Pakistan’s Resolve to Push Through China-Pakistan Economic Corridor Is Credit Positive
Pakistan’s (Caa1 stable) parliament gave ex-post facto approval for a large project linking the country with China (Aa3 stable) via rail, road and an oil and gas pipeline. The government’s support for the implementation of the so-called China-Pakistan Economic Corridor (CPEC) is credit positive for Pakistan because it will spur investment activity, boost bilateral trade flows and help ease the country’s growing energy shortages.
The CPEC marks Pakistan’s deepening geo-strategic ties with China, which has emerged as a strong diplomatic and economic ally, providing support for energy, trade and infrastructure development. The project will connect the port of Gwadar in southern Pakistan with Kashgar in China’s Xinjiang region in the northwest. Apart from serving as a 2,000-kilometer transport link and oil pipeline, the corridor will involve the development of special economic zones and coal, wind, solar and hydro energy projects, primarily using concessional funding from China.
Plans for the CPEC have been in the works for several years, but were revived in February 2013, when Pakistan transferred the contract to develop Gwadar as a commercial deep-sea port to China Overseas Port Holdings from Port of Singapore Authority. During Pakistan Prime Minister Nawaz Sharif’s visit to Beijing in November 2014, Chinese companies and banks pledged $45.6 billion in energy and infrastructure projects related to the corridor. Development plans have encountered several obstacles, including a volatile political environment in Pakistan and a recent debate about re-routing the CPEC. The two countries vowed to expedite work on the corridor during China Foreign Minister Wang Yi’s visit to Islamabad in early February.
Although a large portion of the project will come to fruition in 2017, if implementation proceeds smoothly, the corridor’s wide-ranging economic benefits will bring gradual improvements in Pakistan’s credit quality before 2017. An immediate effect of construction will be a boost in foreign investment flows. As Exhibit 1 shows, China is the largest foreign investor in Pakistan, with inflows totaling $696 million in the fiscal year ended 30 June 2014.
Besides increasing foreign direct investment, the project will support Pakistan’s external position by bolstering trade flows between the two countries, which have already doubled since 2009 to $8.6 billion in 2014 (see Exhibit 2).
More broadly, the CPEC will stimulate Pakistan’s anemic economic growth, which was 4.1% year-on-year in fiscal 2014, by spurring investment activity. At 14.6% of GDP, investment is significantly lower than the median of 22.9% for B-rated sovereigns. Given its proximity to the Persian Gulf, a major oil shipping source, the CPEC will provide a shorter, alternative route to link oil supplies from the Middle East with China, bypassing the Malacca Strait. The development of energy projects along the corridor will also alleviate Pakistan’s chronic power shortages, which have hurt the country’s economic growth and government finances.