ECONOMIC OUTLOOK Sakib Sherani ExMember Prime Ministers Economic

ECONOMIC OUTLOOK Sakib Sherani Ex-Member, Prime Minister’s Economic Advisory Council Founder & CEO Macro Economic Insights CFA Society I April 2020

Copyright © Macro Economic Insights (SMC-Pvt) Ltd. , 2020 All rights asserted and reserved. The contents of this presentation are privileged. All information and analysis presented, unless explicitly acknowledged as sourced from the public domain, is to be treated as proprietary, and as the intellectual property of Macro Economic Insights (SMC-Pvt) Ltd. , Islamabad, Pakistan. The data used has been sourced from official government, central bank and/or multilateral agency datasets, or other credible, international sources which have been cited. While every reasonable effort has been made to ensure the accuracy and authenticity of data used, Macro Economic Insights (SMC-Pvt) Ltd. makes no express or implied warranty as to the same. Macro Economic Insights (SMC-Pvt) Ltd. Registered address: Suite H-4, Karakoram Enclave 1, F-11/1, Islamabad, Pakistan. Macro Economic INSIGHTS 2

Presentation Outline Global shock Likely outcomes Economic outlook Business risks + opportunities SAKIB SHERANI / MEI 3

Global shock Likely outcomes Economic outlook Business opportunities SAKIB SHERANI / MEI 4

Global Uncharted territory Fear, uncertainty, disruption on unprecedented scale Compounded pre-existing worries Global economic slowdown/recession fears Impact of China-US trade war China’s slowdown OPEC+ agreement collapse ‘Risk off’ environment/flight to safety SAKIB SHERANI / MEI 5

Source: worlduncertaintyindex. com 10 yr UST yield Source: Yahoo finance 6

Source: CNBC Source: CNN Money 7

“High uncertainty historically coincides with periods of lower growth and tighter financial conditions. ” SAKIB SHERANI / MEI 8

Global Policy stimulus in pipeline But some countries/regions will be constrained (esp. Eurozone) A global ‘recession’ is inevitable … Key question: duration + magnitude SAKIB SHERANI / MEI 9

‘What will normal look like? ’ While no one can say how long the crisis will last, what we find on the other side will not look like the normal of recent years. Mc. Kinsey & Co. The best-case scenario would be a downturn that is more severe than the GFC … but shorter-lived. [However] the risk of a new Great Depression, worse than the original – a Greater Depression – is rising by the day. Nouriel Roubini This is an economic tsunami. Mark Zandi [chief economist, Moody’s Analytics] SAKIB SHERANI / MEI 10

Impact on Global Economy Bloomberg Economics estimate: Severity Global GDP impact Moderate - 0. 8 % Severe - 1. 9 % Global pandemic* - 4. 8 % * Worst case, World Bank (2014) SAKIB SHERANI / MEI 11

Global shock Likely outcomes Economic outlook Business risks + opportunities 12

Economy’s path will follow that of ‘health’ Ø Growth of new transmission complexes and evidence of seasonality Ø Impact of physical-distancing measures Ø Efficacy of health-system surge Ø Readiness of the health system to navigate recurrence Ø Emergence of herd immunity, and: Ø Discovery of vaccine Adapted from Mc. Kinsey & Co. SAKIB SHERANI / MEI 13

Pakistan High degree of vulnerability to contagion Low surveillance, screening + testing, contact-tracing etc. capacity Cultural factors: Handshakes + greeting hugs Congregational prayer etc. Apathy Lack of mass awareness Partial lockdown ‘Patient 31’ SAKIB SHERANI / MEI 14

Some epidemiological models predict 2 -3 peaks However, bottom-line: disruption/fear aside, longer lasting impact to come from global conditions SAKIB SHERANI / MEI 15

Global shock Likely outcomes Economic outlook Business risks + opportunities 16

Pakistan vs Advanced Economies SAKIB SHERANI / MEI 17

Pakistan Channels of impact: +ve: Lower oil prices Dis-inflation Lower interest rates Fiscal space to govt. = Growth-supportive impact SAKIB SHERANI / MEI 18

Pakistan Channels of impact: +ve: Lower oil prices Dis-inflation Lower interest rates Fiscal space to govt. = Growth-supportive impact • However, positive impact will be limited by low confidence, high disruption + uncertainty, & fiscal consolidation SAKIB SHERANI / MEI 19

Pakistan Channels of impact: -ve: Lower exports Pressure on govt. revenue Potential pressure on remittances ‘Hot money’ + equity outflows Access to int’l capital? SAKIB SHERANI / MEI 20

Working assumptions Base case/Central scenario (global): Fear, anxiety to persist/return 1 st peak is followed by a 2 nd (smaller) one this year Consumer + capital spending to remain depressed Supply chain, logistics, marketing channels disruption Global bankruptcies Sovereign + corporate debt work outs Credit channel disrupted SAKIB SHERANI / MEI 21

Working assumptions Base case/Central scenario (Pakistan): SARS-Co. V-2/Covid-19: 2 -3 episodes of local resurgence Rolling ‘lockdowns’ Exports remain affected till Q 3 2020 Agriculture sector un-impacted Consumer + capital spending to remain depressed Enhanced multilateral emergency assistance + bilateral debt relief SAKIB SHERANI / MEI 22

Pakistan Main assumptions: 2020 2021 Oil price (Brent) US$ 25 Exports - 13% - 17% Remittances - 5% Saudi oil facility continues discontinued Exceptional assistance (WB etc. ) US$ 3 b SAKIB SHERANI / MEI - 20% US$ 3 b 23

Forecasts Summary Actual: Forecast: 2016 -17 2017 -18 2018 -19 2019 -20 2020 -21 2021 -22 Real GDP growth % Y/Y 5. 4 5. 2 3. 3 0. 5 -1. 5 -0. 0 3. 0 -4. 0 Inflation (CPI) End June, % 3. 9 5. 2 8. 9 8. 0 7. 0 Fiscal deficit % GDP 4. 7 6. 6 8. 9 7. 7 7. 2 6. 5 Ext. current a/c US$ bn -12. 6 -19. 9 -13. 6 -5. 7 -6. 1 -8. 4 Overall balance US$ bn … -6. 0 -9. 5 -2. 5 3. 9 0. 7 Bias Data: SBP; IMF Forecasts: Sakib Sherani/MEI Macro Economic INSIGHTS SAKIB SHERANI / MEI 24

Impulse Response Function FY 22 f FY 21 f SAKIB SHERANI / MEI 25

Global shock Likely outcomes Economic outlook Business risks + opportunities 26

Lending at-risk: Govt. /public sector: Very high likelihood of Paris/London Club process Exporters of T&C to US: Prolonged disruption likely, leading to liquidity/solvency issues Consumer discretionary: Autos, appliances, suppliers [steel, motors, tyres etc. ] Travel/tourism/leisure Oil & gas Renewables? IPPs Govt revenue will be under severe strain Financial counter-parties with high exposure to at-risk segments SAKIB SHERANI / MEI 27

Potential opportunities: Healthcare sector Pharma, medical devices, PPE, health technology Construction Beyond short term Sectors with petroleum/petro-chemical inputs Petro-chemicals, plastics, fertiliser, solvents/dyes, paints, pharma Start-up/new airlines Acquisition + possible funding cost advantage Logistics Supply chain management etc. On-line platforms / Telcos Learning, tele-medicine, business support, E-commerce SAKIB SHERANI / MEI 28

Thank You Q&A follows Macro Economic INSIGHTS 29