CPEC to support growth of Pakistan’s construction industry in next decade: Fitch Solutions

January 28, 2019 (MLN): The Macro Research arm of Fitch Ratings, Fitch Solutions expects China-Pakistan Economic Corridor (CPEC) to continue to support 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.

Chinese involvement in the Pakistani construction market will provide a positive upside in terms of timeliness and execution, and will continue to boost to growth of the construction industry in the near future, Fitch Solutions said in a note released on Monday.

According Fitch Solutions, 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 the Pakistan’s national grid, accounting for more than 11% of the total installed capacity in the country.

Also, the392KM 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.

Since the implementation of CPEC, a centerpiece of China’s Belt and Road Initiative (BRI), in 2013, the megaproject has faced numerous challenges resulting in large downside risks to many projects. Despite these challenges, 11 CPEC projects, labelled as early harvest projects, have been completed thus far.

Fitch Solutions also reports 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 USD 40bn. 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 USD18.9bn, of which around USD6bn 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, Fitch notes 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, 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, Fitch maintains the real growth rate of Pakistan’s construction industry to average at 8.9% over the next 5 years.

Fitch will adjust their forecasts to account possible positive ripple effects across the economy, including the construction industry, in the event an IMF bailout is secured.

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