China-Pakistan Economic Corridor (CPEC) will continue to support the growth of Pakistan’s construction industry in the coming years, aided by China’s sustained push on project implementation, as well as warming bilateral relationship between the two countries, says Fitch Solutions.
Fitch in its latest report “Industry Trend Analysis – CPEC to Remain a Primary Driver of Pakistan’s Construction Industry” states “We expect debt concerns surrounding CPEC projects to ease after financial details were released. In addition, we believe political risks associated with CPEC projects have diminished since the 2018 Pakistani General Election. These factors will reduce the overall risk profile of CPEC projects”.
The report further states that CPEC will continue to support the growth of Pakistan’s construction industry in the coming years.
Since the implementation of CPEC, a centerpiece of China’s Belt and Road Initiative (BRI), in 2013, the mega project has faced numerous challenges resulting in large downside risks to many projects. Despite these challenges, 11 CPEC projects, labeled as early harvest projects, have been completed thus far.
Despite significant media and political scrutiny of CPEC, this progress on projects underscores Beijing’s improving track record in project implementation and its commitment to infrastructure development in Pakistan.
Since the inception of CPEC, projects have shown good progress in terms of execution; a total of 3,240MW of capacity had been added to Pakistan’s national grid, accounting for more than 11% of the total installed capacity in the country.
Also, the 392KM Multan to Sukkur section of the Peshawar-Karachi Motorway, a key CPEC project which broke ground in August 2016, is currently more than 80% complete and is slated for completion by August 2019.
As such, Fitch believes that continued Chinese involvement in the Pakistani construction market will provide a positive upside in terms of timeliness and execution, and will continue to boost to the growth of the construction industry in the near future.
The report further states that debt concerns relating to CPEC projects will begin to recede on the back of improving transparency. In December 2018, reports relating to the Pakistani government’s debt to China had been circulating in the media, with this amount purportedly to be in the region of $40 billion.
Pakistan’s Ministry of Planning, Development and Reform and the Embassy of China in Pakistan have since released statements clarifying the total value of the aforementioned 22 early harvest CPEC projects completed and under construction to be around $18.9 billion, of which around $6 billion of loans, representing 32% of total value, were provided by the Chinese government and will be repaid over 20-25 years from 2021 at an interest rate of around 2%.
From these statements, it has been noted an improvement in terms of transparency of CPEC projects, with China also providing a breakdown of the type of financing and the estimated investment for each CPEC project.
Fitch believes such a move is a welcoming sign for Pakistan’s construction industry as calls for a greater level of transparency over CPEC projects are now being addressed by authorities. This would in turn provide more comfort for potential investors to Pakistan’s construction industry.
Furthermore, it has been believed this improved transparency will aid Pakistan’s efforts in the renegotiation an IMF bailout deal, which if secured, could provide its ailing economy with much needed economic relief.
In the meantime, it has maintained the real growth rate of Pakistan’s construction industry to average at 8.9% over the next 5 years. We will adjust our forecasts to account possible positive ripple effects across the economy, including the construction industry, in the event an IMF bailout is secured.
Fitch believes political risks associated with CPEC projects have diminished. “Previously, we note that the transition in power from Pakistan Muslim League (PML) to Pakistan Tehreek-e-Insaf (PTI) posed a downside risk to the Pakistani construction industry as new Prime Minister Imran Khan pledged to review Chinese backed projects, which could potentially have led to project delays and cancellations. However, the political situation in Pakistan has since stabilized and Prime Minister Imran Khan has demonstrated willingness to cooperate with China on multiple issues including CPEC.”
“As such, we are in the view that downside risks stemming from political uncertainty are diminishing, and bilateral projects spearheaded by CPEC, will receive a boost in terms of policy implementation and project continuity”, maintained in the report.