…A Finance and Investment perspective.
From a small market in Wuhan, China, the novel Coronavirus, now named COVID-19 began an inexorable march around the world and is now truly a global health crisis. Half a century of globalization has brought us closer, for good or for worse. Integrated financial markets, closely knit supply chains and easily accessible air travel mean that in this age, a crisis of this nature can scarcely be contained in any one country. Even as countries have scrambled to close their borders and insulate their citizens, the fact is that no country can truly cut itself off from the rest of world without inflicting fatal damage on its economy and the very citizens it seeks to protect.
While the crisis is first and foremost a health crisis, there are obvious economic and financial costs. As the disease first took hold in China, financial markets noticed and panicked as if on cue. China is after all, the world’s production shop and when adjusted for purchasing power parity. Even if the disease had not spread beyond its borders, the effects of China being in the throes of it would still have been profound. With 721,902 infections 33,965 deaths around the world as at 14thMarch 2020. Covid-19 has had a telling effect on health systems and economies. While the economic impact in particular might take some time to decipher, there are some measures we can take now. Companies on stock exchanges around the world have lost much of their value, productivity has slowed and the forecast for growth has been adjusted downwards.
Here in Ghana, our bourse is not nearly as sophisticated or integrated enough to show the dramatic effects that we have seen in other markets. And yet, the effects are unmistakable. Even before the first case was recorded, we saw a marked slowdown in economic activity, owing in no small part to reduced imports from China. After over a hundred confirmed cases, border closures and now a two-week “lockdown” of all but the most essential services by the government, the effects are only going to be exacerbated.
On the fiscal side, the decline in economic activity due to the precautionary measures as much as the actual infection rate will have significant impact. Government revenue in particular will be significantly affected. You can’t tax what is not produced after all. With oil prices also tumbling, our recently discovered cash cow will also not be as fruitful till at least 2021. Some analysts even believe low oil prices could persist for longer. In that event, we would have to find another way to plug the resultant gaps in our revenue.
There is also likely to be a reduction in private and public investments and savings as more resources are applied to the much more urgent imperative of simply staying alive. Ironically, while depriving us of revenue, Covid-19 would require us to scale up our health services and infrastructure to cope, which would in turn require us to spend more money. We would need to hire more doctors and nurses and pay them more to account for increased risk. We would need to implement preventive measures and spend more on research to understand and deal with the virus. And were a vaccine to be found, we would need money to procure them for our citizens. Already, at the direction of the President, the Minister of Finance is looking to find one hundred million dollars that we hadn’t planned to spend when he presented his budget a few short months ago.
For investors, this will be a moment of extreme caution. Naturally risk-averse, the uncertainty of this period will manifest in reduced foreign investment, which frontier economies such as ours have come to rely on. This will impact growth as well as job creation and sustenance. Disruptions in business will also likely lead to higher default rates, which in turn would lead lenders to become more restrained in extending credit. This and the greater sensitivity to changes in market conditions will combine to reduce liquidity in the system.
The greatest risk, of course, should our infection rate get out of control, would be increased mortality which would have devastating effect on human as well as economic levels. We could have a reduction in the labour force from either ill health or worse and extended losses in productivity. For an economy such as ours, vast numbers unable to participate as they seek care would have a tremendously negative effect on both the micro and macro levels. And we would also have to contend with a fall in household income which would disproportionately affect the less well-off who have no investments or financial security. The resultant increase in inequality would have social consequences that we would then have to deal with for many years.
If you are in the market for a silver lining, however, you may find the reduced pressure on the Cedi due to reduced imports a little satisfying. The beneficiary here should be our local producers who should grasp the nettle, step into the void and prove themselves capable. We have seen some of this in the production of sanitizers, hand washing soap, disinfectants and pharmaceuticals.
The president was right to meet the pharmaceutical industry leaders to plan and coordinate a response. It would be appropriate to extend this call to all other relevant sectors and provide high level support for them to rise to the national challenge. Conversely, there is likely to be negative demand in especially non-essential goods and services. While intervention from the government would be helpful, a lot would depend on the deftness and innovation from the firms. Smart re-allocation of resources and even of operational focus would help some weather the coming storms.
In the short term, there are some things that Ghana and countries such as ours can do. We have to immediately scale up our expenditure on public health systems. We need to immediately increase the number of health personnel we have and the facilities where they can operate. This is necessary not just for this pandemic but also critical for the long term interests of our people. Covid-19 is the wake-up call that we should not have needed but we must not let the lessons from it go unheeded. The money won’t be easy to find but we must treat this as a matter of life or death because it literally is.
Our local entrepreneurs will also need help. They will need some breathers from some of their tax obligations to enable them survive. With reduced productivity and demand, insisting on these obligations could be the death knell for especially small and medium sized companies in these fragile times. Workers could also do with some reductions in their income taxes as we seek to encourage spending and demand in order to keep the economy going through the pandemic and beyond.
With some gentle encouraging from government, financial institutions could also offer creditors moratoriums on loan repayments. This will help companies through the bad times so they can live to fight when this is over. Encouragingly, some local institutions are already considering this and at least one has made a firm announcement. We need more to step and hold the hands of their clients through this. Supporting them means that they will still be around when we have gotten through this and able to discharge their obligations fully, rather than spluttering to a stop and out of reach halfway through.
In the long term, however, the whole global economy will need a rethink. The vulnerabilities exposed by this pandemic should force all of us into an uncomfortable but necessary reckoning. Fast and furious globalization has brought many benefits to people all over the world, some more than others, admittedly. But perhaps it is not built to withstand a viral epidemic that lays waste to much of the systems that we rely on. We certainly do not need to shut down this system that has worked, on the whole, so well to replace it with less tested alternatives. But we do need to rethink how it works and scale up its resilience to unforeseen threats such as this.
But while Davos man and woman contemplate the big picture, there are things that we can do at the local level. First and foremost, we have to boost local production. Out of this, the beginnings of vibrant local industrial sector must be seen. In particular, we need to industrialize our agriculture sector to ensure food sufficiency. This will drastically reduce our import bill and with it, the perpetual pressure on our long suffering cedi. And just as importantly, as many of us are finding out as we stock up for the two-week lockdown, when you have to close your doors, you need to have your own food.
This crisis need not break us. But it must change us. We must summon and apply the can do spirit of the Ghanaian to surmount this as we have done with other national challenges in the past. We need to innovate. We need to stand together. We need to become truly self-reliant. And we need to use this moment when we are all focused on a single challenge to unite and reorient our national course to one that works for all Ghanaians of every stripe and colour. And we can.
The writer is a Monetary and Financial Economist