Macro Analysis /
Pakistan

Pakistan Strategy: Government eases Covid-19 lockdown

  • The government has decided to ease lockdown conditions allowing certain industries to resume operations

  • Good for the economy, corporate profitability and equity market sentiment, but risk of accelerating the outbreak

  • Pakistan market has de-rated significantly; the decision could help in setting forth a relief rally

Pakistan Strategy: Government eases Covid-19 lockdown
Raza Jafri
Raza Jafri

Executive Director, Research

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Intermarket Securities
14 April 2020

The federal government has decided to extend the lockdown in the country by two weeks, but certain industries (discussed below) have been allowed to resume operations in a phased manner. However, provinces have the option to make their own decisions and it is possible that Sindh – not ruled by the PTI – may continue with its tougher stance on the lockdown. The lack of a full consensus between the centre and provinces is already leading to several trade associations, including those in Sindh, to announce reopening of their businesses from this week, which could affect the efficacy of the partial lockdown. We do not rule out that in case infections emerge at a quicker pace, stricter lockdown conditions are reinstated going forward. 

The key objective for the government is to contain the rise in unemployment, especially for daily wage earners, and protect industries from delinquencies. Covid-19 cases in Pakistan have reached 5,812 with more than 100 deaths reported so far, which is within initial projections as per the government and has prompted the ease in lockdown conditions.

Keeping aside the risk of a resurgence in infections (the government also intends to bring back 10,000 stranded nationals from abroad), the move is a positive development for the economy, corporate profitability and equity market sentiment. Recent GDP growth projections by the World Bank and the IMF paint a grim picture for Pakistan (World Bank: -1.3% to -2.2% in FY 20, +0.9% in FY 21; IMF: -1.5% in FY 20, +2.0% in FY 21) but, if the move to ease the lockdown conditions is successful, initial growth projections of 3.0-4.0% for FY 21 may come back into play, in our view. There should also be positives for the fiscal deficit given tax collection can bounce back, but the current account may remain under pressure – imports may increase, but exports and remittances remain dependent on global dynamics.

Prime Minister Imran Khan said, “We predicted that coronavirus cases will reach 18,000 by April 14 but fortunately, less number of cases were reported."

Certain industries to reopen; domestic demand is key

Industries that are allowed to reopen or continue operations include:

  • Chemicals
  • Cement
  • Fertilizer
  • Glass
  • Paper & packaging
  • All export sectors (including services).

Note that food and pharmaceutical industries were already operating (and their retail outlets were allowed to open) during the lockdown since late March 2020. Notable exclusions include automobile assemblers and supporting industries.

Notably, there is an emphasis on reopening the construction & allied sectors, but the decision on which construction activities to resume have been left to the provinces. That said, all PSDP-related activities (public projects) will be resumed by the government authorities. As a result, there will likely be an immediate pickup in construction activities, in our view. During the lockdown since late March, we understand some cement plants were operating and selling, but cement was mostly being stockpiled by dealers or projects. Since transport activity related to the above sectors is also allowed, there will be a recovery in petroleum consumption as well – in turn bolstering recovery in the Oil & Gas chain.

In this backdrop, we highlight Pakistan’s domestic demand theme given (i) the 6th largest population at more than 200mn, (ii) strong propensity to spend with household consumption at a high 83% of GDP and (iii) Exports-to-GDP of just 8%, the lowest within peers. With Food comprising 38% of the CPI basket, followed by Housing & Utilities with a 24% weight, demand can be categorised as basic and inelastic. Importantly, most industries primarily cater to domestic demand (Textile a prominent exception) which implies that, if the ease in lockdown conditions is successful, Pakistan’s economy can begin to recover without global trade fully resuming.