From the Pakistan market’s standpoint any escalation will
test two key expectations that have driven the YTD rally at Pakistan Stock Exchange,
monetary easing and Pakistan’s negotiation with the IMF for another program.
On the flipside, the market will draw comfort from the
prospect of fresh bilateral assistance and investments from Saudi Arabia and
the release of final tranche of US$1.1 billion by end April.
Global shipping costs and commodity prices are likely to
rise. Even in case of a de-escalation of the conflict, it threatens to worsen
the disruption of shipping routes through the region, similar to that through
the Red Sea. There is an increased risk of the following in the near term:
Surge
in global oil prices toward US$100/bbl: The Red Sea disruption since
November 2023, along with the extension of OPEC Plus supply cuts, has lifted
Brent from US$78/bbl at the start of 2024 to nearly US$90/bbl, despite a weak
global economic recovery.
Surge in the global shipping costs, through elevated
insurance premiums on shipments through the region.
Global food prices could also rise, because of the rise in
shipping costs and higher fertilizer prices, which the region exports. Food
exports from South Asia, such as rice from India and Pakistan, to the rest of
the world could be disrupted as well.
Potential
delay in the start of interest rate cuts: An escalated conflict will
have negative implications for Pakistan’s CA balance and inflation. In a
scenario where global prices of crude oil, chemicals and food commodities rise
by 10% in the coming months, Pakistan’s trade and CA deficit could expand up to
US$300 million per month.
It is also likely that, in an escalated conflict, Pakistan’s
exports and remittances may shrink, due to a disruption in shipping routes and
economic concerns in the GCC, respectively.
Together these could spell a reversal in the exchange rate parity
which has been stable around 280 since the start of year 2024. Note that, as
per the SBP, Pakistan has a funding gap of around US$3 billion until
June 2024, excluding the US$1 billion Eurobond repaid on April 12, 2024.
