2021: An optimistic outlook

Civil unrest, environmental challenges are some of the major global concerns. Coronavirus is another big challenge of the year 2021 that has put a lot of stress on health systems at home and abroad. Thankfully, the ongoing trial runs of Covid-19 vaccines offer enthusiasm and hope for the future.

The unknown economic implications of the pandemic poses formidable challenges to policymakers and is a bigger threat that could potentially further dampen business cycles around the globe.

This also means global recession could be long lasting following the current disruption of global supply and demand. The world is surely in for a bumpy ride and if the pandemic stays for a longer duration, no country can avert an economic disaster. How might 2021 fare for Pakistan’s economy and key global capital & commodity market indicators? The following are this writer’s thoughts on some of those macroeconomic indicators:

PAKISTAN

Despite tough economic conditions due to Covid-19, policy intervention and swift deployment of constructive measures have helped in nearly restoring the normal functioning of the economy. Unlike many other economies, Pakistan’s has not been pushed into a tailspin due to Covid-19 as yet, thanks to various forms of financial assistance the government sought from its donors and doled out to businesses and people at large. But financial arrangements and debt relief measures will eventually add to the burden since they are not grants. They are only short-term relief measures. Bear also in mind that Pakistan’s economy is not immune to second wave of the pandemic.

Lockdown and social distancing might hit the supply side again, affecting productivity; and it is likely to hit the demand side too, as low corporate income/profit leads to layoffs, which significantly affect revenue collection and exports. In such times, no government can afford political instability in the country.

A conducive business environment is key prerequisite for the economy to flourish, failing which unemployment and poverty will rise further. A firm strategy, therefore, is required to overcome Covid-19-related problems. To achieve higher efficiency and for the sake of competitiveness, the economy demands integrated infrastructure. To be competitive and to increase productivity, labour efficiency should improve. Energy issues should be sorted out as early as possible.

All CPEC projects need to become operative at a much faster pace. More importantly, in order to overcome economic and social challenges, Pakistan’s exports and taxes (both as percentage to GDP) should grow by over 15% per annum for the next five years, otherwise the pressure on domestic and external borrowings will not ease. Failing to attain these two targets will lead to further piling of debt and the size of deficit financing will further increase. If such is the case, hike in interest rates will become necessary and the exchange rate will come under pressure.

GDP: Despite the threat of pandemic, Pakistan’s economy is likely to do far better than what IMF projects, unless of course export orders are cancelled. Housing/construction-related activities too will speed up in the new calendar year, as the central bank’s mandatory condition to banks to finance housing will make allied industries more active. Increase in imports will support growth. Hence, by the end of FY21, the economy is likely to attain 1.8% growth. It will remain in positive territory to possibly close higher around 2.5% by December 2021.

CPI INFLATION: Oil price movements in international markets will give hints of inflationary trends, since over the next year it is only upward adjustment of oil, gas and electricity in the domestic market that will add pressure on inflation numbers.

This writer is of the view that oil prices in the global market will remain at current levels to mildly soft, averaging around $48 per barrel or possibly lower, which should support the economy. Pakistan’s economy cannot afford bad weather conditions, as agriculture is a large size contributor. However, crop reports so far are positive, and continuation of favourable weather conditions and credit availability to the sector would further ease pressure.

On domestic food pricing, administration will have to be watchful and play its role. Rupee’s weakness against dollar will help inflation, whereas a stable currency will be an added advantage. Based on all above factors, yearly inflation by the end of FY21 should be around 8.7% and by the end of calendar year 2021, it should be close to 8.8%.

POLICY RATE: After an awful experiment seen in the recent past, the SBP may not want to resort to unnecessary tightening in the short to medium term since that could harm the ongoing recovery momentum. This is unless inflation threatens to surpass double digits.

Though a hike could be possible if policymakers are convinced to accept tough measures to obtain the much-needed IMF loan tranche as was the case two years ago when the market witnessed an unusual SBP tightening cycle where rates were hiked from 6% to 13.25% between January 2018 and July 2020.

During this period the market witnessed a sharp decline in business activities. Though we cannot dream of quantitative easing (QE), this writer will not hesitate to call a sharp surge in policy rate by 725 basis points in a short span of 18 months, as the famous Taper tantrum of 2013.

It is true that bad times compel policymakers to introduce good and tough policies. But Pakistan’s economy surely cannot afford another ‘mini-Taper tantrum’, when the world economy is struggling to find a direction. A majority of the global central banks has clearly defined their stance that they will continue with their ultra-easy monetary policy and will keep interest rates close to zero for a few more years to stimulate their economies and reduce unemployment.

Pakistan’s economy too is in dire need of a similar-type of support to fuel a vigorous economic growth. Except for borrowings, there is no other source available to generate liquidity. The only other possible option is to obtain funding is by reducing the size of GoP holdings (Rs9.985 trillion) and by softening of policy rate by a further 100 to 200 basis points in combination with the widening of interest rate corridor.

If inflation holds below 9%, this writer doesn’t see any reason for further tightening. However, if inflation edges to around 10% or higher, it will reinforce SBP’s stance to keep inflation in check leading to a 50 to 100 bps hike. The hike should not be more than these levels since further hikes in policy rate could slow down economic activity, which can spoil the fragile economic recovery.

EXCHANGE RATE: We continue to believe that demand and supply gap will help determine future exchange rate direction. At present, there is no balance of payment (BoP) crisis, as long as oil averages around $50per barrel or below.

Exports are just okay, although these should end up around $24 billion by end of FY21. Remittances are the shining star. This is why the current account position is at a comfortable level. As long as imports remain below $48 billion by June 2021, and if REER does not surpasses 100 levels, the rupee will remain stable.

If this writer’s projected number is correct, he sees Rupee trading in 155 to 163 bands until June 2021. If PKR breaches this range or monthly datasets turn weak, we could see choppy moves following which the rupee could move towards 166 per one USD in second half of 2021. However, the real test for rupee will be at the time of debt related/interest payments and profit repatriation, which will largely depend on arrangement of funds.

There’s a need for keeping an eye on forex reserves; any pressure on FX reserves will see a spike in derivatives numbers. This writer does not belong to the $30 billion ‘forex reserve fans club’.

REMITTANCES: Global slowdown due to second wave of the pandemic will continue to add pressure on oil producing economies whereas health concerns will discourage travel, tourism, hotels and restaurant businesses.

Since countries are better prepared to face the second wave of pandemic the demand for oil is expected to slightly increase in the new year, which should help oil prices to average higher by $2 to $4 than in 2020. This will not be enough for the oil producing countries to carry on business as usual, which could lead to a budget deficit and growing unemployment.

However, it will not have an adverse impact on inward remittances. The inflow will stay robust, as odds are in favour of Pakistan. This writer is expecting remittances to hit and cross $27 billion by the end of the current fiscal year, which will break all past records surpassing the highest ever exports.

This writer is expecting a modest increase in calendar 2021. Growth in remittance is huge. Credit should be given to SBP for making effective policy changes and for asking FIs for strong implementation of AML/CFT guidelines to ensure risk assessment, policy for combating money laundering, terrorist financing and risk mitigation through effective inter control and then imposing monetary penalty for violating regulations.

In this case, the FATF is a blessing in disguise that has substantially helped increased flow of funds through the banking channel.

GLOBAL ECONOMIC DATA PROJECTION – 2021

Until mass vaccination takes place all over the globe and the outcome is known to be positive, it is extremely difficult to chalk out a firm economic strategy. The world economy will remain at risk and global GDP is likely to contract.

This is exactly why the US Federal Reserve (Fed) in its unprecedented move decided to opt for ultra-easy monetary policy to engage its economy and reduce unemployment. The Fed has in fact already signaled to maintain low interest rates until 2023 as millions are without jobs in the US due to the pandemic.

EURO @ 1.2268: The European Central Bank (ECB) too has made its intention clear that until the first quarter of 2022, its programme for emergency purchases will remain active with continued cash injection till December 2023.

The bias is clearly on the upside, the support at 1.1680 and 1.1450 should hold. However, an upside break of 1.2580 will encourage a move towards 1.2790. Further moves beyond 1.3050-80 will exhaust as any upside move will create room for a test of next major resistance at 1.3850, which is not a favoured move.

GBP @ 1.3584: BREXIT deal does not confirm stability, as all is not well. The market is still nervous about UK’s future direction. The UK's financial market that was preparing to leave after the 2016 vote to quit, is currently clueless about its next direction since talks are under way in Belgium. Unless there is severe disagreement, this writer will not be surprised to see some sort of understanding being reached soon, as cross-border banks/financial markets are a major issue. Once that is sorted out Pound Sterling will roar.

Pound has strong support at 1.2880. However, failing to hold support line will see a sharp plunge towards 1.220-50 zones, which is not a favoured scenario. Buy on dips with patience will be the preferred choice, as a break of 1.3970-90 area will see a move towards 1.4290-50 zones. If the pound breaks, the rally can potentially extend to wards 1.47.

GOLD @ $ 1880: Economic crisis caused by the pandemic forced global central banks to pour liquidity. Injection of funds helped gold to make record gains. Sentiments are still bullish, as the market still expects more stimulus to come, since quantitative easing always encourages hedge funds and investors to jump on the bandwagon.

But this time, unlike past moves, central banks are not increasing their gold portfolios as they cannot afford to block funds. The expected big stimulus package did not come. Monetary support has exceeded $11.7 trillion. But a stimulus package of larger size may soon exhaust. Hence, the pace of gold buying will gradually slow down. Delay in announcement could lead to some more correction.

A break of $1970 is required for a move towards $2090. However, the resistance of $2140 will be tough to crack for a move towards $2250. On the downside, expect a possible test of $1760, which if hit, gold could ease to $1650-80, although that level would be hard to crack.

(The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper)

Copyright Business Recorder, 2020