Aurora Magazine

Promoting excellence in advertising

Weathering the downturn

Published in Jul-Aug 2019

The impact of the prevailing economic situation on marketing and advertising.

Three years ago, in an article on the budget published in the July-August edition of Aurora, I concluded with: “Pakistan can achieve its rightful potential as a South Asian tiger if it works as a nation that has confidence in itself. Trust between the people and the public institutions serving for the common good is critical.” It seems that the trust deficit still plagues Pakistan as successive promises for a better tomorrow continue to be elusive. Despite the opportunities offered by the China Pakistan Economic Corridor (CPEC), an improved law and order situation and until recently, low inflation and interest rates, Pakistan’s economy once again arrived at a dangerous place with an urgent need of a bailout. How we got here is best left for the experts to debate.

Expectations from the economy in the near future are low; a GDP growth rate target under three percent, tight monetary policies to contain inflation and uncertainty around the exchange rate driven by balance of payment issues and limited foreign reserves. The course correction proposed to address the current economic crisis consists of sustained structural reforms which need conviction and perseverance to bring results to fruition.

The following analysis of economic trends and the proposed budget focuses on variables that affect the revenue and cost for businesses that, in turn, will determine the spend in marketing and advertising.

Political factors, whether internal or external, impact consumer and business confidence, affecting demand for goods and services and the capacity to fulfil it. A level of uncertainty will always plague Pakistan due to its strategic but challenging geographic location. The shifting powers in a multi-polar world, renewed Great Game influencing in Central Asia and tensions in the Middle East are among external issues currently at play. Hence, foreign policy and the economy will remain strongly intertwined. Businesses will need to monitor issues such as the Financial Action Task Force (FATF) and external shocks like changes in oil prices. The former would impact the cost of doing business globally, while the latter would make goods cheaper or more expensive.

Economic policy is shifting to urgently stimulate exports in an attempt to reduce the balance of payments and shore up foreign reserves which would improve the ability to service the burgeoning external debt.

Given the proliferation of communication channels, efforts should be made to remove bickering on subjective false opinions which is self-perpetuating and instead, shift to discussions based on objective information. As a result of being constantly let down, the public has become sceptical and cynical which is detrimental for a country in crisis.

According to an article in DAWN, the external debt-to-export ratio has worsened from 246% of exports in FY 2012-13 to 427% in FY 2018-19. Depreciation of the currency was a key measure taken to promote exports, which have grown in terms of volume. However, on the flip side, given Pakistan’s dependence on imports (particularly for inputs) the cost of goods for businesses has increased, accelerating inflation. To address inflation, interest rates have been increased, compressing the economy in the short-term. As indicated by the low GDP growth rate target for FY 2019-20, growth in consumption is likely to slow down, which, coupled with the ensuing increase in unemployment, will likely result in lower growth or a decline in sales. This will, at best, stagnate or reduce marketing and ad spend. A potential saviour for the demand side slowdown could be inward remittances which, in rupee terms, could lessen the erosion of consumers’ purchasing power.

It is important that the near-term sacrifice results in an increase in the value of exports and not just volume. Currently, Pakistan’s exports are low value-added in nature, which needs to change. Improving productivity through better infrastructure, effective use of technology and enhancement of human resource skills will be critical to sustain long-term competitive advantage for export growth. Apart from shifting to high value-added products and services, exporters should invest in building their brand image. Digital marketing is relatively less expensive and provides an efficient way to increase market access. While IT and digital services in themselves provide export growth opportunity, it is important to enhance skills to compete in the global market. The government should incentivise partnerships with foreign firms which can help in transferring knowledge while benefiting from a lower cost base. Businesses in countries with aging populations are likely partners in providing such opportunities.

The tax revenue target of Rs 5.5 trillion in the new budget is significantly higher than in previous years. Larger traditional sectors like textile, sugar, tobacco, cement, steel and beverages are targets for revenue generation in the proposed budget. Paper and wood industries have been provided concessions and sectors such as home appliances have received relief on custom duties on inputs.

A key objective of recent tax polices is to document the economy and increase the tax base. The concept of ‘filer’ and ‘non-filer’ is proposed to be replaced with status as per the Active Tax Payer list. Regulatory duties have been reduced on mobile phones, tyres and other smuggling-prone items with the aim to document transactions. While increasing the tax base is likely to take time, higher direct taxes such as those on salaries have been proposed and will dampen consumption. A higher tax revenue target in a low-growth economy may also result in further mini-budgets in case targets are missed.

Although the above analysis suggests an overall slowing economy that is likely to constrain marketing and advertising spend in the near-term, below is the potential impact on marketing and communication (Marcom) related businesses:

1 With pressure on revenue and increasing costs of goods, expected return from Marcom budgets will be greater, with a need to deliver creatively effective and low-cost solutions. Promotions and discounts are likely to increase as the erosion in purchasing power will challenge brand loyalty for better deals.

2 Foreign expenditures such as TVC productions abroad should be impacted as a weakening of the exchange rate makes it more expensive and remitting money is also challenging. This provides an opportunity for growth in domestic video production which has improved over the years and continues to attract strong talent. Perhaps incentive to import equipment that can fill the gap could further fuel the business.

3 Digital marketing should benefit due to its efficiency in reaching a growing audience with an estimated 45 million active internet users in Pakistan. Relatively low barrier to entry could erode margins for domestic businesses as the supply side increases at a faster pace than demand. However, businesses exporting digital marketing services, if competitive in quality, could make a windfall.

4 Export-oriented digital services enjoying the benefits of devaluation should be in a better position to attract and retain skilled talent with higher salaries. Talent in digital services may also gravitate towards freelance foreign work on platforms such as Upwork, with more lucrative compensation. Therefore, domestic-focused businesses could find it more difficult to retain top-tier talent.

5 Liquidity in the market is likely to come under pressure due to higher interest rates which could further exacerbate an already notoriously long credit cycle of payments. It is critical that the payment cycles are kept in check through collective efforts such as an industry body/association.

While the creation and implementation of specific polices is a key driver, managing perceptions and behaviour will be equally, if not more, important. Building business and consumer confidence will be critical to realise the silver lining expected at the end of the structural reforms.

Given the proliferation of communication channels, efforts should be made to remove bickering on subjective false opinions which is self-perpetuating and instead, shift to discussions based on objective information. As a result of being constantly let down, the public has become sceptical and cynical which is detrimental for a country in crisis. The expectations of the public need to be managed carefully and in a measured way. This requires articulating a strategy and showing progress objectively from time to time. Data in an increasingly uncertain world will be of paramount importance to shape understanding and inform a correct narrative.

Otherwise, Isaac Newton’s quote will prevail – “I can calculate the motions of heavenly bodies, but not the madness of people.”

Amin Rammal is Director, Firebolt63, The Brand Crew and APR.