The coronavirus outbreak is expected to affect industrial activity of various countries, including key trading partners of Pakistan, analysts said.
A large portion of Pakistan's economy is driven by imported materials including most key sectors such as textiles, automobile, energy, steel, pharmaceuticals, and consumers. "With quarantine efforts at full effect within Pakistan's major trading partners, we can anticipate some decline in Pakistan's trading activity in coming months," a research report of BMA Capital said.
The coronavirus pandemic has continued making headlines as the virus's confirmed cases have crossed the 130,000 mark with its death toll reaching around 5,000. The evident proliferation of the virus has compelled most countries to take preventative actions to limit the spread.
These preventive measures are expected to take a toll on the global economy with expectations of global GDP falling to 2.4 percent compared to previous estimates of 2.9 percent. Many governments have imposed travel restrictions, considerably limiting movements of their population. Moreover, companies are implementing work from home policies in light of the outbreak, which will result in reduced economic activities.
The report said the decline in oil prices resulting from coronavirus outbreak and recent disagreement between Saudi Arabia (KSA) and Russia over supply cuts have the potential to become a boon for Pakistan's economic landscape. During FY19, Pakistan imported $16 billion worth of oil, 31 percent of the country's total import bill. "We estimate that for every $10/bbl decline in Arab Light's spot price, Pakistan's import bill can fall by $1.6 billion," the report said.
Lower oil prices also have the potential to reduce inflation levels on account of lower energy tariff and transportation costs. Consequently, a softer inflation outlook will likely expedite the eventual monetary easing, it added.
In order to combat the potential economic slowdown resulting from the pandemic, many economies have introduced stimulus packages with monetary easing and fiscal expansion to improve economic activity. "In the backdrop of lower inflation trajectory and anticipated economic slowdown, we expect Pakistan's central bank to follow suit", the report said. "We contend for a 100bps cut in policy rate in the upcoming Monetary Policy Committee (MPC) meeting scheduled for March 17, 2020," it added.
While the latest coronavirus affected count stands low at 21 cases (as of 13th March), the virus has shown to proliferate at rapid levels if left unchecked. The risk of the outbreak spreading will likely compel many individuals to take precautionary and preventive actions.
"We can witness a significant reduction in recreational spending, particularly at places where crowds gather, including restaurants and cinemas." Moreover, as seen in other affected countries, families may restrict non-essential road travels. This fact, in addition to the temporary closure of schools (till 31st May) and certain offices, has the potential to significantly curb domestic demand for petroleum products. However, bulk purchasing of sanitizing products such as tissues, soaps, hand sanitizers, disinfectants etc. can follow that is already being seen in Western countries.
"As the situation continues to normalize in China, we believe they may provide the necessary support to ease out Pakistan's overall economic situation from the virus's fallout," the report said. Pakistan is all set to benefit from the reduction in oil prices, allowing the country to reduce inflationary pressures and eventually reduce interest rates to jump-start the economy. Moreover, the IMF announced a $50 billion emergency funding for coronavirus affected countries, which Pakistan can opt for if the virus has significant negative impact on the country's economy. While the containment of coronavirus in China shows encouraging signs, Western countries may likely see surge in cases till June after which the pandemic situation may start to subside (UK government is expecting the virus impact to peak by late May/early June).
"We are of the view that the Pakistan stock market has the potential to bounce back from current levels", the report said adding that the pace of prevention in the virus hit countries along with movement in international oil prices will determine the speed of recovery in local equities.
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