HSBC Global Research’s Checklist for 2008 growth outlook

In the short term, we expect GDP growth to take a breather from the 20-year high of 7.4% y-o-y recorded in 2006 to 6.4% in 2007 and 6.6% y-o-y in 2008. First, growth in the first half of the year has averaged 6.2% y-o-y compared to 7.8% y-o-y in the first half of 2006, largely on account of poor agricultural performance.

Second, the 125bps worth of tightening last year in addition to the same amount in 2005 should also have an impact on consumption spending. However, recovery in agriculture together with strong growth in industry and services in the second half should help growth. A key concern going into 2008 remains the worsening security situation and its impact on business activities through defence spending will clearly increase.

Over the medium term, we think the country has the potential to push up the growth rate to around 7-8%, but only if widespread action is taken.

• To boost the rate of economic growth, the investment to GDP ratio needs to be increased to 32-40%. In this regard, implementation of key infrastructure projects should be expedited to remove bottlenecks in order to facilitate investment.
• Labour productivity is essential to accelerate growth. Steps must be taken to enhance the quality of education, bring forth greater labour participation and increase spending on research & development.
• Sufficient and reliable supply of electricity at competitive prices is crucial. Studies show that a 1% increase in GDP would require 1.5-2.0% growth in electricity supply.
• Steps must be taken to improve the investment climate in the country in order to remain competitive in the region.
• Export strategy in the medium term should be focussed on the diversification of exports towards more service-oriented exports and also more value addition, particularly in the case of agricultural goods.
• Although the government has committed to finance the mega infrastructure projects, public-private partnerships should be the way forward in order to ensure long-term fiscal sustainability.
• Fiscal consolidation efforts should be continued by broadening the tax base, rationalising recurrent expenditure and boosting capital spending. This would also help control debt servicing costs and reduce public debt to sustainable levels.
• Peace, if achieved, also has the potential to boost growth.