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  • Coronavirus Economy

    Economic Impact of the Coronavirus

    October 2020

    35 Million Cases and No End in Sight!

    Governments of Emerging Countries like India and South Africa are facing the Biggest Challenge – but “None of Us are Safe until All of Us are Safe!”

    The number of coronavirus cases registered worldwide soared past 35 million this month. Already last month countries started tightening restrictions to try to stop the rampaging pandemic. The grim landmark came as the World Health Organization warned of “alarming rates of transmission” of Covid-19 across Europe and cautioned against shortening quarantine periods.

    The OECD has urged governments to adopt more targeted measures to support their economies as the initial wave of the coronavirus pandemic has passed in some countries. Still, with many nations struggling with a resurgence in Covid-19 cases, leaders in my opinion need urgently to shift the focus of their programmes towards limiting the lasting scars from the crisis by helping people – especially young people – find new jobs.. With the world likely to have to live with the coronavirus for in my opinion many more months, it is time to switch strategy, especially for emerging economies.

    The most difficult and challenging thing for governments now in my opinion is deciding what to support and helping people in sectors most affected by the virus like for example hospitality and tourism to change jobs. The aim is not to cut costs to target help more carefully in a world where both advanced countries and emerging countries will have to live with coronavirus for most of 2021 until mass vaccination hopefully become available.

    Resources in my opinion need to be directed at companies that are temporarily unviable, rather than helping to maintain ones that are ultimately unviable. We all need to accept a necessary shift in the workforce, a shift toward public investment in new forms of growth rather than propping up sectors that might take years to recover. It governments now fail to take difficult decisions, they will create “zombie” companies and jobs that will just be kept alive on government support schemes.

    Following the lifting of past lockdown restrictions, most countries’ economies have grown faster than expected, even though the initial rapid recoveries have been slowing. Instead of a global contraction of 6% in 2020, the OECD has now produced a central forecast of world economic output dropping 4.5% this year, a figure it described as “still unprecedented in recent history”.

    Upgrades to 2020 forecasts were concentrated in China and advanced economies in Europe, with the outlook for many large emerging economies, including India, Mexico and Argentina, deteriorating since May. China is the only large economy expected to post a positive growth rate in 2020.

    China and much of east Asia have had a good crisis, relatively speaking. The recent rally in the renminbi shows currency markets are starting to acknowledge this.

    But in my opinion this is just the tip of the iceberg. A shift in the economic balance, away form the West and towards Asia, was well under way before Covid-19. The pandemic just accelerated it.

    Start by considering Beijing’s management of the outbreak. It is true that Covid started in China and the geopolitical ramifications of that are still playing out.

    However, case and mortality trends in the region have paled in comparison with many other parts of the world. A history of handling pandemics has helped, as has world-beating technology. But as the US and Europe continue to grapple with new Covid cases, levels in much of east Asia remain low.

    To bring it straight to the point, better pandemic management has delivered better economic results. China is the only country among 48 to have reported a second-quarter gross domestic product number that was higher than at the end of 2019. Taiwan, Vietnam, South Korea and Hong Kong are the next closest.

    In contrast, Spain’s second-quarter GDP was 20% below year-end and India’s as well as South Africa’s 25%.

    East Asian countries that were able to avoid lockdowns limited damage to the services and construction sectors. August activity data from China showed the recovery broadening with consumers re-engaging with the economy. Please understand, this comes without any of the direct government support that western consumers have received. The growth dividend from good Covid management will in my opinion most likely continue to accrue for these east Asian countries, even as fiscal policy packages are scaled down in the west.

    Another big factor for growth has been exports as Asia finds itself with the right product mix in the new Covid era. Taiwan, South Korea and Singapore all benefited from strong tech sectors. China has also seen strong tech exports and – ironically – a surge in exports of medical and personal protective equipment.

    Many analysts said the Covid crisis would disrupt global supply chains but the early evidence underscores how difficult transitions can be. China has been picking up export market share, not the other way around. Asia – if we like it or not – is the world’s main manufacturer of goods and that is likely to remain the case most probably for a very long time.

    The most important indicator of China’s relative strength, and perhaps its most surprising, is the resilience of its balance of payments. China’s August trade balance data showed the surplus rising again after a dip in the spring. In the middle of a huge global trade shock, this is in my opinion a remarkable outcome – and even more so, given it reflects solid imports as well as strong exports.

    This matters for currency markets.

    Indeed, the flip-side of China’s resilient balance of payments is the rise in the US trade deficit. If you strip out oil, the US trade deficit is near a new record high and has been increasing significantly in recent years. The US-Dollar has been weakening against Asian currencies in recent months and I expect this to continue. There are costs to China’s out-performance, of course, and most of them are geopolitical. The US-China tension has been building for some time and the relative shifts in growth and balance of payments trends through the Covid crisis will most probably raise tension further.

    In the near term, Beijing is well behind on its commitments under “phase 1” of the trade deal with the US. Throughout August, China has made less than 40% of its purchases pledged for 2020. Soya-bean imports from the US – one of the most visible elements of the trade deal priced by President Trump – have slowed this year, even as China’s overall soya-bean imports have surged. Part of this is seasonal but there is a lot of catching up to do by year-end.

    Longer term, China’s trade surplus with the US has grown almost 25% since the start of the Trump presidency to more than 300 billion US-Dollar on an annualized basis – in my opinion not really “The Art of the Deal”.

    For all the talk of “winning” against China, the reality is that the current US administration has done little to curb the multiyear trend of ever higher trade deficits. Doing so is harder than it looks.

    In a tight US election season, these trends may prompt more hawkish rhetoric form the Trump administration. And further out, it does in my opinion not really matter who wins in November as the US-China tension is here to stay and Beijing’s successful virus management – and consequent economic resilience – will if we like it or not only raise the stakes in years to come.

    The pressures of the pandemic have fallen hardest on developing countries with weak governments. They’ve struggling to determine who is being infected and why, and to mitigate the economic impact of lockdowns and social distancing measures.

    South Africa for example is emerging from one of the world’s strictest lockdowns. Not before time. Borders were still closed last month and the economy, which contracted 16% in three months, is back to where it was in 2007. As the southern hemisphere moves into summer and infections fall sharply, South Africa should work to revive vital industries, including tourism, safely and quickly.

    The lockdown has been painful. It has been sullied by corruption and state security violence. But the lockdown has been necessary. Cyril Ramaphosa, the president, was in my opinion right to take stringent measures, shutting down much activity before a single death was recorded. As of last month over 17,000 people have died from 700,000 recorded infections. The toll, even if an underestimate, would most probably have been worse had the government not acted decisively.

    If the pandemic is coming under some sort of control, it is hard to say the same about the economy. This has been going backwards, in per capita terms, for years. Covid-19 has merely exacerbated a wrenching decade of corruption and incompetence under Jacob Zuma, the former president. Debt levels, at 60% of output – and heading for 80% – are unsustainable for a still developing economy. Rating agencies have downgraded sovereign debt to junk.

    The ANC’s policies have not been working on the ground either. Levels of economic inequality are as bad as during apartheid. Unemployment is at least 30% and business fears it could rise to an alarming 50%. Longstanding policies of income redistribution, social grants and black economic empowerment are not bad per se. But they have run out of road. South Africa now urgently needs to raise its potential growth rate, which has been stuck at a dismal 1.5% for years.

    That calls for an honest government and an economy that can attract private investment. Mr. Ramaphosa has so ‘far reversed some of the rot by rebuilding captured institutions, but he has done less well at tackling corruption within the ANC.

    He should in my opinion now use public anger over Covid-19 procurement scandals to make examples of some senior officials. If he cannot clean house, the ANC will lose credibility as a vehicle of economic transformation.

    Mr. Ramaphosa in my opinion also needs to address the bloated public sector. This absorbs too much of the state’s limited resources with far too little impact. Many state-owned enterprises are borderline dysfunctional. If they can be resuscitated they should be privatized. The argument that they are a vehicle for transformation is in my opinion wearing thin. Tens of thousands of state-funded jobs do not compensate for the massive loss in productivity. To show his intent, Mr. Ramaphosa should scrap plans to bail out South African Airways. In my opinion it can be restructured and run perfectly well by a private operator.

    South Africa as well as other emerging countries cannot spend more than it raises in taxes indefinitely. Nor can it fill the void with ever-increasing debt. The resulting macroeconomic instability has put off private investors, reducing economic activity still further. That risks condemning South African governments to the dismal task of slicing up an ever-shrinking economic pie.

    The government needs to collaborate with business and labour to get the economy going again. Mr. Ramaphosa has a tendency to caution, but this is the time to act. For South African majority, rather than its vested interests, it is time for him to break some taboos.

    But South Africa is just one example. The World Bank has piled pressure on commercial lenders to defer debt repayments owed by emerging economies as the impact of the coronavirus pandemic threatens to plunge them into a “lost decade”.

    I am worried that some countries might cut back spending on health and education to meet debt repayments, creating a long-term drag on their economic prospects. There is a logical direct connection between debt service, which takes money away from countries, and the urgent need for resources to address health, education and investment in human capital. The World Bank and commercial creditors as a group need to look to the longer run. These countries are a potential source of future income and the right thing is to look to debt relief. I’m personally frustrated that commercial creditors have been continuing to take very large payments from the poorest countries.

    By no doubt, emerging economies need to reduce their overall stock of debt, not simply extend maturities or defer interest payments. In the past, without considering the current impact of Covid 19 on emerging economies, when there have been a wave of debt, these countries go through a long period of austerity and decline that creates a lost decade.

    The G20 group of leading economies has allowed the world’s poorest countries to defer repayments due this year on government-to-government loans. The debt service suspension could be extended into 2021. So far, 42 countries have requested deferrals amounting to about 5.3 billion US-Dollar, less than half the amount that was eligible, according to World Bank Data.

    Governments including China need to put pressure on their domestic institutions to renegotiate debt agreements as quick as possible. But this is not limited to China only, although China is one of the key creditors. The list is long and contains many institutions that have made loans, many of which are not participating in the debt initiative.

    Although the debt deferral initiative calls on beneficiary countries to request similar treatment from commercial creditors, several countries including Pakistan, Benin and Rwanda have voiced concerns that asking for relief would reduce their ability to borrow in the commercial markets in the future. So far, no single country has publicly asked for private sector involvement.

    Governments in emerging economies have borrowed more than 100 billion US-Dollar on international bond markets since April, according to the institute of International Finance.

    The World Bank is seeking to increase cheap lending to the poorest countries, but if commercial creditors did not restructure debts, additional lending would be diverted from domestic social programmes to foreign interest payments instead of supporting the needed revive of their economies. It is obviously not effective when those resources simply go out to creditors that are just charging a high interest rate. The debt burden in these emerging economies is so large that it would cancel out the benefit the World Bank would be providing.

    Governments of emerging economies therefore have to negotiate hard with their current creditors and have to make them clearly understand that we are in this pandemic of Covid 19 together.