Pakistan is heavily cash-based. We think a lack of awareness about digital payment channels is a key factor for the economy’s high cash utilisation level, in addition to a large undocumented economy and banking transaction taxes on non-filers.

Covid-19 could provide a lasting push to digital payments. We believe the following developments could trigger a long-lasting shift in consumer behaviour away from cash and allow for a sharp growth in digital payments: (1) Recently, the State Bank of Pakistan waived digital banking transaction fees to facilitate cashless and branchless transactions; (2) funds from the government’s relief package for low-income workers are likely to be disbursed through mobile wallets like Easypaisa, JazzCash; (3) fear of transmission through the use of physical banknotes is also encouraging individuals and businesses to seek out alternative methods of payment. 

Most of our covered banks have ramped up their IT expenditures in 2019. For the sector, we estimate IT expenses growth was 25% yoy in 2019, and that these costs were equivalent to 20bps of total assets and 8.9% of total costs. 

The bulk of IT expenses are software-related. Among our covered banks, c50% of IT expenses comprise software-related activities (software maintenance and amortisation), while c30% are hardware-related and 20% are network charges. We believe banks with higher focus on software-related activities would be more likely to deliver product innovation and an enhanced consumer experience. 

IT expenses breakdown – 2019

Source: Company accounts, Tellimer Research

Branch expansion is more measured than five years ago, with scope for a further slowdown. Banks grew their branch networks by an average of 4% in 2019; this is roughly half the 2014 growth rate. Slower growth prospects may be one factor, but we think technology adoption is also a contributor. For conventional banks, we think branch networks could ultimately start to shrink (as we have seen in Nigeria and Malaysia) as alternative channels (mainly mobile phones) become more popular. Note that active mobile wallet accounts grew by 2.2mn in H1 19, compared to just a 0.8mn addition in the number of bank accounts.

Figure 4: Branch Expansion – yoy

Source: Company accounts, Tellimer Research

Covid-19 has hit the world economy very hard. Apart from the 260,000+ lives lost, the pavement is littered with traditional retailers going bust: JC Penny, a famous American department store chain founded in 1902, filed for bankruptcy on Monday; Neiman Marcus, founded in 1907, followed suit today; and J.Crew seems set to join them.

But the virus is a godsend for EM e-commerce players. Most notably, Jumia, Africa's answer to Amazon, has risen from its slumber. After losing over 90% of its value in the eight previous months, it rose by 54% in April. 

Chart: JMIA US monthly performance (%)

Source: Bloomberg

Four key points:

1) The main driver of Jumia's upsurge is the general momentum behind EM e-commerce. Traditional stores have been out of action and Jumia has been a huge beneficiary of this in its main markets of Nigeria, Egypt and Kenya. Moreover, the company has aggressively courted higher engagement with its platform by increasing the number of its grocery providers. 

2) Jumia has been well prepared for the supply chain disruptions and currency impact of Covid-19. It has cut costs in terms of headcount and other overheads. 

3) Beaten down EM e-commerce such as Jumia could attract attention. EM e-commerce is an alluring prospect for tech giants such as Facebook and Amazon. The latter have net cash reserves of US$54bn and US$81bn, respectively. 

Africa’s internet penetration is on an upward trajectory, driven by smartphone usage (the continent is a ‘mobile-first’ market where people typically first access the internet via their mobile devices). The Jumia brand has managed to grow in popularity over the years and is currently regarded as the largest e-retail firm in Africa.

4) EM e-commerce is on the rise, but watch out for the cash burn. In the post-Covid-19 world, the market will be far less forgiving of cash-burning e-commerce ventures. Jumia itself is on course to deplete its cash by FY 21. 

Countries are beginning to ease their lockdown restrictions – by our count, over 40% (c85) have announced some form of lockdown-easing measures in recent weeks, including the UK at the weekend; although a proper cross-country comparison is made difficult as measures vary by country (and it depends on how strict policies were in the first place). Investor attention will now begin to focus more on the prospects for an economic recovery, and its speed and trajectory – will it be V-, U- or even L-shaped? 

This recovery will depend on numerous factors, of course, but some of the most important drivers are the various stimulus measures that governments and central banks around the world have taken. The global monetary policy response has been largely uniform, across both developed and emerging markets, with many central banks easing in various guises, but fiscal measures have been much more uneven. 

These fiscal responses cover many areas, seeking to limit the extent of the downturn, targeting health spending, protecting the most vulnerable, businesses and workers, and providing the conditions for a rapid return of activity when countries emerge from hibernation (or suspended animation – the chart below shows the remarkable collapse in economic activity) when conditions allow. 

Figure 1: Real activity index* (% yoy) 

Source: Tellimer Research. *Brookings-FT TIGER series. 

In the full version of this report(for Tellimer Insights Pro subscribers), we show the variation in fiscal responses across the globe, based on information from the IMF's policy tracker, which reports the measures taken by 192 countries (or the individual country reports where necessary) – from this, we calculate each country's fiscal response based on announced measures, with the caveat that we do not yet know much about implementation or take-up of many of these measures and whether costs will turn out to be more or less than expected.

Market conditions have stabilised in recent weeks, in part based on these global policy measures, as evident among EMs from declining bond spreads (the EMBIGD spread is down by c20% from its peak on 23 March), an easing in capital outflows (or even the return of some inflows) and the opening of the new issue market (albeit mainly for high grade). But how this continues will depend in large part on the success of the measures these countries have taken to date.