Coronanomics: Understanding The Darker Side of A Virus's Economic Downside


Saturday, February 29, 2020, /  08.15 AM / Teslim Shitta-Bey, Managing Editor, Header Image Credit: Pharmtimes

Global economic and financial markets are in a tailspin as the impact of the Coronavirus that started in China at the beginning of 2020 hits economies hard.   Global equity markets have seen Indexes falling into negative regions as fears of supply chain disruptions, and cutbacks in demand and supply paint an ugly picture of manufacturing sector revenue decline and profit reductions in Q1 2020 and even beyond.

Global equity markets have dipped into the red from one continent to another, starting from America's Dow Industrial Average which slipped by -9.71% to China's SSE Index which tumbled by -7.24%, and South Korea's KS11 Index which skidded by -8.71%. Japan's Nikkei 225 Index dipped by -10.65%  as Italy's S&P/MIB Index dropped by -7.73% at the end of the trading week. Global markets on Friday February 28, 2020 generally slipped as they saw Corona red.


The Virus


According to the World Health Organisation (WHO), "Coronaviruses (CoV) are a large family of viruses that cause illness ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS-CoV) and Severe Acute Respiratory Syndrome (SARS-CoV)." The new virus wreaking havoc across the globe is considered a novel coronavirus (nCoV) which is a new strain that was not previously identifiable in humans.  

Doctors at the WHO explain that, "Coronaviruses are zoonotic, meaning they become transmitted between animals and people.  Detailed investigations found that SARS-CoV was transmitted from civet cats to humans and MERS-CoV from dromedary camels to humans. Several known coronaviruses are circulating in animals that have not yet infected humans." 

The organization notes that common signs of infection include respiratory symptoms, fever, cough, shortness of breath and breathing difficulties. In more severe cases, an infection can cause pneumonia, severe acute respiratory syndrome, kidney failure and even death. 

What WHO does not say is that the virus can lead to a global economic meltdown. The deadly economics of the virus is gradually pulling the world into a downward economic spiral as a growing number of businesses "catch" the bug.


The Economics


With demand falling off as buyers of goods in China and the rest of Asia hold off new orders, production cycles will scale downwards as manufacturers hold back from increasing inventories and fresh spending on inputs (see illustration 1 below).



Illustration 1 The Deadly Economics of Coronavirus

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Murphy's law

Murphy's law states that what could go wrong could get exponentially worse. Meaning that there are no automatic backstops to a viral epidemiological phenomenon such as the Coronavirus. Indeed, recent reports by epidemiologists at Harvard University, USA, supports the notion that the virus could become more pervasive than earlier thought. The scientists believe that the virus may not be containable because many of the people infected will not leave symptoms that will make them easily identifiable, which is the case for some people identified as positive. The ability of people to carry the virus without symptoms reduces the ability for early detection and isolation and increases the risk of spread.

The fact that the novel virus code-named COVID-19 can go undetected with only mild symptoms or no symptoms at all, unlike MERS and SARS, reduces the speed and likelihood of containment. The consequence is that the world, at least for now, will be in a state of mental siege with governments across the globe scrambling to protect their citizens from the virus by locking out people (and products) from other countries. The consequence would be a slowdown in global economic growth, and a fall in employment (as factories see higher inventories and lower sales), lower consumer income and spending, and a  drop in new investments in plant and equipment.    


According to the manager of a Chinese-owned factory located off the Lagos-Ibadan Expressway around OPIC Estate, who requested for anonymity, "we did not go home to China this year for the usual festivities, and we thought it would be wise to cut back on our production a little, but with emerging trends in slower sales orders, it is becoming clear that we need to slow down production to avoid a rise in inventory of our finished products. We must face the obvious fact that we are heading for hard times", said the manager. 

Nigeria has as of Friday February 28, 2020, reported only one verified case of the Coronavirus which was carried by an Italian consultant to local cement company, Lafarge Africa whose Ewekoro plant in Ogun State was placed under quarantine this Friday. The infected consultant had just come in from Milan, Italy when the cement company's observant clinic staff raised an alert that triggered the protocols to transfer the Italian to a predesignated centre for disease management in Lagos (Italy has seen 650 reported cases and 17 reported deaths).

Nigeria's Ministry of Health and Centre for Disease Control (CDC) has moved swiftly to contain the new local incident of the virus and have adopted similar strategies to the country's Ebola virus protocols of 2014 to ensure the safety of citizens (see illustration 2 below for global spread of the virus as of February 28, 2020).  


Illustration 2 Map of Coronavirus Spread Around the World As Of February 28, 2020

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The current virus has had a deadlier impact on the global economy than its Ebola counterpart. The impact of the new so-called "novel" virus on global economic activities could trigger a recession that would slow growth below the International Monetary Fund's (IMF's) outlook for 2020 earlier estimated at +3.3% while emerging markets were forecast to grow at +4.4% (+2.13% higher than Nigeria's recent +2.27% for 2019). Revised IMF forecast for 2020 may place global economic growth closer to +3.0% and emerging market growth closer to +4.1%.


The Oil Price Slide


Riding on the back of sweeping global economic contraction oil prices slid from US$56.3 per barrel at the beginning of the week, Monday February 24, 2020 to US$50.6 per barrel by Friday February 28, 2020. The fall in spot prices for oil may affect future contracts and prices as investors and buyers build-in a CRD, "coronavirus risk discount", into their pricing outlook. The fall in future contract prices could hit countries like Nigeria hard and fast as international oil prices fall below the federal government of Nigeria's budget 2020 benchmark price of US $57 per barrel. A slide in oil revenues would adversely affect the growth in Nigeria's foreign reserves and the capacity of the Central Bank of Nigeria (CBN) to stabilize the exchange rate at a recent N360/US$.

A forced depreciation of the exchange rate will affect the Nigerian economy at different levels and dimensions.


The Nigerian Blowback


A reduction in international oil prices and a fall in oil export volume (as global demand tilts downwards) would lead to a contractionary fiscal and restrictive monetary policy regime in Nigeria. To combat the rise in domestic prices, the CBN would likely increase the cash reserves ratio (CRR) of banks further (currently 27.5%) and raise the monetary policy rate (MPR) back to 14% from 13.5%. And to cover the growing fiscal gap, the government would probably increase its domestic borrowings by issuing fresh treasury bills (T-bills) and bonds as it chases new tax revenues. The effect of government policy would be to raise domestic interest rates and pull loans away from domestic private-sector borrowers. A reduction in loans to the private sector would decrease domestic production and reduce local employment. The CBN and the fiscal authorities may likely find themselves by the end of Q1 2020 in the worse of an alternate world; one in which high domestic prices chase low domestic production.


The consequence of the government policy would be to adjust 2020 economic growth projections down from the last GDP rate of +2.55% for Q4 2019.  A bright outlook for Q1 2020 would see real GDP growth of about +2.1% or 17 basis points below the full year 2019 growth of +2.27%. A less optimistic outlook for GDP growth would put Q1 2020 growth at +1.9%, a lot would depend largely on how badly the Coronavirus spreads in March 2020.


Whatever is ugly could get uglier (murphy's law) and so Nigeria's fiscal and monetary authorities must brace up for a tough and dirty fight to keep the economy stable. A Coronavirus-inspired global economic meltdown will hurt Nigeria's economy badly (international oil prices are already below the 2020 budget's benchmark oil price of US$57 per barrel), while global economic outlook does not look like reversing any time soon. The true test of Nigeria's heterodox fiscal and monetary management in 2020 appears prepped for a real match.


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