The COVID-19 virus, which has brought economic activities in one of the World’s largest economies, China, to a standstill could trigger a global economic recession if measures are not put in place to curb the outbreak as soon as possible, Executive Director of Financial Market Sales at Standard Chartered Bank Ghana, Mr Jojo K. Bannerman, has said.
He said the virus was impacting the World differently from the way other previous outbreaks have, due to the importance of China to the global economy. China now accounts for c.20% of global GDP versus c.9% during the SARS outbreak of 2003.
Mr Bannerman was speaking in an interview with the Daily Graphic on the economic impact of the COVID-19 virus.
“I agree 100% that if the outbreak becomes a global pandemic, which is the worst case scenario, then clearly we are likely to experience a global recession,” he stated. The virus has now infected about 88 countries outside of China.
Commenting on how a possible global recession would affect Ghana, he said “while we may not experience a recession in Ghana, we are likely to experience lower growth output.”
“Already, oil makes up about 6% of the country’s revenue. The forecast in the 2020 budget for Brent Crude was around US$62.6 and its now selling below US$32 due to the outbreak of the virus which has reduced demand for oil products and compounded by an increase in supply from Saudi Arabia as a result of Russia’s refusal to reduce oil production. Hence there is potential impact on government’s oil revenue which may result in lower growth in the oil and gas sector and may also translate into a lower industrial growth,” he explained.
Global market volatilities
Highlighting the impact of the virus on global market volatilities, he said US and European economies were hugely impacted by trade activities in China, c.40% imports from and c.27% exports to China, and as a result stock markets in the US and Europe were beginning to lose significant value.
“The price of oil also fell below US$40 per barrel for the first time since 2016 and we are seeing the impact across various commodities,” he noted.
Cocoa prices fell c.12.6% year to date from 2,898 to 2,530 USD per metric tonne while Gold prices have increased by c.10.6% from 1,517 to 1,678 USD per troy ounce. The entire US Treasury yield curve has fallen below 1% for the first time in history and emerging market Eurobonds have lost significant value. The Ghana 2061 Eurobond which was recently issued at 8.75% coupon is quoted on the secondary market at a yield of c.10.2%.
South African Rand has been the most impacted Sub-Saharan currency having witnessed a c.13.8% depreciation against the US Dollar since the beginning of the year from 14.00 to 15.93. The volatility in Rand is due to multiple factors including the fact that South Africa accounted for c.22 % of imports between China and Sub-Saharan Africa, while Nigeria, Kenya, and Ghana accounted for c.18%, c.7% and c.6.5% respectively based on data from World Integrated Trade Solution in 2018.
Disruption to supply chain businesses
Mr Bannerman also pointed out that the outbreak of the virus had caused a disruption to global supply chain businesses.
“We have companies in Ghana who have goods locked up in China that they cannot import. They have paid for the goods but the delay in shipping will naturally have an impact on their cash flow.
“There are companies in Ghana who have equipment that need to be installed however the specialist are Chinese who are under quarantine hence they can’t set up their infrastructure”.
“There are manufacturing companies setting up factories and plants in Ghana with the people from Asia, Europe, and Americas not able to travel into Ghana to manage the manufacturing process.” he explained.
He said a lot of businesses were being affected because they were not able to get new stock from China.
He noted that, for a country like Ghana, who imports a lot from China, companies would soon begin to run out of stock if they did not find alternative markets to import from immediately.
This, he said could also lead to higher demand for the limited stock that would be available, potentially leading to higher prices and possibly spilling into higher inflation.
He said other aspects of businesses have also been affected such as trade shows in the US and other countries which have been canceled.
“In Italy, fashion shows have been canceled. Football games have previously been cancelled with authorities now contemplating playing games behind closed doors,” he said.
Opportunities for local industries
Mr Bannerman also noted that the inability of Ghanaian companies to import from China at the moment could also serve as a huge opportunity for local industries.
“Areas of Agri products, clearly allow for the local industry to take advantage of the opportunity and increase production to meet demand,” he stated.
He said although the country may benefit in terms of stabilization of the cedi due to lower imports, this was not sustainable in the long run.
“It is not really a benefit because the global volatilities we have seen in other countries have not started in Ghana and if it should start, we will see volatilities in the foreign exchange rate as well. This is because some offshore investors may repatriate investments from the country as they have done in other Asian countries,” he explained.
Companies must begin to engage bankers
Mr Bannerman advised Ghanaian companies to start engaging their bankers on the impact the virus could have on their businesses.
“If there is a slowdown in economic activities it will result in lower consumer spending. Lower consumer spending may mean that companies who have borrowed from banks may have to go and renegotiate longer financing terms, if not we may end with an increase in non-performing loans,” he stated.
“Even after the outbreak is curbed, it may take companies a bit of time to recover their production cycle so clearly the economic impact is no longer a 2020 quarter one only as it will spill into a quarter two,” he added.
Standard Chartered Bank