Coronavirus and economic impact

Coronavirus is officially in Pakistan. It is contagious for the world economy. Global value chains are disrupted. Stock and commodity prices are falling around the world. Long term bond yields are heading south in fear of global recession. Airlines and tourism businesses are fearing big losses. This year, oil demand growth is likely to come to zero first time after global recession of 2008.

Car sales in China fell by 92 percent in first two weeks of February. This has sent jitters to European and US based car companies as China is the biggest consumer of cars in the world. The stocks fell across the markets due to this. Apple has warned about global iPhone shortages. The impact is much wider.

Longevity of the impact is uncertain. At this point, demand is suppressed as people are postponing buying and travelling. That is why the commodity prices are falling. Due to supply chain disruption, production is being impacted too. Time is not far for inventories to exhaust. Essential demand is likely to remain sticky and prices will go up due to shortage. Travel can wait, people can postpone jeans, cellphones etc buying. However, medical and food needs would create shortages. Masks are already in short supply.

Pakistan is not isolated from direct and indirect impact. At the time of writing, there are two confirmed cases in Karachi. It is just a matter of time before the number rises. The KSE100 is down by 3,644 points or 9 percent in last six trading days.

Oil prices are down significantly. It is good for the balance of payment. This will help tame imports and will give room for the government to not pass on the full impact to consumers via higher PL. That said, it can adversely impact exports and overall domestic industrial growth. Pakistan imports from China are close to $16 billion. Virtually, all the raw material and intermediate goods in many industrial productions are imported from China. The supply chain is already disrupted, be its electronics, automobile or textile.

New export orders are down. Buyers are not sure about demand. Inventory of imported items used in exports is probably enough to cater for existing orders. If more orders come from Europe or USA, raw material import shortages from China will invariably reduce exports.

In value added textile, inputs such as dyes, chemicals, buttons etc are imported from China. The supply of fresh import is already interrupted. Importers usually maintain inventories that is to be consumed by March. There will surely be shortage from April onwards. With falling new orders, textile units may partially close down till the time virus fear persists. Same argument of raw material shortage and industrial closure holds true for many industries catering to domestic demand. The nascent economic recovery is at stake.

Companies in expansion phase will have to face delays as machine imports will be slowed down. BMR activities are to be affected as well. It is hard to imports spare parts from China. Telecom is not insulated either. Smartphone imports are largely from China, and so is the case for many telecoms related machines.

The energy sector has ramifications too. 4,000 HVDC line for evacuation of power from Thar to up north is delayed. The technical staff is mostly Chinese and not many workers came back to work after Chinese New Year holidays.  The story is similar for other energy related projects. Some say contractors are lucky as projects were invariably getting delayed and now sponsors have reasons to negate penalties to be imposed for delays.

The overall economic slowdown is good for inflation outlook. Bond yields are falling around the world. US 10-year bond is down to 1.3 percent. Pakistan’s 30-year Eurobond is trading at its all-time low of 6.5 percent. World over, central banks are cutting rates.  Monetary easing can start earlier than expected in Pakistan. These are interesting and fluid times.