The State Bank of Pakistan (SBP) has cut the policy rate by 150bps, within a week of its last monetary policy meeting (held 17 March 2020), in which it had cut the rate by 75bps. The cumulative interest rate cut is thus 225bps, which is the sharpest move by the SBP in a decade. We think the purpose of such a large cut is not so much to stimulate economic activity, but to largely mitigate the adverse impact of an extended lockdown and encourage business sentiment. The rate cut was complemented by a PKR1.0tn relief package, announced by the government, for the poor and vulnerable sectors (details given below).
Note that the SBP had indicated in the recent MPS that it stands ready to ramp up monetary stimulus, if the economic impact of the coronavirus outbreak worsens. What has changed since the last MPS? Firstly, most of Pakistan has been put into a lockdown (as is happening globally) as Covid-19 cases have doubled to nearly 1,000 cases. Hence, many industries, except food and pharmaceuticals, have shut down operations. Secondly, investor pessimism and volatility in both global and local capital markets did not ease off despite large interest rate cuts (KSE-100 has lost 12% since the recent MPS).
With the cumulative cut of 225bps already, we think that the SBP will not cut interest rates further or significantly during the remainder of 2020, unless the outbreak worsens (and the lockdown extends more than expected) or if inflation eases off considerably into single digits.
Impact on non-financial sectors
The monetary stimulus may not stir economic activity immediately, because that presently hinges on whether the authorities will be able to quell the outbreak and withdraw the lockdown, in our view. However, we think that it will serve to reduce borrowing costs of and contain delinquencies among leveraged companies (amid potentially very little sales in the coming months). In the KSE-100 index, more than 30 companies have a debt to asset ratio of 30% or more. Additionally, the SBP also mentioned in the MPS that it will enable banks to restructure loans. Some of the gains from lower finance costs will initially be offset by lower revenues amid the lockdown, in our view.