Updating this earlier list that accompanied my article with an additional list of the latest articles on the economic impacts of the novel coronavirus outbreak and COVID-19 disease. They range from articles by prominent thought-leaders about the macroeconomic challenges, including trade, fiscal and monetary policy to articles about impacts in specific economies like China and the US, as well as articles about possible (and recommended) policy options being discussed by international organisations like the IMF, UNESCAP and others. I will keep updating this list.
An article by two Brookings fellows, including the excellent Homi Kharas – The triple economic shock of COVID-19 and priorities for an emergency G-20 leaders meeting
An op-ed by the former Chief Economist of the IMF and former Indian RBI Governor – The Pandemic Stress Test
An excellent article on the US by the head of the St Louis Fed – Expected U.S. Macroeconomic Performance during the Pandemic Adjustment Period
Article on the unprecedented QE by the US Fed – Fed announces unlimited bond purchases in unprecedented move aimed at preventing an economic depression
A useful compilation of analysis and recommendations by UNESCAP – The Impact and Policy Responses for COVID-19 in Asia and the Pacific
An article on the likely sustained supply chain impacts of COVID-19 – How coronavirus shutdowns are redrawing supply chains and globalisation forever
An article on the Chinese economy’s demand shock following recovery from the supply shock – China’s factories reopen, only to fire workers as virus shreds global trade
A poignant article on the economic inequality being wedged by COVID-19 – White-Collar Quarantine’ Over Virus Spotlights Class Divide
And finally, an excellent overview of the economic consequences for Sri Lanka by an IPS researcher – ‘A Brewing Storm’: Economic Impact of COVID-19 on Sri Lanka‘
An insightful podcast on how companies are coping (or not) with the massive disruption in global trade flows due to COVID-19 – COVID-19 and Trade: Stories from the Data
An article by trade expert Simon Evenett advocating for better trade policy (with less protectionism) to tackle the fallout – Tackling COVID-19 Together: A Bottom-Up Approach to Trade Policy
A video featuring the Managing Director of the IMF – IMF director Kristalina Georgieva on the coronavirus’ economic fallout
A database and tracker by the IMF on measures taken by different countries – Policy Responses to COVID-19
(updated on 30th March 2020)
In this episode of the Curionomist Podcast, I take a brief look at some of the economic relief measures that different countries have announced. In the previous edition of the COVID-19 special series, I talked about the macro-level economics impacts of the COVID-19 outbreak for the world economy. I briefly touched on the fact that the economic recovery of countries and the world at large would depend a lot on the relief measures that countries adopt and how effective they would be. Of course, as I mentioned last time, unlike the response to the Global Financial Crisis, this Coronavirus crisis is not seeing any sort of cohesive global action with regard to economic recovery – no real G-20 action, no real cooperation or coordination. Several of the most affected countries have announced different combinations of relief measures, mainly aimed at giving financial relief to people and businesses. This podcast recaps some of these, as well as the newly announced relief measures in Sri Lanka, as well as what the IMF recommendations are for fiscal stimulus responding to COVID-19.
It’s been a while since I’ve done one of these. With current curfew and work from home, I thought it’s a great time to get back into it. It is a COVID-19 special podcast, one of several I will publish over the next few days and weeks. In this first episode, I take a look at the economic impacts of the novel coronavirus outbreak. Do share your thoughts and ideas in the comments section!
The economic fallout of COVID-19 is unlike anything the world has seen in a century. Disruptions to supply chains, collapse in demand, international trade, and travel, along with lockdowns and collapsing stock prices, resulting from the novel coronavirus disease 2019 (COVID-19) have dealt a heavy blow to the global economy. The impact is likely to be prolonged throughout 2020, and in summary, the forecast risks are overwhelmingly on the downside and depend crucially on how governments respond. Here is a quick snapshot of the forecasts and estimates, as of 19th March 2020:
Macroeconomics and Growth:
- According to UN trade and development agency UNCTAD, the likely cost to the global economy is US$ 1 trillion in 2020, and in a so-called ‘doomsday scenario’ where global growth is just 0.5%, the cost would be as much as US$ 2 trillion[i]
- The IHS Markit forecast for world real GDP growth in 2020 has been revised down to 0.7%. Growth below 2.0% is classified as a global recession[ii]. They estimate a U-shaped rather than V-shaped cycle, as a sharp reduction in near-term growth is followed by a slow recovery.
- S&P Global Ratings believes the effects of the COVID-19 pandemic will push the world economy into recession, dragging full-year GDP global growth down to just 1.0 – 1.5%. S&P projects China’s economy to expand 2.7% – 3.2%, and the Eurozone economy to contract 0.5% – 1.0% in 2020.
- Both S&P and IHS Markit predict US recession in Q2, if not sooner.
Unemployment and Jobs:
- The International Labour Organization (ILO) said the initial impact would be a loss of 25 million jobs globally[iii].
- Based on different scenarios for the impact of COVID-19 on global GDP growth, the ILO estimates indicate a rise in global unemployment of between 5.3 million (“low” scenario) and 24.7 million (“high” scenario) from a base level of 188 million in 2019. By comparison, the 2008-9 global financial crisis increased global unemployment by 22 million.
- Underemployment is also expected to increase on a large scale, as the economic consequences of the virus outbreak translate into reductions in working hours and wages.
- US Treasury Secretary estimates that US unemployment could rise to 20% by the peak of the economic impact, from 4% now.
Supply Chains, FDI, Markets:
- The supply chain disruptions (mainly due to slowdown of manufacturing in China) could result in a US$ 50 billion decrease in exports across global value chains, according to UNCTAD[iv] (Figure 1 below)
- The outbreak could cause global foreign direct investment (FDI) to shrink by 5%-15%, the lowest levels since the 2008-2009 financial crisis (upper bound is if the outbreak lasts all of 2020)[v]. A sample of the top 5,000 listed companies globally showed earnings forecasts for fiscal year 2020 have been revised down by an average of 9% (Figure 2 below). The automotive industry (-44%) and airlines (-42%) have been the hardest hit.
- The Dow Jones industrial average – a key gauge of share prices in the US – fell below its level on the day of Donald Trump’s inauguration in January 2017 and has now dropped 10,000 points in a month.
- Oil prices fell 8% with the cost of Brent crude hitting its lowest level in 18 years, since the aftermath of the invasion of Iraq[vi]. While the sharp drop in oil prices will help energy consumers but will hurt energy producers. The net effect on global growth is likely to be negative, but small. For Sri Lanka, these depressed oil prices will reduce incomes in oil producing countries, several of whom are host countries for Sri Lankan migrant workers and a source of large inflows of remittances. But it will help our oil import bill (BoP benefit) and also (if GoSL keeps pump prices unchanged) will help public revenues.
Figure 1: Trade Impact for Top 15 Most-Affected Countries
Figure 2: Earnings Revisions and Capex of Top 5000 Listed Firms
This is the 2nd article in the ‘COVID-19 Special Series’. The first was on February 10th, 2020 on ‘Coronavirus and the Global Economy: a Quick Take’
During a recent trip back to Myanmar, I met with many players in the emerging innovation and entrepreneurship ecosystem there, and on one occasion I was fortunate to visit the new Yangon Innovation Centre (YIC). The YIC is a compelling example of how a local government can provide the most useful asset it has at its disposal – real estate – to spur a new innovation ecosystem.
The YIC, supported by the Yangon Regional Government, has supported the capital city’s I&E ecosystem following its establishment in March 2019. It started as a small experiment by the regional government following a discussion around how the city can “empower young people to do more”. The space is in downtown Yangon, by the river, and was a former go-down. A group of like-minded individuals was brought together as the YIC Association to run the Request for Proposals process to select an operator and had as little involvement with government as possible in order to keep the process credible. Accordingly, Seedstars, a global accelerator and entrepreneurship community development enterprise was selected, and their subsidiary – Seedspace, which runs a global network of c-working spaces and startup hubs – won the bid to run YIC. The Seedspaceinnovation and entrepreneurship hub at YIC is now supported by CB Bank and Thura Swiss. The operating model is that of revenue plus profit sharing. Revenues comes from co-working and event space. The Hub is looking at setting up similar models in Kayin State and in Mandalay Region.
YIC runs an ‘Investment Readiness Programme’, which is an accelerator for startups for 6 months. Under this, 4 startups are currently in the cohort. There is also the ‘Seedstars Academy’ where university students and young entrepreneurs can get support to develop very early, idea-stage, businesses.
Local conglomerates have now begun looking to engage the YIC startup community (through hackathons, for example) and are eager to sponsor and work together. This is a testament to the growing interest among so-called ‘old economy’ businesses of Myanmar, in this new area of I&E. Recently a ‘FinLit’ hackathon (on financial literacy) was organized together with Phandeeyar, Oracle, and Yoma Bank. Meanwhile, Aya Bank now has their own innovation unit based out of YIC.
UPDATE 16 March 2020: As there has been a lot of interest in this article and the COVID-19 economic impacts, but the originally article is now a bit dated, I am providing here some useful articles that discuss various aspects of the global economic fallout of the virus outbreak. I will keep updating this list:
The global macroeconomic impacts of COVID-19: Seven scenarios – https://www.brookings.edu/research/the-global-macroeconomic-impacts-of-covid-19-seven-scenarios/
The Pandemic Stress Test – https://www.project-syndicate.org/commentary/covid19-economic-weaknesses-by-raghuram-rajan-2020-03
A recession is unlikely but not impossible: Covid-19 infects the world economy https://www.economist.com/finance-and-economics/2020/03/05/a-recession-is-unlikely-but-not-impossible
The Economic Consequences of the Coronavirus – https://www.project-syndicate.org/commentary/economic-consequences-of-coronavirus-for-china-and-asia-by-akira-kawamoto-2020-02
With unprecedented force and speed, a global recession is likely taking hold – https://www.washingtonpost.com/business/2020/03/14/recession-economy-coronavirus-jobs/#click=https://t.co/U7U9sNHkey
Is anyone in charge? Unlike in 2008, there’s no plan to stabilize the global economy – https://www.marketwatch.com/story/is-anyone-in-charge-unlike-in-2008-theres-no-unified-response-to-stabilize-the-global-economy-2020-03-11
Why COVID-19 is likely to change globalization, not reverse it – https://www.csmonitor.com/layout/set/amphtml/Business/2020/0309/Why-COVID-19-is-likely-to-change-globalization-not-reverse-it
Companies’ supply chains vulnerable to coronavirus shocks – https://www.ft.com/content/be05b46a-5fa9-11ea-b0ab-339c2307bcd4
Coronavirus: China’s economy suffers dramatic collapse in January, February in warning to rest of world – https://www.scmp.com/economy/china-economy/article/3075314/coronavirus-caused-dramatic-collapse-chinas-economy-warning
VIDEO – Coronavirus: Is the dramatic collapse of China’s economy a warning for the rest of world? – https://www.youtube.com/watch?v=Yn1nhLGHrWc&feature=emb_logo
PODCAST – Economics in the time of Covid-19 – https://voxeu.org/vox-talks/economics-time-covid-19
ORIGINAL POSTED on 10th February 2020
There is plenty of speculation and scenario-building around what the impact of the Novel Coronavirus outbreak will be for the global economy. Here’s my own, albeit quick, take. Unlike when the SARS (SARS-CoV) epidemic struck the world, China is now much more integrated with the global economy and this will make the economic fallout of the Novel Coronavirus more pronounced. In fact, SARS struck just a few years after China joined the World Trade Organisation and had only just begun its integration with the global economy. Whereas today, when the 2019 Novel Coronavirus (2019-nCoV) is hitting the world, China is nearly 20 years into its global integration journey and is a huge part of global supply chains, of labour and capital markets. China now accounts for over 17% of global GDP, compared to less than 5% when the SARS outbreak hit.
More Chinese are travelling around the world today than back in 2002-3, when SARS affected China. Chinese outbound travel is growing at 4-6% annually, and the Chinese aviation market is set to surpass the US as the world’s largest aviation market. Over 81 million overseas trips were made by Chinese citizens during the first half of 2019 alone, up 14% year-on-year. For tourism-dependent economies like Sri Lanka and Maldives, Chinese visitors represent a large share of total tourist arrivals – often in the top 5 – and is rapidly growing.
The regions of China that are most affected by the 2019-nCoV are also the most important in terms of the country’s economic growth. Provinces affected by the partial or full shutdown imposed by the state, account for around 69% of Chinese Gross Domestic Product (GDP). These are the regions that have been asked to stay shut for an extra one week, following the Lunar New Year, affected not only restaurants, shops and small businesses, but most crucially, factories and industrial establishments. China’s factories are a key link in global production networks, with China-linked supply chains playing a vital role in everything from electronics to apparels.
Wuhan itself is one of China’s most critical trade and logistics hubs. In fact, some of the world’s leading automobile parts and components manufacturers – like Germany’s Bosch GmbH – are located here. Honda and Nissan also have large plants in Wuhan, serving their international supply chains.
China’s economic growth is likely to slow to sub 5% in Q1 2020, with a muted Lunar New Year economic activity, dampened consumer sentiment (and impact on retail and wholesale trade), and slow manufacturing and services growth. Hong Kong, South Korea and Vietnam will perhaps be the neighbouring economies most impacted by a Chinese slowdown – both through the supply chain disruption channel as well as the tourism and travel channel. Any slowdown in the Chinese economy will also impact those economies that supply raw materials to China, most notably Australia and Brazil. A McKinsey report which analyzed 186 countries found China to be the largest export destination for 33 nations and the largest source of imports for 65. So clearly, China is more systematically important to the global economy today, than when the SARS virus struck.
Meanwhile, countries like Sri Lanka may benefit to some extent, with likely shifts in production orders for apparels from Chinese factories to Sri Lankan factories. Those apparel manufacturers able to respond in a nimble, agile, reliable and cost-effective manner stand to gain, as do those who have supply chain linkages to raw material bases outside of China; for instance, sourcing fabrics from India (both Brandix and TeeJay have Indian plants). Beyond gaining from these immediate shifts on account of nCoV, there may be some sustained shifts where manufacturers become more resolute about diversifying production bases, as a risk mitigation measure. Already, as was pointed out in a previous article, manufacturers had already begun this ‘supply chain re-drawing’ on account of the US-China trade war.
The magnitude of the impact of 2019-nCoV on the China economy, the neighbouring economies most integrated with China, as well as the world at large, will hinge crucially on how quickly the virus is contained, how quickly the infection rates drop, and how quickly the mortality rate falls. As winter wanes, and China and the northern hemisphere warm up over the next few weeks and months, scientists and doctors say the climate for the virus becomes less conducive and infection rates should slow. While the economic impact of 2019-nCoV may be more pronounced than SARS-CoV, one can hope that it may not be as prolonged.
cover image courtesy AFP va Getty Images, sourced from Lowy Institute
At the launch of the Central Bank of Sri Lanka’s Monetary Policy Roadmap for 2020 yesterday, the new Governor has said in his speech that Sri Lankan banks should finance startups more and be less risk-averse. According news coverage by Economynext, the Governor has said:
“I urge Sri Lanka’s banking sector to rethink its credit disbursement policies, as the traditional ‘risk averse’ mindset has deprived emerging entrepreneurs and new ventures of much needed initial capital. […] Credit schemes that take into consideration the specific challenges faced by startups have failed to develop.”
I fundamentally disagree with this proposition. Here’s why,
Globally, banks are risk averse to this segment startups, and is not unique to Sri Lankan banks. Before calling for banks to fund startups, regulators must understand the financing needs in a startup’s lifecycle. It’s a bad idea to take on debt as an early stage startup. Its usually “friends family and fools” that provide capital first and then angel or seed funding rounds, followed by venture capital in the growth stage. In all these, the investor would typically take an equity stake. Banks cannot do that.
Moreover, banks fundamentally don’t understand startup biz models (esp digital startups) and its hard to expect them to do so. Banks typically have less than 20% capital, part of which is also debt capital, and the rest is public depositors funds. These depositors are extremely sensitive to ratings where bad debt ratios play a key role. Banks cannot afford to lend to high risk startups using depositors money. Also in Sri Lanka, you’d be hard pressed to find a retail depositor who has an appetite for more than one year tenor, whereas startups typically require longer term funding preferably at fixed rates. So the timing mismatch of assets and liabilities don’t lend themselves to startup lending. If banks are to lend long term, they need to get sources of funding to match that. There’s certainly a role for development banking to play a stronger role in Sri Lanka, as currently there is no strict development bank (DFCC and NDB are no longer development banks). In addition, banks are a highly regulated business globally (by Central Banks!) with close controls on integrated risk, provisioning, NPL management, capital adequacy, etc. This regulatory environment naturally does not lend itself to high-risk high-reward startup financing.
Even in the past when Sri Lanka began its venture capital journey, in the early 1990s, several banks started their own VC funds to invest in startups (Lanka Ventures with DFCC, NDB Ventures with NDB Bank, and People’s Venture Company with People’s Bank). But they didn’t do too well. They were run by bankers, and with a banker’s mindset of ‘moderate risk moderate return’. The only notable exit was Millenium IT, which had investments from NDB Ventures and People’s Venture Company. Whereas, the new incarnation of VCs in Sri Lanka – of the likes of BOV capital, Lankan Angel Network, etc. – are doing a better job since they’re not run by, and thinking like, bankers and can take disproportionate risk. The capital for these come from a closed group of investors, not public depositors and public shareholders like in the case of banks. As a general rule, only one in nine startups succeed and VCs make adequate returns with the successful 10% upside covering the rest of the downside. This kind of equation doesn’t work for banks, as its a totally different business model. So, it’s easy for regulators to say “banks should be less risk-averse and lend more to startups” – but in practice, its not so easy!
Furthermore, I would encourage that the regulator looks inwards to see what of it’s own policies and procedures are hindering startup growth beyond the financing question. I have heard numerous startups complain about the cumbersome rules and procedures around eKYC adoption, seamless digital customer on-boarding and mobile and digital banking innovation. Ease up those and digital startups will flourish without any need for pushing banks to finance them. On the banks’ side, I think what they can do better is to open up to working with startups – especially fintechs. Open APIs, opening up for collaborations on digital banking and wallets, easing up their paperwork for startups to begin a banking relationship, developing startup-friendly banking tools etc.
Having said all this about banks, what’s clear is that Sri Lanka needs more financing sources for startups, beyond bank finance. We have a few angel, seed and VC funds and some exciting exits recently. Startups have a high failure rate. We need capital sources that have an appetite for, and an understanding of, this and provide different kinds of financing rather than bank loans.