carriers,
built between 1980 and 1983 - the Sargodha, the Islamabad, and the Multan. PNSC's
dry bulk fleet consists of five vessels; the most recent of these, the Sibi, was acquired in
May 2011. This acquisition was part of PNSC's drive to modernise and expand its dry
bulk fleet. Until December 2010, the company had just two dry bulk vessels. Earlier in
2011, PNSC signed a syndicated structured finance facility worth PKR10.3bn (US
$104.6mn) with a number of Pakistani banks for the purchase of five multi-purpose dry
bulkers.

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As part of its five-year expansion plan, PNSC also intends to expand its tanker fleet and
purchase an LNG carrier. The shipping company currently has three tankers in its fleet the Quetta, the Lahore, and the Karachi.
The fleet expansion by Pakistan's national carrier is similar to that recently undertaken
by India's SCI. We believe that it makes sense for nations to cater for their own shipping
needs wherever possible, particularly when matters such as energy security are
involved.
PNSC operates its vessels globally both on a chartered and tramping basis. Its Trade
Area West includes Middle Eastern destinations such as Dubai and Kuwait, and
European stops like Antwerp and Taragona, in addition to West African and Brazilian
ports. Trade Area East covers Far East ports including Shanghai, Yokohama and Busan.
The three tankers all operate on a shuttle service between the Persian Gulf and Karachi.
Financial Data

According to newspaper Business Recorder, in October PNSC reported a gross profit


of PKR3.291bn (US$30.75mn) in the last financial year, an increase of 57% on the
PKR2.096bn achieved in the year-earlier period. At its annual general meeting held in
the same month, PNSC announced a 10% dividend to share holders. Captain Anwar
Shah, a maritime consultant was proposed by shareholders to the position of
shareholder director and was re-elected unopposed by a large majority. Captain Shah is
ex-director general of ports and shipping/chairman of the Gwadar Port, and a governor
of the World Maritime University in Sweden.

Latest Activity

Dispute Over Oil Import Tanker Contracts: PNSC saw itself involved in a dispute over
fair competition in late October. Pakistani newspaper Dawn reported a dispute between
the local branch of Transparency International, the anti-corruption group, and senior
officials of the national oil company, Pakistan State Oil (PSO). Transparency
International Pakistan (TIP) was mounting a legal challenge against an October 2012
decision by PSO to award contracts to PNSC to meet its freight import needs across a
range of products (such as crude oil, petrol, and diesel). TIP is arguing that a
competitive tendering process should have been followed, and that PSO's freight
import needs should not be entrusted to a single supplier. The PSO in turn argued that
it was acting under a 2001 cabinet committee order. A PSO executive told Dawn 'the
original decision was made after 9/11 and the Afghan invasion by the US; all the
international shipping lines were charging exorbitant insurance charges to bring oil to
Pakistan.' According to this source, last year the government had validated the original
decision and required that PSO, the Trading Corporation of Pakistan (TCP) and Pakistan
Steel Mills should all meet their import needs through PNSC. PSO sources claimed that
TIP adviser Adil Gilani was himself not impartial but was pursuing the interests of other
commercial groups. Referring to the new government, Gilani said 'This is a problem in
our system. The PML-N used to say what we are saying today when they were in
opposition.'

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Political Outlook
Political Risk Analysis
BMI View: Pakistan held its largest by-elections on August 22, with the ruling Pakistan Muslim LeagueNawaz (PML-N) coming out on top yet again, and building on from its strong showing in the May general
elections. The strong and ongoing support for the PML-N illustrates the public's continued patience with
the party's more conservative economic agenda, which we see as vital in the government's efforts to
jumpstart the economy.

Pakistan held its largest by-elections on August 22, with 13 National Assembly and 26 Provincial Assembly
seats up for grabs. The latest polls were held in seats that were forced to invalidate their results from the
general elections last May due to violence and other reasons. Overall, the ruling Pakistan Muslim LeagueNawaz (PML-N) came out on top, winning 18 - 5 national and 13 provincial - of the contested seats on the
day, building on from its strong showing in the general elections (see 'Strong PML-N Showing Points To
Stability, But Challenges Remain', June 20). The main opposition, Pakistan People's Party (PPP), fared
poorly yet again as it secured just 6 of the 39 seats available.

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Victory For The Ruling Party


Pakistan - August 22 By-Election Results, Total of National & Provincial Assemblies

Source: BMI, Election Commission of Pakistan

Public's Enduring Patience Vital For Government's Agenda

The strong and ongoing support of the Pakistani public for the PML-N from the general elections in May to
the by-elections in August illustrates the populace's continued patience with the party's more conservative
economic agenda, which we see as vital in the government's overall efforts to jumpstart an embattled
economy. Crucially, the public's patience has endured despite the renewed economic strains in recent
months, such as those brought on by the ongoing weakness in the rupee and the resurgence of headline
inflationary pressures of late (see 'Pressure Is On For SBP To Turn Hawkish', August 22). Furthermore, the
PML-N's mini electoral victory this month is a show of general tacit support for the government's loan
arrangement and structural reform package with the IMF, which is likely to impose economically painful
but necessary conditions (e.g. subsidy reform).

Other Key Takeaways

The fact that relatively peaceful by-elections were held so soon after the general elections in May when
certain areas of the country were hit by poll-related violence demonstrates to us Pakistan's slowly maturing

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democracy, which we view as a positive for long-run political stability. Indeed, we recently upgraded the
country's long-term political risk rating (see abovementioned June article). The overall success of the latest
polls sends a strong signal to militant groups such as the Pakistani Taliban that violence merely delays
democratic processes and that it cannot derail democracy completely. Furthermore, on a more cautionary
reminder, it is worth reiterating that the latest by-elections do not have an immediate positive impact on the
PML-N's numbers in the Senate, where it continues to hold an inferior position to the opposition PPP.

Table: Pakistan Political Overview

Federal republic, constitution restored on December 15 2007. Executive power rests with the prime
System of
minister, and the cabinet is drawn from parliament. Bicameral legislature led by 342-seat National
Government Assembly (five-year term, elected by universal suffrage).
Head of State President Asif Ali Zardari
Head of
Government

Prime Minister Mohammad Nawaz Sharif

Last Election Presidential - September 6 2008


National Assembly - May 11 2013
Senate - 2 March 2012
Composition
Of Current
Government Coalition comprising PML-N, JUI-F, and Independents.

Key Figures

Minister of Defense - Mohammad Nawaz Sharif, Minister of Finance & Revenue - Mohammad Ishaq Dar,
Minister of Foreign Affairs - Mohammad Nawaz Sharif, Minister of Interior - Chaudhry Nisar Ali Khan,
Minister of Law & Justice - Mohammad Nawaz Sharif, Governor of State Bank of Pakistan - Yaseen
Anwar, Chief of Army Staff - General Ashfaq Pervez Kiyani, Director-General Inter-Service Intelligence Lt-Gen Zaheerul Islam

Main Political
Parties
(number of
seats
Pakistan Muslim League-Nawaz (PML-N, 184): Senior member in the governing coalition and party of
National
Prime Minister Nawaz Sharif. Main vote-bloc is the province of Punjab. Leans to the centre-right and
Assembly)
intermittently linked to religious leaders.
Pakistan People's Party (PPP, 41): The PML-N's main opposition in parliament. Led by Asif Ali Zardari,
widower of assassinated former premier Benazir Bhutto, and their son Bilawal Zardari Bhutto. Main votebloc is the province of Sindh. Has populist and centre-left leanings.
Pakistan Tehreek-e-Insaf (PTI, 30): Minor party in the opposition, where its main vote-bloc is the province
of Khyber Pakhtunkhwa. Led by Imran Khan, espouses a modern Islamic republic.
Pakistan Muslim League-Quaid (PML-Q, 2): Controlled the former government until its defeat in the
February 2008 elections. Party leader is Chaudhry Shujaat Hussain, parliamentary leader is Chaudhry
Pervaiz Elahi.
Muttahida Qaumi Movement (MQM, 23): Formed by Altaf Hussain to defend the rights of Urdu-speakers in
the province of Sindh. Often blamed for ethnic violence in Karachi.
Jamiat Ulema-e-Islam-Fazl (JUI-F, 12): A religious conservative party that is part of the governing coalition
at the centre and is led by Fazl-ur-Rehman.
Other parties represented in the National Assembly: Pakistan Muslim League-Functional (PML-F,
5); Jamaat-e-Islami (JI, 4); Pakhtunkhwa Milli Awam Party (PMAP, 3); National People's Party (NPP, 3);
Independents (8).

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Pakistan Political Overview - Continued

Federal republic, constitution restored on December 15 2007. Executive power rests with the prime
System of
minister, and the cabinet is drawn from parliament. Bicameral legislature led by 342-seat National
Government Assembly (five-year term, elected by universal suffrage).
ExtraMiltant groups linked to the Taliban and al-Qaeda include Lashkar-e-Jhangvi and the Tehrik-i-Taliban
Parliamentary Pakistan (the Pakistani Taliban). Other religious militants group include the Harkat-ul-Mujahideen. The
Opposition
government has also outlawed the Sipah-e-Sahaba Pakistan and Tehreek-e-Jaferia Pakistan.
Next Election Presidential - 2013
National Assembly - 2018
Senate - 2015
Ongoing
Disputes

The state of Jammu and Kashmir is divided between India and Pakistan. Pakistan controls the Northern
Areas and Azad Kashmir, while India controls Jammu, the Kashmir valley and Ladakh. India and Pakistan
also share a disputed border in the Rann of Kutch, which lies in India's Gujarat and Pakistan's Sindh.

Key partner in US-led war on terror. Procures military equipment from China, a rapidly growing political
Key Relations and economic partner.
BMI ShortTerm Political
Risk Rating

51.7

BMI
Structural
Political Risk
Rating

53.7

BMI

Long-Term Political Outlook


BMI View: Pakistan is at risk of experiencing years of instability and militant activity, but an outright
collapse of the state is unlikely unless the core province of Punjab becomes ungovernable. Under such
circumstances, we would not preclude a military coup. Meanwhile, due to its strategic importance,
Pakistan's foreign allies will do everything they can to ensure its stability.

Pakistan is a pivotal country for global security, owing to its large population, Muslim identity, links with
Islamist terrorism, adjacency to Afghanistan, and its nuclear arsenal. Therefore, international concerns
about Pakistan's future are wholly warranted. Although Pakistan returned to democracy in early 2008 after
almost a decade of military rule, the country remains wracked by violence, with no end in sight to the
conflict. Islamist militant activity, hitherto largely confined to the regions bordering Afghanistan, is
spreading to the central parts of Pakistan. If the government fails to curb this militancy, then the coming
decade (2013-2022) could be far more turbulent than the last. However, even without Islamist attacks,
governance will remain weak, thus constraining economic development.

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Challenges And Threats To Stability

Weak institutions: Although the main political parties have ideological differences, they are largely
personality- or family-dominated, and this has led to accusations of nepotism, patronage, and corruption.
This, in turn, has proved a source of public anger and unrest.

Powerful military establishment: The military is arguably Pakistan's strongest and most respected
institution, and it has ruled the country for roughly half of its 65 years of existence, most recently under
Pervez Musharraf between 1999 and 2008. While the military has acted as a stabiliser at times of trouble,
and although the 1999 coup was initially welcomed, Pakistanis have shown a tendency to eventually tire of
military rule and demand the return of democracy.

Economic inequality: Pakistan's per capita GDP is very low at US$1,223 and income inequalities are high,
both vertically (i.e. between different segments of society) and horizontally (between different provinces
and regions). Education levels are low, as evidenced by a very high degree of illiteracy, especially in rural
areas and among women. In FY2010/11, only 59% of Pakistanis above the age of 10 were literate (men
70%, women 46%).

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Population Pressures Growing


Pakistan - Total Population, '000s & Under-25s, %

Source: UN World Population Prospects: The 2008 Revision

Demographic pressures: Pakistan's population is increasing rapidly, with the World Bank forecasting it to
rise from 180mn in 2012 to 212mn in 2022. In addition, the proportion of the total aged below 25 is very
high at 56% and is expected to remain high at 49% in 2022. Urbanisation rates are also increasing, albeit
slowly. This backdrop makes it all the more urgent for both the government and the private sector to create
sufficient job opportunities in order to absorb the expanding labour force. The rising population also
threatens to create pressures on Pakistan's agriculture production and water supply.

Islamist militancy: The combination of rapid population growth, the weak education system, and the lack
of opportunities for economic advancement provides fertile ground for the growth of Islamist militancy.
This is being exacerbated by the ongoing insurgency in Afghanistan, which is leading to knock-on effects in
Pakistan, as evidenced by the increasing terror activities of the Pakistani Taliban.

High ethnic diversity: Pakistan is a culturally diverse state, with the largest linguistic group, the Punjabis,
accounting for only 44% of the population in the last census in 1998. Other significant linguistic groups that
have demonstrated separatist tendencies include Pashtuns (15% nationally, but an overwhelming majority in

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the Afghan border regions), Sindhis (14%) and Baluchis (4%). Also noteworthy are tensions between the
majority Sunni Muslim population and the Shi'a minority, which comprise 10-15% of the total. Although
separatism has been contained, any collapse of the state could risk reigniting centrifugal forces.

As a result of these challenges, BMI's long-term political risk rating for Pakistan is 53.7/100. It scores
56.4/100 in the 'characteristics of polity' subcomponent, a figure that is undermined by weak institutions but
supported by a relatively free press and minority rights. Pakistan scores 52.5/100 for 'characteristics of
society', but only 45.0/100 for 'scope of state' due to a low government spending-to-GDP ratio and the fact
that the military threat posed by neighbouring India serves as a constraint on Islamabad's regional actions.
However, Pakistan scores 60.0/100 for 'policy continuity', reflecting the fact that there has been broad
continuity by successive governments.

Scenarios For Political Change

Over the coming decade, we see several possible scenarios for Pakistan's evolution, based on different
permutations of military rule, civilian rule, moderate ideology, and radical Islamist ideology.

Table: Scenario Matrix: Evolution Of State

Military Rule

Moderate

Radical
Islamist

Civilian Rule

Military seizes power as civilian government fails to Polity remains broadly democratic; regular elections
maintain security; army remains bulwark against
held with moderate parties prevailing; government
militant Islam; elections suspended indefinitely;
maintains stability; steady economic growth
foreign policy remains broadly pro-Western;
achieved; foreign policy remains broadly prorelations with India strained but tensions contained;
Western in alignment; relations with India stay
technocratic government maintains economic
cordial; government makes concerted effort to
reform, reassuring investors
reduce militancy
win power and Islamicise institutions
Military becomes Islamicised and seizes power; Islamist parties
polity remains democratic in name only;
army becomes vanguard of radical Islam; foreign and society;
government makes no effort to rein in Islamist
policy becomes fiercely anti-Western; relations with
groups;
foreign investors become increasingly
India deteriorate as Pakistan steps up support for concerned; foreign
policy becomes increasingly antimilitant groups in India, Afghanistan and elsewhere;
Western; relations with India deteriorate; active
provides assistance to nuclear development in Saudi
support for Taliban in Afghanistan; risk of large
Arabia; risk of major confrontation with West
confrontation with the West

Source: BMI

Best-case scenario - Continued moderate civilian rule: In this scenario, the civilian government
maintains its authority and the population remains committed to supporting moderate political parties rather
than radical movements. The army manages to keep a lid on Islamist militancy and Pakistan retains its
generally pro-Western alignment, plus its rapprochement with India. This scenario would by no means

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preclude ongoing terrorist attacks in Pakistan - and possibly in India too - but, on the whole, the state does
not fall victim to systemic change.

This outcome still has a reasonable likelihood of playing out, but will become increasingly unlikely if the
tempo of militant attacks increases and starts to engulf the core province of Punjab. If the state once again
becomes ungovernable, we would not rule out a military coup, with the army acting as a bulwark against
militants and the ultimate guarantor of state stability. Throughout its 62-year history, Pakistan has alternated
between civilian and military rule and we are far from convinced that this cycle is over. Businesses might
initially be spooked by a military takeover, but subsequently conclude that this is better than continued
paralysis and instability. Pakistan's last military ruler, Pervez Musharraf, is credited with delivering strong
economic growth, though this was also due to a robust global economy.

Worst-case scenario - Radical Islamist regime: This is the nightmare scenario for Western and Indian
policymakers, since it would provide a tremendous boost for the forces of radical Islam and make Pakistan a
much more aggressive state on the regional and global stage. Moreover, Islamabad's nuclear arsenal would
make it very difficult for the West to pressure Pakistan. This scenario has been bandied about for many
years, but has failed to materialise. While an Islamist takeover cannot be ruled out, there are formidable
obstacles to this. First, most Pakistanis do not favour a radical government, as evidenced by the weak
showing of Islamist parties in the 2008 and 2013 general elections. Secondly, there is no charismatic and
popular Ayatollah Khomeini-like Islamist figure in Pakistan that could mobilise the masses for an Iranianstyle revolution. Thirdly, the army remains a bulwark against an Islamist state and the several thousand
Islamist militants are nowhere near numerous or powerful enough to take over the state.

However, there is a possibility that Pakistan will become an increasingly intolerant society without
necessarily becoming a militant Islamist state. Another possibility is that the army becomes radicalised, or is
taken over by radicals, and forms a coalition with Islamist parties. Given Pakistan's socioeconomic
problems, this cannot be ruled out.

Other scenarios - Unity versus fragmentation: In addition to how the military-versus-civilian and
moderate-versus-radical dynamics play out, there are two other forces to consider, namely forces of unity
(centripetal forces) and disunity (centrifugal forces). These can have both peaceful and violent
manifestations. Pakistan is vulnerable to centrifugal pressures, which could substantially weaken
government control. The main forces for unity are the core province of Punjab, the Pakistan Army, and
Islam as a state religion. In addition, Western powers all have a vested interest in preventing Pakistan's
disintegration and will continue to provide the country with substantial economic assistance. However, in

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the event of an outright collapse of the Pakistani state, the West or other major powers would largely be
powerless to stabilise the country, given that this would take an estimated 1-3mn troops.

Table: Scenario Matrix: Centrifugal Versus Centripetal Forces

Disunity Prevails

Unity Prevails

Peaceful
Outcome

Pakistan experiences growing separatism, but these


pressures are contained as the government adopts a
looser structure allowing for greater autonomy for its
provinces

Pakistan remains a peaceful and unified entity;


the government maintains authority throughout
most of the country

Violent
Outcome

Pakistan undergoes violent fragmentation as the army


struggles to contain Islamist militants and separatist
regions; the latter become de facto independent states

Pakistan remains nominally unified, but the


government loses de facto control of border
regions and vast tracts of territory nationwide to
Islamist militants

Source: BMI

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Oil Price Outlook


Global Oil Products Price Outlook
Oil product prices continued to rebound in Q313 as a result of upward movement in crude oil prices.
However, they have not returned to Q113 levels yet despite all three crude grades, Brent, Dubai and WTI,
gravitating towards Q113 averages at the time of writing. This supports our view for a tapering in oil
product prices on the back of lower crude oil prices, relatively muted demand and a comfortable supply
picture in the downstream sector. Growing challenges to oil-based fuels, the result of growth of gas and
natural gas liquids production, particularly in the US, would also suppress rises in prices of oil-based
products. Increasingly stringent emission controls in the shipping sector would see bunker fuel prices in
Rotterdam particularly hit.

Methodology
Our refined products forecasts methodology is based on estimating the future spreads between each product
- gasoline, gasoil/diesel, naphtha, jet fuel/kerosene, bunker fuel 180 and 380 - and its regional benchmark:
WTI for products sold at New York, Brent for Rotterdam and Dubai for Singapore. Therefore, changes in
crude prices (and our crude price forecasts) will automatically trigger movements in our forecasts for oil
product prices.

Our estimates of the spread between crude prices and individual oil products are determined by the
following:

Supply: This will be affected by changes in regional and global refining capacity.

Demand: This is partly a function of our expectations for the trajectory of the global economy. With
regard to customers, we have identified four main sectors/users for the respective products: kerosene/jet
fuel in the aviation sector, gasoline and diesel for retail users and land freight operators, naphtha in the
petrochemicals industry (a gauge for industrial activity) and bunker fuel for the shipping sector. In our
outlook for demand we therefore incorporate forecasts and the views of BMI's Shipping, Freight
Transport, Autos and Petrochemicals industry analysis, as well as the assumptions and forecasts from
BMI's Country Risk analysts, in an effort to incorporate a wide range of industry data.

Crude Price Forecasts


In October we revised our forecast for Brent and WTI for 2013. We now expect Brent to average US
$107.60 per barrel (bbl) and WTI at US$98.40/bbl. Our forecast for Dubai, which takes into account the
estimated spread between Dubai and Brent, is US$104.20/bbl (see 'Resistance To Remain Strong As Risk
Premium Subsides', October 3 2013).

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Table: BMI's Oil Price Forecasts, Average Price (US$/bbl)

Brent
WTI
Dubai

2011

2012

2013f

2014f

2015f

2016f

2017f

111.05

111.70

107.60

102.80

102.00

101.00

99.00

95.05

93.30

98.40

101.50

101.00

96.00

94.00

106.15

108.88

104.20

101.50

100.50

98.50

96.50

f = forecast. Source: BMI

Variance Across Product Markets

Crude oil prices rebounded particularly towards the end of Q313 as security risks in the Middle East led to
supply fears. This is reflected in the increase seen across all products between Q213 and Q313.

Brent, WTI Moves Back Up


Front Month Price Of Brent & WTI, January-Present (US$/bbl)

Source: Bloomberg

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However, the extent of this increase varied across the different products:

Gasoline: High crude oil prices and the driving season pushed prices up, but the extent of this increase is
less than that seen in crude prices. Going into 2014, gasoline prices have fallen despite a slight increase in
Brent and Dubai in the European and Singaporean markets. In New York, gasoline prices fell more than
proportionately to the drop in WTI. From a high of about US$122.71/bbl on average across all three
markets, the price of gasoline has fallen to about US$112.62/bbl at the time of writing. This suggests that
there could be excess supply to demand in the gasoline market.

Slow Gasoline Move


% Quarter-On-Quarter Change In Gasoline And Crude Prices

Source: Bloomberg, BMI

Diesel/Gasoil And Jet Fuel: Prices across all three markets have kept steady at the average price in Q313
of about US$126.13/bbl. Jet fuel prices have also remained at Q313 levels, at about US$125.40/bbl. The
percentage change in prices across all three quarters has trended closely to the percentage change in crude
prices.

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Naphtha: Prices at Singapore had rebounded 9.1% at the time of writing from US$93.09/bbl in Q213: this
compares with a 7.01% and 7.84% increase in Dubai and Brent over the same period. Data on naphtha
prices in Europe beyond July 9 has yet to be updated, but prices likely softened in Q313 as Platts reports
that many petrochemical firms in the region had turned to cheaper propane over the season.

Bunker Fuel: Bunker fuel prices continue to be least resistant to changes to crude oil prices. While bunker
fuel prices increased from Q213 to the time of writing, the extent of this rise was less than that seen in other
fuels, supporting our view that a weak shipping sector would cap gains in bunker fuel prices. Growing
emphasis on shifting to cleaner fuels has also hit bunker fuel prices, especially in the Rotterdam market,
owing to more stringent fuel standards in north-west Europe. Of the three markets, bunker fuel prices in
Rotterdam have been the weakest, exhibiting a downtrend trend at the start of Q413 despite a quarter-onquarter increase in crude oil prices.

Weak Bunker Price Movement Endures


Price Of Bunker Fuel 180 (LHC) & Bunker Fuel 380 (RHC), January 2013-Present (US$/metric tonne)

Source: Bloomberg

The relatively mild changes seen in most product prices despite crude oil price fluctuations reinforces our
view that oil product prices are likely to even out over 2013 following wild fluctuations. However, there are
nuances to the price pattern among all three markets seen at the start of the quarter:

Rotterdam: Fall in gasoline, jet fuel and bunker fuel prices.

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New York: Weakness in all product markets. This is most likely a result of a consumer concerns in face
of a political impasse that brought the operations of the US government down.

Singapore: Some strength seen across nearly all product categories.

Narrower US Market Crude-Product Spreads


Weak short-term sentiments surrounding the US's economic outlook, complicated by higher domestic crude
prices owing to an easing of the Cushing glut, would significantly reduce the bumper refining margins US
refiners enjoyed due to their access to discounted crude feedstock in 2012. As US refiners have to compete
with other producers in a well-supplied global market, we continue to expect the gains in product prices to
be capped relative to gains in WTI.

However, we note that they would still benefit from larger crude-product spreads than their European and
Asian counterparts, with a partial rebound expected in 2016 as a result of an expected short-term glut in
crude oil in the US as production temporarily outstrips infrastructure capacity (see 'WTI Pushed Higher As
Upside View Plays Out', July 26 2013).

Falling Over Time


Expected Crude-Product Spread* In New York, Rotterdam & Singapore (US$/bbl)

*Average of forecast spread between crude benchmark and the following products: Gasoline, gasoil/diesel, naphtha, jet
fuel and bunker fuels. Source: Bloomberg, BMI

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Weak Demand Persists

Despite the recovery in crude prices, we maintain our outlook for lower prices for oil products, as demand is
expected to be muted over our forecast period to 2017:

China Worries: We have consistently highlighted in our Commodities team's monthly write-up on
Chinese industrial imports that China's refined product imports could follow a downward trend - both a
result of slower growth and an increase in domestic refining capacity as China slowly becomes a net oil
products exporter, adding supplies to the global market. As the world's second-largest oil consumer,
slower Chinese demand would further loosen up the global oil products market. Our Country Risk team
reiterates that the loss of momentum in the Chinese machine will also have knock-on effects for other
economies.

Upward Fuel Price Revisions: Some of the fastest growing oil markets have adjusted fuel prices at the
pump in order to correct economic imbalances: China (March), Indonesia (June) and Vietnam (July).
Higher prices are likely to see a cutback in oil consumption, and consequently oil product imports in
these countries.

Other Emerging Market Problems: Fiscal and monetary problems faced by Brazil and Argentina where subsidies fuelled a boom in oil consumption - could eventually make subsidies unsustainable. This
could hit oil product demand from Latin America.

Limited Upside From US And Japan: Despite rising optimism about both the US and Japanese
economies, we expect energy efficiency measures to limit oil demand growth that should accompany
economic recovery. Moreover, Japanese oil consumption had been propped up in 2011 and 2012 by a
switch to fossil fuels for power generation in the wake of the Fukushima nuclear meltdown. Tokyo is still
considering the return of nuclear power, which could reduce the power sector's demand for heavy fuels.

Weak Consumption Growth From Europe: Weakness in the eurozone, together with energy efficiency
measures, will limit demand from this large market.

Increase In Global Refining Capacity: The impact of this would be especially strong in the Asian
market, thereby keeping margins depressed.

Beginning Of A Switch To Alternative Fuels: Liquefied natural gas (LNG) and biofuels can be
expected to play a larger role, particularly in the transport sector as governments move to cap carbon
emissions and as supplies of LNG and biofuels begin to grow.

We expect these trends to continue into 2014. Our short-term forecasts for 2013 and 2014 show a year-onyear (y-o-y) decrease in prices across all products. This forms part of our view that an upward price trend
that began in 2009 has reversed into a downtrend from 2012. This change is particularly pronounced in the
bunker fuels market, for both 180 and 380 fuel grades. Nonetheless, in the longer term, we expect prices to
remain above levels seen in 2010 through to the end of our forecast period in 2017 as a result of high crude
prices.

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Risks To Outlook
The risks we highlight to our forecasts are:

Crude Oil Prices: Although we have already priced in OPEC support for prices in our crude oil price
forecasts, we assume that the OPEC price floor will be set at US$100/bbl. Any larger-than-expected cuts
in OPEC output, together with security risks in the Middle East, could support oil product prices.

Regional Discrepancies In The Fall In Prices: As such, broad generalisations should be taken with
caution.

Slower-Than-Expected Downward Trend In Prices: Falling prices may delay the rise of alternative
fuels, including some early movement towards LNG and biofuels in the transport sector and the power
sector, which we have already seen in the shipping and air freight industries. This could in turn taper the
downward trend in fuel prices.

Table: BMI's Refined Products Forecasts, US$/bbl

2011

2012

2013f

2014f

2015f

2016f

2017f

Rotterdam

129.18

131.41

126.72

121.92

120.74

119.36

117.36

New York

128.23

130.74

123.40

121.50

119.00

117.60

115.60

Singapore

125.67

126.90

123.13

119.10

116.87

114.54

112.06

Global

127.70

129.68

124.42

120.84

118.87

117.17

115.01

Rotterdam

127.49

130.36

125.33

119.65

118.00

116.20

113.44

New York

126.64

130.79

125.77

123.39

120.70

119.64

117.64

Singapore

126.26

128.18

124.47

120.50

118.50

115.50

113.50

Global

126.80

129.78

125.19

121.18

119.07

117.12

114.86

Rotterdam

114.94

121.28

118.13

114.39

113.59

112.59

109.43

New York

119.30

124.79

121.38

119.89

117.55

114.20

112.20

Singapore

119.91

123.47

118.80

115.51

114.51

112.51

109.81

Global

118.05

123.18

119.44

116.60

115.22

113.10

110.48

Rotterdam

106.07

106.75

101.17

98.30

98.85

98.79

97.02

Singapore

102.46

102.87

101.20

100.50

99.50

97.50

95.50

Global

104.26

104.81

101.19

99.40

99.17

98.15

96.26

Rotterdam

97.27

101.52

96.40

91.49

89.56

87.31

85.18

New York

101.09

104.67

97.15

95.50

94.40

89.40

86.74

Jet Fuel

Gasoil/Diesel

Gasoline

Naphtha

Bunker Fuel 180

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BMI's Refined Products Forecasts, US$/bbl - Continued

2011

2012

2013f

2014f

2015f

2016f

2017f

100.14

102.46

95.22

92.07

92.01

90.86

89.63

99.50

102.88

96.26

93.02

91.99

89.19

87.18

Rotterdam

94.03

97.47

93.80

88.79

85.26

81.31

77.68

New York

97.13

100.32

94.89

92.99

90.49

83.49

79.49

Singapore

98.94

101.08

94.12

90.97

91.11

89.96

88.73

Global

96.70

99.62

94.27

90.92

88.96

84.92

81.97

Rotterdam

95.65

99.50

95.10

90.14

87.41

84.31

81.43

New York

99.11

102.50

96.02

94.25

92.45

86.45

83.12

Singapore

99.54

101.77

94.67

91.52

91.56

90.41

89.18

Global

98.10

101.25

95.26

91.97

90.47

87.06

84.57

Singapore
Global
Bunker Fuel 380

Bunker Fuel Average

f = forecast. Source: BMI, Bloomberg

Supply: Supported By Global Refining Capacity


A slight increase in global refining capacity vis--vis demand between 2012 and 2017 will help contain
dramatic increases in oil prices. According to our forecasts, based on refinery changes in our downstream
database, refining capacity is expected to rise by approximately 10% between 2012 and 2017 - which is two
percentage points higher than the growth we project for global oil consumption over the same period.
Nonetheless, this expansion alone is insufficient to account for the fall in fuel prices that we expect to see.

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A Comfortable Supply-Demand Picture


Global Refining Capacity & Oil Consumption, 2010-2017 ('000b/d)

f = forecast. Source: EIA, BMI

The geography of expansion is highly uneven. Emerging markets in Asia, the Middle East and Africa are
building up their capacity. However, developed economies such as Japan and Europe will see more refinery
closures, which will in turn negate some of the loosening of the global fuels market that the former should
have brought about.

Emerging Markets

Africa will see the fastest rate of regional refining capacity growth at 30%. However, the most significant
growth in absolute volume will come from the Middle East - where Saudi Aramco has at least three large
300,000 barrels per day (b/d) refineries set to come online - and in Asia - where expansions continue apace
in China and India, while Indonesia considers at least four large new-build refinery projects. Meanwhile,
Russia's refinery modernisation programme will see its plants continue to serve the market to make up for
expected closures in Central Europe. Turkey - the fastest-growing market for oil in Europe - will also see
significant refinery expansions.

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Market Growth Spurs Refining Expansion


Refining Capacity Of Emerging Markets, 2010-2017 ('000b/d)

Selected CEE = Russia, Azerbaijan, Turkey, Turkmenistan; Emerging Asia = China, India, Indonesia, Pakistan, Thailand,
Vietnam; f = forecast. Source: EIA, BMI

Therefore, most of these markets will be adequately prepared to meet an expected increase in local fuel
demand and will have spare capacity for export, especially the Middle East and Russia. Even China,
which has overtaken the US as the world's largest oil consumer, is on its way to becoming a net fuel
exporter owing to a continued increase in its domestic refining capacity. This will loosen some pressure on
global supplies and, in turn, prices.

Developed Markets

Among developed markets, the outlook is brightest for US refiners that are amply supplied by cheaper crude
feedstock available in the North American markets, thanks to a production boom in the US and Canada.
However, due to fragmentation of the US refined fuels market, where supplies are concentrated in the
refining heartlands of the Midwest and Gulf Coast, prices in import-dependent New York (East Coast) are
expected to remain elevated and follow international trends. This will create an uneven market with prices
that can vary vastly from region to region, reflecting differences in the crude baskets that refiners have
access to.

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Lower runs and refinery closures in developed markets outside of the US will be the main factor propping
up prices despite capacity expansion in emerging markets. At a time of high crude feedstock prices, crude
import-dependent refiners in developed Europe and Japan will see their refining margins pressed. Weaker
domestic demand also makes them dependent on external markets for support. However, their export
competitiveness will be challenged by the smaller scale of their plants relative to new-build and
sophisticated facilities in emerging markets, and cheaper fuel exports coming out from the US. For
example, European refiners are increasingly challenged by US competition in their traditional stronghold in
West Africa, while cheaper Russian products are displacing local output in the Central European and
Mediterranean markets.

Struggling Against The New Challengers


Refining Capacity In Western Europe & Japan, 2010-2017 ('000b/d)

f = forecast. Source: EIA, BMI

Losses in capacity in these traditional refining markets will limit the scale of global refining expansion, such
that the global fuel market will not be oversupplied and prices will not be forced down significantly. Slower
demand growth - owing to an expected rise in fuel efficiency, tougher environmental rules, rollback of fuel
subsidies and alternatives to oil products - explains the extent to which individual oil product prices will
fall.

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Naphtha: US Gas Hits Demand

As a key feedstock for the petrochemicals industry - for which final demand is heavily reliant on industrial
needs - naphtha is greatly exposed to wider macroeconomic trends. With the exception of the US, we expect
tepid growth in key industrialised countries - growth in the eurozone and Japan is projected to average 1.0%
and 1.2% respectively between 2013 and 2017. China's growth is also expected to slow from an average of
9.2% between 2008 and 2012 to 6.4% between 2013 and 2017.

Although the US is expected to register 2.4% average growth over the same period, naphtha is not likely to
benefit from it. This is largely because much of the petrochemical sector in the US is increasingly switching
to gas-based ethane as feedstock for ethylene production instead of naphtha to capitalise on lower gas
prices. With fiercer competition from the US, Asian petrochemical giants may be forced to roll back
production to maintain their bottom lines, which will further dampen demand for naphtha.

Naphtha Losing Competitiveness Versus Ethane


Spot Price Of Naphtha (Singapore) & Ethane (Mont-Belvieu), US$/bbl

Source: Bloomberg

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Naphtha Out Of Favour In The US


US Ethylene Steam Cracker Cash Margins By Feedstock Type (US$/metric tonne)

Source: Bloomberg

The biggest challenge to naphtha prices in Europe and Asia will be the rise in natural gas liquids production
(NGL) especially from the US. Although prices from July 9 are not available at the time of writing, Platts
reported that naphtha demand in Europe had suffered in Q313 as refiners looked to crack the cheaper
propane over naphtha.

The price competitiveness of propane over naphtha in the past two years is a result of growing US supplies
into the global market. As shown by the chart below, US exports of propane have grown almost eightfold
between January 2009 and July 2013, particularly from 2012.

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US NGL Production Pushes NGL Prices Down


US Monthly Propane Exports, 2008-July 2013 ('000 bbl)

Source: DOE, Bloomberg

The use of propane for winter heating is likely to reduce competition for naphtha till the end of 2013, but we
highlight that NGLs and an upward trend in US propane exports would continue to put downward pressure
on global naphtha demand through our forecast period to 2017.

We forecast an average price of US$101.19/bbl for naphtha in 2013 and US$99.40/bbl in 2014 - a 7.2% fall
from 2012. The fall in crude prices, alongside slow growth in key countries, will see naphtha prices fall by
2% between 2013 and 2017. An exacerbation of the eurozone crisis or economic shocks elsewhere pose
downside risk to this forecast, though we note that the negative spread between crude benchmark prices and
naphtha prices limits the extent to which prices can fall further.

Gasoline And Gasoil/Diesel: Subsidies & Fuel Efficiency Cap Upward Movement
Gasoline and gasoil/diesel - key for the land transport sector - will also be affected by a weaker global
economic outlook. Complicating demand for gasoline and gasoil/diesel are green measures; fuel-efficient
vehicles and green legislation limiting emissions will further limit growth in consumption of these fuels in
developed countries. Oil-based fuels could also see a growing challenge from alternative power sources

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such as batteries or natural gas - LNG and compressed natural gas (CNG) - as the preferred choice in the
transport sector towards the tail-end of our forecast period, both in emerging and developed markets.

For example, Indonesia, the Philippines and Pakistan are pushing their countries towards CNG for
transportation, while China has already started a pilot programme to run public buses and taxis on LNG in
selected cities. A rollback of fuel subsidies or price controls on fuel - which China, Brazil, Indonesia,
Vietnam and Malaysia have enacted under budgetary and monetary pressures - would also slow demand
growth significantly in these key growth markets. Together with an anticipated increase in regional refining
capacity (and associated output), we expect a move towards convergence in prices at Rotterdam and
Singapore as the Asian market loosens.

Meanwhile, in the US, major freight player UPS is deploying more gas-powered trucks in its fleet. This
would be backed by a US$50mn investment into LNG-fuelling stations. Other major transport companies
could follow suit, given the low price of domestic gas in the US and under a small but growing shift towards
green policies. Meanwhile, Volkswagen's Scirocco R-Cup - a car race that will pit cars powered by CNG
against each other - could also indicate a growing embrace of gas-powered cars at the household level. The
challenge posed by gas to oil-based fuels will likely grow, especially if supported by a further fall in gas
prices globally and a corresponding development of gas-fuelling infrastructure to support greater
commercial and private use.

Our average global gasoline price for 2013 and 2014 is US$119.44/bbl and US$116.60/bbl respectively,
compared with an average of US$123.18/bbl in 2012. The average global gasoil/diesel price for 2013 is
forecast at US$125.19/bbl - a 4% y-o-y fall. Over the longer term, we expect gasoline and gasoil/diesel
prices to fall about 7-8% between 2013 and 2017.

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Demand Pressures And Crude Price Changes Support Downward Trend


Average Price Of Gasoline, 2011-2017 (US$/bbl)

f = forecast. Source: Bloomberg, BMI

Jet Fuel: Limited Upward Movement


We forecast that jet fuel prices will fall steadily through to 2017, in line with our crude price and other fuel
products forecasts. Between 2013 and 2017, prices are forecast to fall by 9% in Singapore, 7% in Rotterdam
and 6% in New York.

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No Take-Off Expected
Average Price Of Jet Fuel, 2011-2017 (US$/bbl)

f = forecast. Source: Bloomberg, BMI

We expect that European, North American and Asian air freight carriers will continue to be squeezed in
2013 and going into 2014, by a challenging global economic picture and the continued growth of Middle
Eastern carriers and their new hubs in the Gulf. This will have knock-on effects on jet fuel demand. Indeed,
the industry's troubled run continues into 2013 with year-to-date figures from IATA to the end of August
2013 showing a global rise in freight tonne-km of just 0.7%.

IATA did, however, continue to record an increase in passenger demand going into 2013. At the time of
writing, passenger traffic for August 2013 (the most recent data available) saw 6.8% y-o-y growth, marking
year-to-date growth of 5.1%. Nonetheless, it warned that a decrease in consumer confidence owing to
macroeconomic developments will affect this upward trend.

Given that these are not major increases, we believe that the downward pressure on crude oil prices will
continue to have spillover effects on jet fuel prices. Thus, we see little upside risk to our short-term jet fuel
price forecasts.

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Table: Total Air Freight And Passenger Volumes

Aug 2013 vs. Aug 2012

YTD 2013 vs. YTD 2012

RPK
(% change y-o-y)

FTK
(% change y-o-y)

RPK
(% chg y-o-y)

FTK
(% chg y-o-y)

International

7.5

3.7

5.2

0.4

Domestic

5.6

3.0

4.8

2.3

Total Market

6.8

3.6

5.1

0.7

RPK: Revenue-Passenger-Kilometres; FTK: Freight-Tonne-Kilometres. Source: IATA

Bunker Fuels: Sulphur Control To Hit Rotterdam Hardest


Our global average forecast for bunker fuel (the average of the 180 and 380 grades' global prices) has been
revised upwards to US$95.26/bbl for 2013 and US$91.97/bbl (following a upward revision in our crude oil
price forecast). This marks a 5.9% and 9.2% decrease from the 2012 average of US$101.25/bbl - the highest
average price recorded over the last three years.

Of all the oil products, the downtrend in bunker fuel prices looks the most pronounced. 2012 saw a strong
downward trend in bunker fuel prices, reversing a strong price rally that had taken off in 2009. Also, among
all oil product bunker fuel had been least resistant to changes in crude oil prices, as demand and supply
dynamics in the shipping sector played a bigger role influencing prices.

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End Of The Uptrend


Bloomberg Average Weighted Price Of Bunker Fuel 180 & Bunker Fuel 380, 2010-Present (US$/bbl)

Source: Bloomberg, BMI

Downward pressure on bunker fuel prices is chiefly a result of weakness in the global shipping industry. We
have also been highlighting three key risks to shipping, each of which will have a knock-on effect on bunker
fuels demand:

High Risk Of Global Overcapacity: This threat is complicated by an expected increase in new and
more fuel-efficient ships - especially container ships. 2013 has seen ships with new mega-vessel capacity,
including Maersk Line's Triple E-Type 18,000 twenty-foot equivalent unit vessel, the largest ship to
date, come online. Importantly, these ships are not just larger, but are also more fuel-efficient than those
currently employed around the globe, thereby reducing bunker fuels demand.

Overall Cleaner Shipping Industry: These efficiency trends are also part of a broader push for a
greener industry by both governments with forward-leaning environmental policies and major ports
themselves. Hong Kong and Los Angeles - two of the largest ports in the world - are demanding that
container ships use cleaner bunker fuels than today's standards.

Separate Push To Increase The Use Of LNG As A Shipping Fuel: Several European ports have
invested in LNG shipping infrastructure to support this new industry. Singapore has also engaged Lloyd's
Register to help develop its port's LNG bunkering capabilities. Det Norske Veritas, a ship classification
bureau, estimates that 19-45% of ships will be powered using LNG by 2030. Meanwhile, Maersk Line
wants to test biofuels and NYK Line is trialling a solar power-assisted car carrier. While this remains a
long-term prospect that will only kick in towards the end of our forecast period, it will dampen oil-based
bunker fuel demand in the long term.

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Pressure On Europe

This quarter we have incorporated the effect of environmental policies and regulations in the shipping sector
into our forecasts. In North America and northern Europe (comprising the Baltic Sea, North Sea and
English Channel), strict sulphur standards on bunker fuel will come into effect in 2015. By 2020, the EU
will impose a strict 0.1% limit on sulphur content of all vessels entering the EU Emissions Control Area
(ECA).

Assuming no relaxation of these policies, the shipping industry will have to meet these requirements either
by retrofitting their vessels with scrubbers to reduce emissions, switching to the more expensive marine
gasoil or turning to LNG as an alternative fuel. This could squeeze demand for sulphur-heavy bunker fuel
further and hit prices particularly in Rotterdam as European shippers are expected to be most hit by new
regulations.

This underpins further downward revision in our bunker fuel price forecast for Rotterdam. From a forecast
of US$87.46/bbl for 180 and US$79.96/bbl for 380 by 2017, we now expect prices at Rotterdam to come in
at US$85.18/bbl for the 180 grade and US$77.68/bbl for the more pollutive 380. In contrast, the slow rate of
development in emissions regulations in Asia will support bunker fuel demand and prices in the Singapore
market. As such, by 2017, Rotterdam is likely to see the lowest price for bunker fuel while Singapore is
expected to see the highest price.

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Emissions Control Hit Rotterdam


Average Price Of Bunker Fuel, 2011-2017 (US$/bbl)

f=forecast. Source: Bloomberg, BMI

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Macroeconomic Forecasts
Economic Activity
BMI View: We have downgraded our FY2013/14 (July-June) real GDP growth forecast for Pakistan to
3.4% from 4.0% previously, as the economy undergoes a painful - but necessary - adjustment on the back of
a general tightening in both fiscal and monetary policy. As the country readjusts domestically, however, we
note that an improving external demand outlook should provide some relief.

We have downgraded our full-year real GDP growth forecast for Pakistan for the current fiscal year
(FY2013/14 [July-June]) to 3.4% from 4.0% previously, as the macroeconomic environment readjusts
painfully due to a general tightening in fiscal and monetary policy. To be sure, we continue to believe that
this tightening in policy is necessary in order to correct the significant structural imbalances in the economy,
which should eventually put the economy on a much stronger footing and thus higher growth trajectory over
the medium-to-long term. As such, while we have revised our near-term growth expectations, we have kept
our FY2014/15 growth forecast at 4.0%, which implies a strong bounce in economic activity following this
year of transition.

As we flesh out below, our recent downgrades centre on lowering our growth expectations for domestic
private demand, namely private consumption and gross fixed capital formation growth. While the revisions
made were fairly marginal, they have had a notable impact on the headline rate of growth as domestic
demand makes up the lion's share of the Pakistani economy, equivalent to approximately 111% of GDP
over the past five years. We have lowered our projections for private consumption and gross fixed-capital
formation growth to 2.0% and 1.5%, from 2.8% and 2.0%, respectively. The consequent downward revision
in our import growth forecast as domestic demand weakens, however, provided a slight statistical cushion
for headline growth.

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Monetary Adjustments
Pakistan - Exchange Rate & SBP Policy Rate

Source: BMI, Bloomberg, State Bank of Pakistan

SBP Surprises The Market With A Hike

The State Bank of Pakistan (SBP) surprised most observers when it decided to reverse its two-year long
dovish stance on monetary policy in its September meeting, hiking its benchmark reverse repo rate by 50
basis points (bps) to 9.50%. To be fair, while we were expecting the central bank to turn hawkish at some
point this fiscal year, we were caught slightly off guard by the monetary authority's decision to tighten
policy so soon. This is especially so when taking into account the fact that real interest rates were still well
above zero and that a premature hike risks curtailing the nascent economic momentum witnessed so far.
Nonetheless, we continue to see another 50bps worth of further hikes from the SBP (see 'SBP Takes An
Expected Hawkish Turn', September 16), which should add further downside pressure on domestic demand.
A tightening of monetary policy should help to stabilise the Pakistani economy, which has seen headline
inflationary risks rise markedly over the past few months as broad money supply growth continues to
accelerate to multi-year highs.

In addition and on a related note to monetary policy, we highlight the ongoing weakness of the Pakistani
rupee due largely to the government's recently-approved Extended Fund Facility (EFF) with the IMF, which

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contains in it the condition that the short-term priority of monetary policy is to rebuild the country's foreign
reserves. The SBP has already started net purchases of foreign exchange in the interbank spot market
towards this endeavour. Even though a weaker currency should support the international competitiveness of
the country's export sector, the detrimental impact it is likely to have on domestic purchasing power may
eventually counteract some of these gains. In a span of around four months, the rupee's nominal value has
fallen by about 7.5% against the US dollar since mid-June to current levels, following a prolonged period of
relative stability.

Fiscal Correction
Pakistan - Budget Deficit, % of GDP

Source: BMI, Ministry of Finance (Pakistan)

Painful Fiscal Correction At Hand

Moving on to fiscal policy, we reiterate that the recently-elected Pakistan Muslim League-Nawaz (PML-N)
government's agenda to rapidly correct the country's extreme budgetary imbalance is likely to put a
dampener on growth - and a necessary one, at that. Taking a brief look at recent history, the previous leftleaning Pakistan People's Party (PPP)-led administration saw the fiscal deficit nearly doubling from 5.2% of
GDP in FY2008/09 to a 14-year high of 8.0% last fiscal year. This has led to a substantial crowding out of

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the private sector. Indeed, we note that, through this period, average monthly credit growth to the
government sector stood at approximately 35% year-on-year (y-o-y), which is well above the rough 5%
average witnessed in the non-government sector.

After four straight years of a widening fiscal deficit (i.e. increasing government support for the economy),
we project the government's shortfall to narrow to 6.8% of GDP this fiscal year. This IMF-backed fiscal
adjustment in the economy is expected to be painful over the short-to-medium term. As outlined in the EFF,
the initial fiscal adjustment efforts include both an increase in revenue and decrease in expenditure.
Already, the government has hiked the goods and services (GST) tax rate. A reduction in energy subsidies,
projected to produce 0.75% of GDP in savings, is a critical measure that will hurt most, if not all, segments
of the economy, which is already suffering from a long-running energy crisis. While this fiscal moderation
is painful in the near term, similar to the monetary policy adjustments, it should help to set the country's
growth prospects on a stronger footing over the longer run.

External Demand Outlook Provides A Relief

As the Pakistani economy goes through an adjustment period domestically, the silver lining for the country
this fiscal year is the improving prospects of its key exports markets, which are the EU and the US. As we
wrote recently (see 'Rupee Weakness Due To Conditionality, External Accounts Are Sound', September 26),
the EU and the US account for close to 40% of the nation's total outbound shipments and both are projected
to witness a resurgence in real GDP growth in 2014. EU real GDP growth is forecasted to rise from -0.1%
this year to 1.2% in 2014, while US growth is projected to bounce back up to 2.8% next year from an
expected slowdown to 1.8% this year. To be sure, the ongoing structural slowdown in China could limit the
potential upside in overall export growth as Asia's largest economy is slowly becoming a key destination for
Pakistani exports. Indeed, shipments to China now constitute about 10% of the total, double the amount just
three years ago.

Expenditure Breakdown

Private Consumption

We project real private consumption growth to halve to 2.0% this fiscal year from 4.0% in FY2012/13,
contributing 1.6 percentage points (pp) to headline growth. Private consumption remains the mainstay of the
Pakistani economy, equivalent to around 85% of GDP.

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Public Consumption

Real public consumption growth is forecasted to drop from 9.7% last fiscal year to 0.5% in FY2013/14,
adding just 0.1pp to the headline rate of growth. The election of the economically conservative Pakistan
Muslim League-Nawaz should keep government expenditures low over the foreseeable future.

Gross Fixed Capital Formation

We expect gross fixed capital formation growth to rebound this fiscal year to 1.5% from the dip to 0.8%
registered last fiscal year. That being said, its contributing to headline growth will remain subdued at just
0.2pp.

Net Exports

Net exports are projected to contribute much less to headline GDP growth this fiscal year, primarily due to
the bounce in import growth from -2.4% in FY2012/13 to around 9.5% this fiscal year. Export growth is
forecasted to remain robust at 12.5% in FY2013/14. The component's statistical contribution to growth is
expected to fall to just 0.1pp.

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Table: Pakistan - Economic Activity

2008

2009

2010

2011

2012

2013

2014f

2015f

2016f

2017f

10,355

12,542

14,249

17,656

19,406

21,616

24,410

27,743

31,339

35,403

165.1

158.8

169.3

206.1

216

222.7

242.2

270.6

301.2

333.6

0.4

2.6

3.7

4.4

3.6

3.4

4.1

4.1

GDP per
capita, US$
1,3

988

934

978

1,170

1,206

1,223

1,308

1,438

1,575

1,717

Population,
mn 4

167

170.1

173.1

176.2

179.2

182.1

185.1

188.1

191.2

194.2

Industrial
production
index, % y-oy, ave 2,3

4.2

-7.6

4.7

1.7

1.3

4.2

3.2

2.4

2.5

Unemploymen
t, % of labour
force, eop 1,3

5.2

5.5

5.6

5.8

5.5

5.5

5.5

5.5

5.5

Nominal GDP,
PKRbn 1,3
2017f
Real GDP
growth, %
change y-o-y
1,3

Notes: e BMI estimates. f BMI forecasts. 1 Fiscal years ending June 30 (2011=2010/11); 2 Quantum Index of Large Scale
Manufacturing, (2011=FY2010/11). From 2012 onwards, base year = 2005-06. Sources: 3 Pakistan Bureau of Statistics/
BMI; 4 World Bank/UN/BMI.

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Demographic Forecast
Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is
the total population of a country a key variable in consumer demand, but an understanding of the
demographic profile is key to understanding issues ranging from future population trends to productivity
growth and government spending requirements.

The accompanying charts detail Pakistan's population pyramid for 2013, the change in the structure of the
population between 2013 and 2050 and the total population between 1990 and 2050, as well as life
expectancy. The tables show key datapoints from all of these charts, in addition to important metrics
including the dependency ratio and the urban/rural split.

Population Pyramid
2013 (LHS) & 2013 v 2050 (RHS)

Source: World Bank, UN, BMI

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Population Indicators
Population, mn (LHS) & Life Expectancy, Years (RHS)

f = BMI forecast. Source: World Bank, UN, BMI

Table: Pakistan's Population By Age Group, 1990-2020 ('000)

1990

1995

2000

2005

2010

2013e

2015f

2020f

111,091

126,690

143,832

157,971

173,149

182,143

188,144

203,351

0-4 years

19,305

20,376

21,051

19,856

21,312

21,427

21,363

21,622

5-9 years

15,877

18,759

19,948

20,657

19,559

20,380

21,017

21,121

10-14 years

13,251

15,721

18,628

19,777

20,490

19,706

19,396

20,876

15-19 years

11,067

12,998

15,601

18,327

19,472

20,131

20,248

19,206

20-24 years

9,595

10,655

12,848

15,099

17,799

18,660

19,070

19,926

25-29 years

8,388

9,227

10,515

12,401

14,629

16,351

17,366

18,729

30-34 years

6,916

8,132

9,101

10,217

12,088

13,320

14,278

17,076

35-39 years

5,339

6,714

8,005

8,864

9,970

11,009

11,810

14,031

40-44 years

4,473

5,163

6,582

7,780

8,628

9,216

9,732

11,578

45-49 years

4,135

4,301

5,028

6,358

7,532

8,052

8,387

9,490

50-54 years

3,436

3,942

4,143

4,805

6,093

6,832

7,254

8,101

55-59 years

2,825

3,223

3,733

3,895

4,525

5,246

5,771

6,891

60-64 years

2,255

2,579

2,968

3,418

3,569

3,840

4,152

5,322

65-69 years

1,723

1,970

2,271

2,598

2,996

3,064

3,125

3,657

70-74 years

1,209

1,400

1,612

1,848

2,116

2,331

2,444

2,561

Total

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Pakistan's Population By Age Group, 1990-2020 ('000) - Continued

1990

1995

2000

2005

2010

2013e

2015f

2020f

75-79 years

749

874

1,019

1,167

1,337

1,447

1,534

1,782

80-84 years

372

446

526

608

695

756

800

925

85-89 years

140

164

199

232

267

290

307

357

90-94 years

33

40

47

56

65

71

75

87

95-99 years

10

10

12

100+ years

e/f = BMI estimate/forecast. Source: World Bank, UN, BMI

Table: Pakistan's Population By Age Group, 1990-2020 (% of total)

1990

1995

2000

2005

2010

2013e

2015f

2020f

0-4 years

17.38

16.08

14.64

12.57

12.31

11.76

11.35

10.63

5-9 years

14.29

14.81

13.87

13.08

11.30

11.19

11.17

10.39

10-14 years

11.93

12.41

12.95

12.52

11.83

10.82

10.31

10.27

15-19 years

9.96

10.26

10.85

11.60

11.25

11.05

10.76

9.44

20-24 years

8.64

8.41

8.93

9.56

10.28

10.24

10.14

9.80

25-29 years

7.55

7.28

7.31

7.85

8.45

8.98

9.23

9.21

30-34 years

6.23

6.42

6.33

6.47

6.98

7.31

7.59

8.40

35-39 years

4.81

5.30

5.57

5.61

5.76

6.04

6.28

6.90

40-44 years

4.03

4.08

4.58

4.92

4.98

5.06

5.17

5.69

45-49 years

3.72

3.39

3.50

4.03

4.35

4.42

4.46

4.67

50-54 years

3.09

3.11

2.88

3.04

3.52

3.75

3.86

3.98

55-59 years

2.54

2.54

2.60

2.47

2.61

2.88

3.07

3.39

60-64 years

2.03

2.04

2.06

2.16

2.06

2.11

2.21

2.62

65-69 years

1.55

1.55

1.58

1.64

1.73

1.68

1.66

1.80

70-74 years

1.09

1.10

1.12

1.17

1.22

1.28

1.30

1.26

75-79 years

0.67

0.69

0.71

0.74

0.77

0.79

0.82

0.88

80-84 years

0.34

0.35

0.37

0.38

0.40

0.41

0.43

0.45

85-89 years

0.13

0.13

0.14

0.15

0.15

0.16

0.16

0.18

90-94 years

0.03

0.03

0.03

0.04

0.04

0.04

0.04

0.04

95-99 years

0.00

0.00

0.00

0.00

0.00

0.01

0.01

0.01

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Pakistan's Population By Age Group, 1990-2020 (% of total) - Continued

100+ years

1990

1995

2000

2005

2010

2013e

2015f

2020f

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

e/f = BMI estimate/forecast. Source: World Bank, UN, BMI

Table: Pakistan's Key Population Ratios, 1990-2020

1990

1995

2000

2005

2010

2013e

2015f

2020f

90.1

89.3

83.2

73.3

66.0

61.7

59.4

56.0

52,663

59,755

65,306

66,807

68,845

69,484

70,075

73,001

Active population, % of total

52.6

52.8

54.6

57.7

60.2

61.9

62.8

64.1

Active population, total, '000

58,428

66,934

78,526

91,165

104,304

112,658

118,069

130,351

82.9

82.0

75.9

66.1

58.8

54.6

52.3

48.8

48,433

54,856

59,626

60,289

61,361

61,514

61,777

63,619

7.2

7.3

7.2

7.1

7.2

7.1

7.0

7.2

4,230

4,899

5,680

6,517

7,484

7,970

8,298

9,382

Dependent ratio, % of total working


age
Dependent population, total, '000

Youth population, % of total working


age
Youth population, total, '000
Pensionable popn, % of total working
age
Pensionable popn, total, '000

e/f = BMI estimate/forecast; 1 0>15 plus 65+, as % of total working age population; 2 0>15 plus 65+; 3 15-64, as % of
total population; 4 15-64; 5 0>15, % of total working age population; 6 0>15; 7 65+, % of total working age population; 8
65+. Source: World Bank, UN, BMI

Table: Pakistan's Rural And Urban Population, 1990-2020

1990

1995

2000

2005

2010

2013e

2015f

2020f

Urban popn. % of total

30.6

31.8

33.1

34.5

35.9

36.9

37.6

39.5

Rural popn. % of total

69.4

68.2

66.9

65.5

64.1

63.1

62.5

60.5

Urban popn, total, '000

33,967

40,333

47,663

54,470

62,129

67,179

70,648

80,379

Rural popn, total, '000

77,124

86,357

96,169

103,501

111,020

114,963

117,496

122,973

e/f = BMI estimate/forecast. Source: World Bank, UN, BMI

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Methodology
Industry Forecast Methodology
BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and
causal/econometric modelling. The precise form of model we use varies from industry to industry, in each
case being determined, as per standard practice, by the prevailing features of the industry data being
examined.

Common to our analysis of every industry is the use of vector autoregressions. Vector autoregressions allow
us to forecast a variable using more than the variable's own history as explanatory information. For
example, when forecasting oil prices, we can include information about oil consumption, supply and
capacity.

When forecasting for some of our industry sub-component variables, however, using a variable's own
history is often the most desirable method of analysis. Such single-variable analysis is called univariate
modelling. We use the most common and versatile form of univariate models: the autoregressive moving
average model (ARMA).

In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality
is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for
analysis and forecasting.

BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of
objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for
example poor weather conditions impeding agricultural output, dummy variables are used to determine the
level of impact.

Effective forecasting depends on appropriately selected regression models. BMI selects the best model
according to various different criteria and tests, including but not exclusive to:

R2 tests explanatory power; adjusted R2 takes degree of freedom into account

Testing the directional movement and magnitude of coefficients

Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value)

All results are assessed to alleviate issues related to autocorrelation and multicollinearity

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BMI uses the selected best model to perform forecasting.

It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry
forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot
structural breaks, anomalous data, turning points and seasonal features where a purely mechanical
forecasting process would not.

Sector-Specific Methodology
There are a number of principal criteria that drive our forecasts for each transport variable:

GDP Growth

As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its
relationship with overall trade volumes. Projected GDP growth is calculated using BMI's own
macroeconomic and demographic forecasts.

Real Trade Volumes

The sum of imports and exports plays a particularly important role in developing countries with a small
domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The
volumes are forecast based on the following criteria:

Trends manifested through historical data;

The impact of future step changes to the economy (such as future membership of the EU or some other
regional body).

Port Traffic
Port traffic levels act as a 'second opinion' on trade volumes. However, this check needs to be used with
caution as trade values and volumes do not always move over time in the same way.

Market Share

The market share of each mode (road, rail, inland waterway, coastal shipping) for future years is based
upon:

Trends in historical modal split data;

Evidence of government policy favouring one or more modes over others;

Government and or private sector investment plans in specific modes.

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Sources
Sources used in transport reports include local transport ministries, officially released company results and
figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian
Development Bank.

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