- The oil price war and coronavirus together will trample world markets
Yesterday, there was a bloodbath across international stock markets as soon as trading opened in various countries as oil prices plunged by close to 30%; the worst one-day drop since the Gulf War in 1991. The novel coronavirus has already wreaked havoc across the globe, causing stock markets to plunge, forcing major economies like the US to consider cutting interest rates to zero in order to minimize the impact of the fast spreading disease on its economy. UK’s 2-year bond, for example, has turned negative for the first time ever. OPEC (Organization of the Petroleum Exporting Countries) was pushing to cut production amid an expectation of drop in demand for oil due to the coronavirus epidemic but Russia, one of the largest oil producers in the world, was resisting any such move. Negotiations failed and a price war ensued that has culminated in the massive drop in the prices of Brent and Brent Crude, the global benchmark for oil prices.
Pakistan too has not been spared from the fallout as the KSE-100 index plunged 2,100 points within six minutes of the stock market opening on Monday morning, forcing a precautionary 35-minute stoppage in trading, which is the largest intraday fall in the country’s history. Foreign money parked in equities has started to flow out with $21 million exiting the market last week bringing the number to a startling $65 million in a month. If interest rates come down then outflow of ‘hot money’ that provides the much-needed support and comfort to the PTI’s economic team, will also start. According to government figures there are only seven reported cases of the coronavirus in Pakistan. Efforts at containment through border closures and quarantine are commendable but countries like Iran, Italy and the UK have experienced similar figures initially only to be followed by a surge in cases overnight. Preparations to address the direct effects of the coronavirus must be made now in order to handle a situation where it starts spreading much more rapidly. The indirect effects, such as that on the economy, could be catastrophic for a country as fragile as Pakistan. Although falling oil prices will help in reducing the current account deficit further, this is no time to become complacent. The government should be prepared for any sort of shock to the economy.
