Pakistan An Economic Turnaround

September 2006

Pakistans Turnaround Synopsis

Historical Bottlenecks Late 1990s A Reinvigorated Tiger

- Growth quadrupled Highly - Sanctions removed to 78%Near-zero - Increased integration sanctioned - Increased wealth GDP growth with global economy levels - Growing middle class

- Exports doubled International - FX risen five fold isolation - Stable currency - Annual FDI doubled

Deep - Fiscal deficit halved recession - Inflation contained

- Threat international Recent of sovereign bonds sovereign issues oversubscribed default - KSE: one of the best performing markets

The Growth Story

Pakistan witnessing rapid and sustainable economic growth
Nominal GDP (US$ billion) & Real GDP Growth (%) Real GDP Growth 06 (%)

207 182 8.4 6.6 6.4 5.1 72 82 3.1 96 111 125 142 7.4 7.8 8.0 8.2 161

6.6 5.4 4.7 5.7

2002

2003

2004

2005

2006

2007E

2008E

2009E

2010E

Pakistan

ASEAN

Latin America

MENA

Nominal GDP (US$ billion)

Real GDP Growth (%)

One of the fastest growing economy in Asia Expected to surpass the US$ 200 billion mark by 2010

Source: Pakistan Ministry of Finance, Economist Intelligence Unit, Abraaj Analysis

The Growth Story (contd)

Wealth levels have increased and a large middle-class is emerging
GDP per Capita (US$ PPP)
3,420 3,200 2,980 2,780 2,410 1,980 2,070 2,210 2,590

Household Income Distribution (%)

49.3

41.7

48.6 45.0 5.7

2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E

9.7
1991 Lowest 20% 2002 Highest 20%

Middle 60%

Rising disposable income Increasing income distribution largely a result of decreasing unemployment Accelerating income growth across lower and middle segments of population

Source: Economist Intelligence Unit, Pakistan Federal Bureau of Statistics

The Growth Story (contd)

Exports have become competitive and almost doubled in last five years
Exports (US$ billion) Exports (% of GDP), 2006

16.5 14.4 12.3 11.2 9.2 9.1

13.2 36.2 29.7

106.1

2001

2002

2003

2004

2005

2006

Pakistan

China

Indonesia

Malaysia

Low cost advantage spurring exports Broadening geographical reach and more access to US, EU and UAE markets Potential to increase and diversify target countries

Source: Economic Intelligence Unit

The Growth Story (contd)

International investors have begun to take notice of the Pakistan story, however significant upside remains as FDI flows are still far below regional levels
Foreign Direct Investment (US$ million)
3,521

Foreign Direct Investment (% of GDP), 2006

13.9

9.1 1,524 949 2.8 1.1

798 322 485

2001

2002

2003

2004

2005

2006

Pakistan

Singapore

India

UAE

Opening up of economy leading to strong foreign interest FDI inflow more than doubled in 2006 Broad based inflow across sectors

Source: Pakistan Ministry of Finance, Economic Intelligence Unit

The Growth Story (contd)

Significant decline in external debt
External Debt (% of GDP)
47 46 44 34.0 30.8

External Debt (% of GDP), 2006

19.1 38 36 34 16.0

2001

2002

2003

2004

2005

2006

Pakistan

Singapore

India

UAE

Consistent decline in external debt / GDP ratio Concerted effort to move away from poorly structured high-interest debt Allowing increasing government expenditure on value-added projects

Source: Pakistan Ministry of Finance, Economic Intelligence Unit

The Growth Story (contd)

Rapidly increasing foreign exchange reserves and a stable currency
Foreign Exchange Reserves (US$ billion) Exchange Rate (Year-end, PKR:US$)

12.3 9.8

12.6

13.1

60.9

58.5

57.2

59.1

59.8

61.1

4.8 2.1

2001

2002

2003

2004

2005

2006

2001

2002

2003

2004

2005

2006

Strong remittance flow and growing exports leading to accumulation of foreign reserves Reserves providing currency stability Standard & Poors upgrade long-term local and foreign rating

Source: Pakistan Ministry of Finance, Economic Intelligence Unit

The Turnaround Strategy

External debt re-profiling and fiscal reforms were at the centre of the multi-faceted strategy
Fiscal Deficit (% of GDP)
4.3 4.3

Interest Payments (% of GDP)

6.3

6.1
3.7 3.4 3.2

4.8 4.0 3.2

3.1

2.4

2001

2002

2003

2004

2005

2006*

2001

2002

2003

2004

2005

2006

Restructuring and debt write-off leading to reduction in interest payment Improved stability of economy; manageable fiscal deficit Recent hike largely due to absorption of high oil prices

* Excluding earthquake-related spending Source: Pakistan Ministry of Finance, State Bank of Pakistan

The Turnaround Strategy (contd)

Privatizations was another key focus
Privatizations (US$ million)
3,598 21
Pakistan State Oil Sui Southern Gas Co Sui Northern Gas Pipeline National Investment Trust State Life Insurance Co. Faisalabad Electric Supply Co Genco 1 (Jamshoro) Peshawar Electric Supply Co National Power Con Co Oil & Gas Oil & Gas Oil & Gas Financial Financial Utilities Utilities Utilities Utilities Lyallpur Chemical Fertilizer Hazara Phosphate Ferter Tomato Paste Plant Pakistan Tourism Development Corp. Sindh Engineering Heavy Mechanical Complex, Taxila Heavy Electrical Complex, Hattar Pakistan Machine Tool Factory, Karachi Service International Hotel, Lahore

Current Privatization Pipeline

Company Pakistan Petroleum Sector Oil & Gas Company Morafco Industries, Fais Sector Industry & Real Estate Chemicals Industry & Real Estate Industry & Real Estate Tourism Construction Industry Power Industry Sale of Land

12 9 7 3 18 671 558 178 3 343

2001

2002

2003

2004

2005

YTD 2006

Value of Privatization (US$ million)

Number of Deals

A dynamic privatization program Strong political support

Source: Privatization Commission of Pakistan

The Turnaround Strategy

Financial sector reforms catalyzed economic transformation
Bank Lending (% of GDP), 2006 Market Capitalization (US$ billion) & P/E Ratio (times)

Market Capitalization

12.9x

64.9

63.9

67.8

Trailing P/E Ratio

9.7x 9.2x

40.5

7.7x 46 47

4.4x 17 10

30

Pakistan

Singapore

India

UAE

2002

2003

2004

2005

YTD 2006*

Financial sector transformation was the main driver of economic growth Increased availability of credit for all segments of the economy

Source: Pakistan Ministry of Finance, Economic Intelligence Unit

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The Turnaround Strategy

Creation of an enabling and governed economic framework
Policy Description
All sectors are open to FDI with equal treatment of local and foreign investors 100% foreign equity allowed, and royalties, franchise fees, capital, profits, dividends etc all fully repatriable Attractive tax / tariff incentives package Low cost of doing business, one-window facilitation Reduction in corporate tax rate from 39% in 2005 to 35% by 2007 for private companies

Investment Policy & Environment

Regulatory Framework

Strengthening of the institutional capacity of a number of independent regulatory bodies in Pakistan that have developed management structures, technical expertise, technology and enforcement capacity compatible with international best practices Government is playing an effective role to transparently execute and institutionalize regulations designed to win the confidence of investors and general public

Transferring powers and responsibilities, including those related to social services from the federal and provincial governments to local levels Strengthening governance by increasing decentralization, transparency, accountability of administrative operations, and peoples participation in their local affairs

Power Devolution

Source: Pakistan Board of Investment

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