Karachi, November 29, 2021 (PPI-OT): Pakistan Strategy: Ease-off in commodities strengthening Pakistan’s case

Since COVID struck a year and a half ago causing widespread disruptions and bringing global economies to a screeching halt, many variants have come to light with the latest inclusion being the ‘Omicron’ with center being Southern Africa. This comes at a time when EU is bracing for another tough winter both in terms of intensity and social costs with surge in COVID ‘Delta variant’ cases triggering discussions for lockdown.

These developments have spooked Commodity prices with Oil (Brent) spiraling down 9.4% to US$74.5/bbl – the lowest since Aug’21. While the breather could be short-term, however, possible continuation of measures to clip growth across the globe could put fetters on a longer-term price trend in our view.

This makes Pakistan’s top-down case attractive where a 5% drop in oil price translates into US$700mn import savings while moderating pressure on exchange rate, and a 60bps impact on monthly inflation. It further allows the Govt. to meet its PDL target through upfront higher adjustments in our view.

From sectoral vantage, we advise shift to Power and select OMCs (PSO) on circular debt payments, from Textiles (on risks to demand outlook in EU). Other recommendations remain intact where we like Banks (on monetary tightening though a more gradual path cannot be ruled out given fluid dynamics) and Cements (easing coal prices improve earnings outlook of the sector).