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Pakistan

China Pak Economic Corridor

19 May 2015

Pakistan Economy
Short Report
Impact of China Pak Economic Corridor - A Birds Eye View
China Pak Economic Corridor (CPEC) could be a game changer: Chinese President signed
MOUs and agreements for projects worth USD46bn during his visit to Pakistan in Apr15. With
bulk of these projects likely to be implemented during the next three years, keeping expected
general elections of 2018 in view, we believe this investment would likely have significant
positive consequences for Pakistans economic growth.
Chinese investments can lift FY16-18 GDP growth beyond 6% through direct impact: We
expect local component of this investment to be around USD18bn, assuming a higher local
component for investments in Hydel, Road, Rail and Gwadar Port (50% to 80%) and lower for
Machinery intensive coal based power plants (20%). This alone could add 2.1pp to GDP growth
each year during FY16-18 and raise GDP growth above 6%.
Indirect impact is likely to be much larger: Bulk of this investment is related to setting up
+15,000MW coal based power plants, 74% of existing capacity. Resulting security of electricity
supplies would yield a snowball effect on the private sector investment activities. Private
investment to GDP averaged 9.6% during the last five years as opposed to 12.7% during the
preceding five years. At the same time, private sector credit to GDP has fallen to 12.6% (Jun08: 28.2%) whereas banking sectors ADR has fallen to 52% (Dec-08: 83%).
Pakistans medium term GDP growth potential could rise above 6% based on historical
ICOR: USD46bn Chinese investment will augment annual Investment to GDP by 5.3pp and will
add 1.5pp to Pakistans annual GDP growth potential in the medium term based on a historical
Incremental Capital Output Ratio (ICOR) of 3.6x. Assuming this leads to mobilization of
USD15bn (1/3rd of Chinese investment) in incremental private sector investment during this
period, the increase in growth potential could be as much as 2.0pp. If these investment levels
sustain, Pakistans growth potential can rise above 6.0% assuming last years GDP growth rate
(4.1%) as a base.
China is going to be an equal beneficiary; if not greater: While bulk of the investment will
likely go into coal based power plants, the investment theme revolves around the ChinaPakistan economic corridor. The proposed trade route of China-Pakistan economic corridor will
reduce distance between China (more specifically Kashghar in Xinjiang Province, 4,376km
away from Beijing) and the Persian Gulf to 2,500 km as opposed to the existing distance of
13,000 km from Beijing to the Persian Gulf and reduce shipping time from 45 days to 10 days.
There have already been further developments in some projects under CPEC: Gwadar
deep sea port, operated by China Overseas Port Holding Company (COPHC), handled its first
private container vessel on May 11th, 2015. 100 MW Quaid-e-Azam Solar Park in Bahawalpur
built by Chinas Tebian Electric Apparatus Stock Co Ltd was inaugurated on 6th May. A 50
megawatt windmill project owned by a local subsidiary of United Energy Group, in Jhimpir,
Thatta, was inaugurated on 12th May, 2015. Progress on 870MW Suki Kinari hydropower
project and 720 MW Karot Hydropower Project has also accelerated.
Stock market impact: Investment led growth in GDP would augment volumes and earnings of
Cement and Steel companies while higher income levels and improved energy availability
would help the manufacturing sector through higher demand and cheaper and secure energy
supplies. This should help improve feasibility of expansions, expand margins and accelerate
earnings growth. Banks would witness accelerated balance sheet growth and a higher share of
lending in the asset mix which will likely augment NIMs. Consumer stocks would also benefit
from the higher demand and income levels.

AzferNaseem,CFA

+92111262111
azfer.naseem@bmacapital.com

www.bmacapital.com

Pakistan
China Pak Economic Corridor

China Pak Economic Corridor could be a game changer


Chinese President signed MOUs and agreements for projects worth USD46bn during his
visit to Pakistan last week as part of the China-Pakistan Economic Corridor. The
investment program is part of a Chinese master plan titled One Belt, One Road which is a
planned network of road, rail, oil & gas pipelines and maritime routes that stretches from
China to South and Central Asia. The project aims at transforming regional trade routes,
increase Chinese influence in the region and bridge the regions infrastructure gap.
Planned investments in Pakistan are heavily concentrated in energy (74%) followed by coal
mining (20%) and road networks (13%). While Pakistans primary area of interest is cheap
energy through coal, the economic corridor significantly shortens the length of the trade
route from South West China to the Middle East, Africa and Europe and is equally
advantageous to both countries. With bulk of these projects likely to be implemented during
the next three years, keeping expected general elections of 2018 in view, we believe this
investment would likely have significant positive consequences for growth in Pakistan.
Chinese investments can lift FY16-18 annual GDP growth beyond 6% through direct
impact
We expect the local component of this investment to be around USD18bn, assuming a
higher local component for investments in Hydel, Road, Rail, Mining and Gwadar Port (50%
to 80%) and lower for Machinery intensive coal based power plants (20%). This alone could
add 2.1pp to GDP growth each year during FY16-18 which would lift GDP growth above
6% during FY16-18 using FY14 growth (4.1%) as a base.
Impact of Chinese Investment - Direct Contribution to GDP Growth
GDP - FY15

USDbn

287

Local Component of Investment

USDbn

18.1

Local Component of Investment

% of GDP

6.3%

years

% of GDP

2.1%

Time Period
Annual Addition to GDP Growth
Source: BMA Research

Estimation of Local
Component

Investment
(USDbn)

Energy

Domestic
Share

Domestic
Share
(USDbn)

33.8

Coal

7560 MW

8.8

20%

1.8

Wind

200 MW

0.5

20%

0.1

Hydel

1590 MW

4.2

50%

2.1

Solar

1000 MW

1.7

0%

Second phase

6445 MW

9.5

20%

1.9

Mining expenditure

9.0

50%

4.5

Road

5.9

80%

4.7

Rail

3.7

50%

1.8

Mass Transit in Lahore

1.6

50%

0.8

Gawadar Port

0.7

50%

0.3

China Pak Fiber Optics

0.0

0%

Total

45.7

18.1

Source: BMA Research

19 May 2015

Pakistan
China Pak Economic Corridor

Indirect impact is likely to be much larger


Bulk of this investment is related to setting up +15,000MW power plants, 74% of existing
capacity. Out of this, 10,400 MW of capacity is expected to be added by FY18 which
amounts to 46% of existing capacity. Materialization of the entire 15,000 MW power plants
will augment electricity generation by 90% even if existing inefficient capacity is shut.
Impact on Electricity Generation
Total Capacity Additions under Chinese Investment (MW)

16,845

Current Capacity (MW)

22,812

% Increase

74%

Incremental Generation at 70% Utilization (GWh)

103,294

Current Generation (GWh)

96,122

Less: Generation on Inefficient plants (GWh)

16,737

Potential generation after completion of projects (GWh)

182,678

% increase

90%

Source: BMA Research

Clarity on completion of these power projects and resulting security of electricity supplies
would yield a snowball effect on the private sector investment activities. Private investment
to GDP averaged 9.6% during last 5 years as opposed to 12.7% during the previous 5
years. Private sector credit to GDP has fallen to 12.6% (Jun-08: 28.2%) whereas banking
sectors ADR has fallen to 52% (Dec-08: 83%).
Pakistans medium term GDP growth potential could rise beyond 6% based on
historical ICOR
Based on 45 year data, Pakistan needs 3.6 units of incremental investment to yield one unit
of growth, i.e. an Incremental Capital Output Ratio (ICOR) of 3.6x. USD46bn Chinese
investment will augment annual Investment to GDP by 5.3pp and will add 1.5pp to
Pakistans annual GDP growth potential in the medium term based on an ICOR of 3.6x.
Assuming this leads to mobilization of USD15bn (1/3rd of Chinese investment) in
incremental private sector investment during this period, the increase in growth potential
could be as much as 2.0pp. If these investment levels sustain, Pakistans growth potential
can rise beyond 6.0% assuming last years GDP growth rate (4.1%) as a base.
Impact on GDP growth Potential
GDP - FY15

USDbn

287

Total Investment Size

USDbn

46

Total Investment Size

% of GDP

16%

Years

Time Period
Annual Addition to Inv/GDP ratio

% of GDP

5.3%

Addition GDP Growth Potential (ICOR = 3.6x)

"

1.5%

Incremental Private Sector Investment

"

1.8%

Addition GDP Growth Potential (ICOR = 3.6x)

"

0.5%

Percentage Points

2.0%

Total Increase in GDP Growth Potential


Source: BMA Research

19 May 2015

Pakistan
China Pak Economic Corridor

Pakistans ICOR averaged 3.6x between 1970-2014


GDP growth
20.0%
18.0%

Investment to GDP
18.7%

17.1%

16.0%

ICOR (RHS)
18.3%

4.0

4.5

17.9%
3.8

3.6

Avg ICOR (RHS)

4.1
14.7%

14.0%

2.5

10.0%

2.0

8.0%
6.0%

3.5
3.0

2.9

12.0%

4.0

6.5%
4.8%

4.6%

4.7%

4.0%

1.5
3.6%

1.0
0.5

2.0%

0.0%
1970-79

1980-89

1990-99

2000-09

2010-14

Source: BMA Research

China is going to be an equal beneficiary


While bulk of the Chinese investment in Pakistan will likely go into coal based power plants,
the investment theme revolves around the China-Pakistan Economic Corridor. Roads,
Rail and Port infrastructure that are part of the investment plan (22% of total investment)
will connect the Chinese city of Kashgar in Xinjiang Province to Gawadar through a
2000km road network and enhance usability of the Silk Route for China for trade with and
energy sourcing from the Persian Gulf. This will help China improve growth and accelerate
development in Xinjiang Province where the country is also dealing with a separatist
movement by the indigenous ethnic Uighur population. The proposed trade route of ChinaCPEC significantly shortens Chinas trade route to Middle East and Africa

Source: Media Sources, BMA Research

19 May 2015

Pakistan
China Pak Economic Corridor

Pakistan economic corridor would reduce distance between China (Kashghar, 4,376km
away from Beijing) and the Persian Gulf to 2,500 km as opposed to the existing distance of
13,000 km and reduce shipping time from current 45 days to just 10 days. Besides this:

China will be able to make attractive financial returns as all these projects are
being done in an investment mode, returns on which would be much better than
the US treasury instruments where China parks bulk of its foreign exchange.

The projects would help Chinese firms and labor as machinery used in the
infrastructure projects would be procured from China and the projects would also
employ a large number of Chinese labor

The Gwardar-Xianjiang route will also provide China with access to the Indian
Ocean and the Middle East's vast trade in petroleum, an important factor in
securing access to long term raw material supplies. The route can also serve as
an alternative to the Malacca straits, which China currently uses to access the
Middle East, Africa and Europe.

There have already been further developments in some projects under CPEC
While information sharing from official sources remain less-than-ideal, a review of the
media sources and cursory channel checks on CPEC linked projects indicate that wheels
are already in motion. More specifically:

Gwadar deep sea port Gwadar, operated by China Overseas Port Holding
Company (COPHC) under a 40 year lease, handled its first private container
vessel on May 11th, 2015.
100 MW Quaid-e-Azam Solar Park in Bahawalpur owned by Punjab Government
and built by Chinas Tebian Electric Apparatus Stock Co Ltd was inaugurated on
th
6 May. Capacity would be enhanced to 1000MW by FY18.
A 50 megawatt windmill project in Jhimpir, Thatta, was inaugurated on 12th
May15. The project is owned by UEP, a company owned by United Energy
Group.
Financing agreement related to 870MW Suki Kinari hydropower project between
EXIM Bank of China, Industrial and Commercial Bank of China Limited and SK
Hydro (Private) Limited was signed recently. Financial close is expected to be
announced by Jan-Feb16
China Three Gorges South Asia Investment Limited has accelerated the land
acquisition for 720 MW Karot Hydropower Project. The projects financial closure,
which was initially scheduled for Aug-16, will likely be reached by Dec-15.

Stock market impact


Chinese investment will help remove energy bottlenecks and will augment growth and
income levels. Key direct beneficiaries would be the Cement and Steel stocks due to likely
higher volumes emanating from investment led GDP growth. Another key beneficiary would
be the manufacturing sector which would likely witness both demand side benefits from
higher volumes and supply side benefits from cheaper and secure energy supplies. This
should help improve feasibility of expansions, expand margins and accelerate earnings
growth. Banks would witness accelerated balance sheet growth and a higher share of
lending in the asset mix which would help expand NIMs. Consumers stocks would also
benefit from the higher demand and income levels.

19 May 2015

Pakistan
Market Strategy

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Azfer Naseem, CFA

Director Research and Business Development

azfer.naseem@bmacapital.com

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21 Oct 2014

Pakistan
Market Strategy

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21 Oct 2014

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