Market bugaboo … the economics of coronavirus

Folks flourish when the expected eventualises, so do markets. Today we assess the various horizons of business actors in various markets. As the IMF and the World Bank abandons the initial predicted ‘V’ shape recovery of Covid-19 on the global economy, I attempt to position the impact of this menace on people and stocks performance across markets.

The Organisation for Economic Co-operation and Development (OECD) expects the world’s economy to grow at its slowest rate since 2009 due to this invasion. The last week of February 2020 saw the worst performances of major stock markets since 2008-09 financial crisis with Shanghai recording -2.9 percent, Dow Jones -7.5 percent, Nikkei -9.1 and FTSE 100 -11 percent.

Wall Street expects the Fed to act soon by lowering interest rates but some predicting it could reverse policy back to where it was during the financial crisis.

Goldman Sachs economists said they see the Fed cutting rates by 50 basis points at or before its March 17-18 meeting and probably 100 basis points in the first half of this year but as short-term rates keep going lower, it is possible they could go all way to near-zero where they were during the Great recession.

The Fed made an emergency interest rates cut by half a percentage point on Tuesday March 3, 2020 the biggest single cut in more than a decade as a preemptive move to protect the economy from the coronavirus, yet markets continue to tumble. Stocks rallied immediately after rate cut but speculation of the Fed impotence in the face of economic risks quickly fuelled a market sell off.

By late Tuesday, stocks were steeply lower and bond yields had plummeted to previously unthinkable lows as investors sought a safe place to park their monies. Interest rates are now set in a 1 to 1.25 percent range.

Mark Carney, the Governor of The Bank of England on March 9, 2020 followed queue by announcing an emergency rate cuts from 0.75 percent to 0.25 percent, taking borrowing cost back to the lowest level in history. It has since dropped further to 0.1 percent.

Other policy measures set by the Bank in support of economic stability includes the freeing up of billions of pounds of extra lending power to help banks support firms. This comes at the back of a sharp fall in trading conditions including spending on non-essential goods. Move is themed as a coordinative action designed to have maximum impact by stimulating spending in this era of shock.

At the micro level there is some heightened level of attrition in the efficacy of rate cuts and fiscal stimulus as the virus sickened at least 93,000 people globally as of Wednesday March 4, 2020 with major outbreaks taking hold in China, South Korea, Japan, Iran and Italy.

A faithful symptom present for every US recession since 1975, the inverted yield curve has warn off many investors. Yield curve is a graph depicting yields on US treasury bonds at multiple maturities.

Typically, its slopes upward, as short-term rates are lower than long term rates as long-term investments attract additional risk premium. An inverted yield curve is a situation in which long term rates are lower than short term rates suggesting that markets expect a recession which will reduce interest rates in the near to mid-term. Market data as August 27, 2019 confirms this situation.

Note that these signs could be months or even years before a recession.

In the sequel, crude oil prices tumble by 25 percent since January which translates to US$10billion loss in revenue across oil producing countries which furthers doubt on projected global growth of 3.3 percent for 2020 from 2.9 percent in 2019 (IMF WEO reports).

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China is the world largest importer of oil and indeed the linchpin of oil demand. Covid-19 has led to a sharp drop in its demand for crude oil as factories are idle, restrictions on transportation network and millions of people quarantined. Global demand has been hit hard and now expected to fall by 435,000 barrels year on year in the first quarter of 2020, the first quarterly contraction in more than 10 years (International Energy Agency).

Global airline revenues are expected to fall by US$4-5 billion in the first quarter of 2020 as a result of flight cancellations, according to a report from UN’s International Civil Aviation Organization (ICAO). The Chinese economy is much more significant for the world today. In the 2000’s it was 8 percent of the world economy now it is 19 percent and much more integrated in Asia and with the rest of the world.

Analyst from S&P, for example, estimated on Tuesday March 3, 2020 that the virus could lower China’s GDP growth to 5 percent. IMF cuts growth outlook for China’s economy by 0.4 percentage point to 5.6 percent but argues that impact on the world’s economy would be minor and short-lived as China gears up to recovery by Q2.

Alternative data available depicts traffic congestion in Beijing between 20-40 percent below 2019 averages. Coal utilization also below average as 60 percent of China’s industrial economy depends on coal for power, 86 percent of about 1 million restaurants tracked on the Meituan-Dianping – China’s biggest delivery platform remained closed as of February 14, 2020. Low shipping related activities, real estate transactions down by 90 percent and using air pollution levels as a proxy to track the restart of industrial production, experts say production could be running between 50 to 80 percent below capacity.

What problem is the Feds trying to solve or contain? – a known feature of most recessions is Credit cuts and Rationing. The Fed sought to boost investor confidence and access to credit. Rate cuts can bolster confidence and help to keep borrowing cheap thereby increasing spending but largely criticize for its short-term horizon.

Skewing the analysis to the mortgage market and the direct financial reprieve to homeowners by this rate cut, using the average rate of a 30-year fixed mortgage was 3.45 percent during the week through February 27, 2020 down from 4.35 percent a year earlier Freddie Mac said. The average rate on a 15-year mortgage fell to 2.95 percent from 3.77 percent a year earlier.

This blows the refinancing door wide open particularly for homeowners that had taken loan a year ago. A knock off of US$150 off your monthly mortgage payments creates valuable breathing room in the household budget. These eras are hugely characterised with capital deflation in the short-term hence lowering rates further improves the fluidity on markets.

When economy slows down or looks like it could, the Fed may choose to lower interest rates to incentivize businesses to invest and hire more. The World Bank has outlined measures such as announcing a US$12billion financing facility in an attempt to assist countries deal with the health and economic effects of the outbreak in areas such as disease surveillance, health systems and improving access to health services across the world.

Other issues identified by the IMF and the World Bank which are at various stages of assessments include;

The extent of the virus on global supply chain, tourism, Connection to corporate debt, working capital financing in the short term, rising issues of frozen capital in certain markets and an extensive scenario analysis of both regulatory and structural stimulus to dealing with this pandemic.

Restrictions have affected the supply chains of big companies such as Diageo, JCB and Nissan who rely on China’s production and its 300 million migrant workers. Aggregate demand globally falls as customers buy less with many avoiding activities that might expose them to the risk of infection such as going out shopping.

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However, in purely business terms there some bright spots, consumer goods giant Reckitt Benckiser for example has seen a boost in sales for its Dettol and Lysol products. Statistics from VisitBritian on Chinese travellers to the UK being kept at home coupled with their 3x spending power over the average traveller could adversely hit the industry.

It is imperative to emphasize the plethora of options and questions been asked around the world. I know you have a couple, so do I. As we embrace ourselves for this moment, I attempt to put forward the critical role of information flow surpassing the availability of finance to combat this, especially in the wake of no proven vaccine, our readiness as a country in managing this disaster be it health systems and sanitation measures and ultimately a clear plan of pragmatic crisis response measures i.e. for the nation as a whole, corporations and various business actors.

The marathon nature, sheer geographic spread and the undetectability attribute of the virus broadly is responsible for the stirring of this global pandemonium. Questions on duration also leaves the market with low certainty. It is with this that the International Finance Corporation a member of the World Bank Group through its Trade and Supply Chain Finance program proposes a $6bn financing facility to augment working capital for various qualified entities especially in developing countries across the world in trade areas of health.

In the forthcoming World Bank Development committee meeting scheduled for April this year, most likely to be virtual, developing countries such as those in the sub Saharan Africa would know with specificity how much support is allocated to them in dealing with the spill over effects of this contagion.

A positive shift recorded so far, is the collaborative efforts among countries in the management of the virus. In the interim, World Bank has recommended to all finance ministers in various member states to increase funding allocations to social protection expenditures to smoothen income and consumption as people stay home, access medical services and in some situation tax service suspension especially to strategic service providers within the health industry.

These measures rivet on the need to prioritize people first. An important piece to this puzzle is economies building the bridge between where we are now and recovery, focusing various responses in a very coordinated manner to achieve the collective interest of global economic stabilization.

Lessons for Ghana and food for thoughts

Questions-

  1. Should we expect MPC lowering GRR to stimulate spending?
  2. Is the Ghanaian economy healthy enough to absorb such shocks as China is touted to have resilient fundamentals and poised to recover strongly by Q2, can same to be said for Ghana?
  3. Due to fiscal space limitations, is the Government on a contingent basis working to access some of the emergency allocations by IMF/IFC?
  4. Stress on Financial system in the country i.e. working capital constrictions, corporate debt and panic withdrawals to meet emergent obligations?
  5. Decongestion, evacuation or isolation plans?
  6. Is it time to stuff up? Should we store groceries and other life essentials?
  7. Is it time to borrow more at cheaper rates as investors seek to park monies in safe zones such as Ghana at the moment?

Today is difficult, tomorrow would be more difficult but the day after would be beautiful but most die tomorrow evening – Jack Ma (Jeong). Could this be the recipe for the unprepared?

>>>The writer is a financial economist (Associate, ACCE-GAFM)

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