Oil price crash to benefit Pakistan’s macros

Karachi, March 09, 2020: Oil prices has dropped by more than 30 percent as OPEC failed to strike a deal with its allies regarding production cuts.

 Saudi Arabia has slashed its prices as it is reportedly getting ready to ramp up production, leading to fears of an all-out price war.

WTI crude briefly dropped to below the US$28/bbl (-32 percent), while Brent crude also plummeted to around US$32/bbl (-29 percent).

We believe, lower oil prices are a net positive for Pakistan’s macros (especially the external account), as 26 percent of Pakistan’s imports are oil price driven.

 We estimate, on an annual basis, US$20/bbl lower oil prices would reduce Pakistan oil import bill by 26 percent or US$3.8-4.2 billion.

 On the other hand, we can potentially see a cumulative reduction in exports and remittances by around US$1-2 billion. Hence, on a net basis, Pakistan’s external account could potentially improve by US$2.2-2.8 billion (~50 percent of Pakistan Current Account Deficit) due to US$20/bbl lower oil prices. The expected PKR/USD to remain stable in the near term.

On the fiscal side, we believe lower oil prices will give the government enough fiscal space to sail through at least the next couple of IMF reviews. The government is unlikely to completely pass on the impact of lower oil prices to the consumers, through increase in Petroleum Development Levy (as seen last month).

 The government is also likely to pocket part of lower oil prices in electricity tariffs (under Monthly Fuel Adjustments), resulting in lower accumulation of circular debt. In our view, the pressure to increase gas prices will also subside.

The lower oil prices will naturally result in lower CPI inflation going forward. We estimate, average annual inflation could potential come down by 1-1.5 percent due to US$20/bbl lower oil prices (FY21E: 8.0 percent).

This will potentially affect State Bank of Pakistan’s (SBP) thinking in the upcoming Monetary Policy due in March-2020, where we believe SBP can deliver a 100bps cut in Policy Rate. We expect PIBs and T-bills yields to follow suit.

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