Stimulating the Economy

Though unscheduled, the Monetary Policy Committee (MPC) meeting should not have been unexpected given the support recently provided by central banks across the world. With the latest 200bps cut in the policy rate, it seems that the SBP is now on the front lines in the fight against Covid-19.

• While we’ve had our fingers crossed for flattening of the Coronavirus curve, for now at least we will have to make do with a flatter bond yield curve.

• Given the composition of Govt. domestic debt, respective maturities and potential financing needs we estimate the back to back cumulative 425bps cut should result in savings on debt servicing of at least ~Rs500bn by Jun-2021.

• Although the step taken by the G20 is a positive development, considering the havoc that Covid19 could potentially cause, debt forgiveness may eventually become essential.

• While the terms are yet to been finalized, Pakistan’s debt obligations to official bilateral creditors during May-Dec, 2020 could fall between US$5bn to US$8bn, as per our estimates.

• The accommodative tone of the latest IMF press release should not be surprising given that just recently the government was able to announce what it claims to be a Rs1.2tn relief package – larger than the entire 39-month EFF program.

• This bundle of good news should trigger circuit breakers on the PSX today (particularly cyclicals such as cements and steel) with effects still visible on Monday. However, the broader outlook depends on how soon (or late) the pandemic is controlled and how effectively the leadership manages the crisis. Read More…