Una crisis, respuestas múltiples: revisión del impacto económico y respuestas a Covid-19

DISCLAIMER: The views expressed herein are those of the presenter and they do not represent the author's employer.  

Exploring the Global Impact of the pandemic: “The IMF World Economic Outlook, The Great Lockdown”

The coronavirus pandemic is having a major economic impact worldwide. Households and businesses have been required to enter into a lockdown in order to prevent the spread of the virus and allow health systems to cope with the crisis. 

Indeed, under the assumption that the pandemic, when contained, peaks in the second quarter in most countries in the world, and then recedes in the second half of the year, the International Monetary Fund is projecting “global growth in 2020 to fall to minus 3 percent, a downgrade of 6.3 percentage points from January 2020, a major revision over a very short period. This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis”. 

According to Guido Sandleris, Research Professor at the University Torcuato Di Tella and former Central Bank President of Argentina, this crisis has two distinctive characteristics compared to other crises. First, it occurs at a very fast pace, the contagion, the economic collapse and the public policy responses. Second, there is an unprecedented global simultaneity in the economic collapse. In this sense, it is a truly global crisis since no country has been spared from infection. The shock is indeed large and as the IMF highlights, “there is continued severe uncertainty about the duration and intensity of the shock”.  

The main consequences on the economy: the “Double Shock” explained by Guido Sandleris, Federico Furiase and Martín Vauthier on the University Torcuato Di Tella Talk.  

According to the economists Federico Furiase and Martín Vauthier, both professors of finance of the University Torcuato Di Tella, and Guido Sandleris, due to countries being in lockdown, there has been a contraction on the level of economic activity worldwide. This pandemic has thus brought an unprecedented shock in supply, which in turn has produced a shock in demand: workers have lower earnings and consumers react in a cautious manner towards this unprecedented situation. This has resulted in a combined shock in a context where financial equity market prices were at their highest. This disruption in supply and demand leaves companies without liquidity and increases the likelihood of bankruptcies, exacerbating an economic contraction spiral.  

As Federico Furiase and Martín Vauthier highlight, countries are facing a trilemma between the economy, health and individual liberties. When governments prioritize one of these factors, there is one that suffers. Governments that tend to protect the economy and the health system do this in detriment to individual liberties. Governments are therefore managing risks among these three factors and choosing the most optimal solution in order to reduce the spread of the virus, while attempting to minimize the cost and impact on the economy and individual liberties.  

The Common economic responses to the Covid-19 crisis explained by Guido Sandleris, Federico Furiase and Martín Vauthier on the University Torcuato Di Tella Talks

In this context, governments know that they cannot tackle the shock in supply since this is a consequence of the containment measures which aim to prevent the spread of the virus and the saturation of health systems. Governments can nonetheless mitigate and moderate the disruption in demand and stabilize financial markets in order to reduce the impact and scope of the economic instability and increase the likelihood of a progressive recovery. In this sense, governments have been mainly implementing two types of economic responses to break the economic contraction spiral and tackle the curve of recession:

Fiscal policy (highlighted by Guido Sandleris)

1. Increase health spending;

2. Provide money transfers to citizens and workers; 

3. Provide credits and money transfers to businesses and most affected sectors of economy.

Monetary policy (highlighted by Federico Furiase and Martín Vauthier)

1. Reduce interests rates;

2. Enlarge the balance sheet of Central Banks by buying treasury bonds and injecting liquidity in the credit market so that credit channels are not interrupted. 

The amplitude of these responses have depended nonetheless on the pre-crisis economic financial health of governments. Advanced economies have thus a larger fiscal and monetary room for action while emerging economies face a combination of the impact from the virus, isolation, poverty, labor market informality and economic distress. Indeed, as the IMF highlights, “advanced economies with strong governance capacity, well-equipped health care systems, and the privilege of issuing reserve currencies are relatively better placed to weather this crisis”. Meanwhile, other countries, such as some emerging market countries, are facing a “a multi-layered crisis comprising a health shock, domestic economic disruptions, plummeting external demand, capital flow reversals, and a collapse in commodity prices”. Shutdown due to the Covid-19 pandemic has exacerbated developing countries’ financial problems and has hit them very hard. This can be particularly seen as a result of four main factors explained in further detail below.

Debt explained by Simon Cox on The Economist Podcast

As Simon Cox, Emerging Markets Editor of The Economist, explains, advanced economies can undertake large levels of debt at low borrowing costs and they can sustain these levels of debt comfortably. Investors think of these bonds as “safe haven assets” and they are eager to invest in them. Advanced economies can afford borrowing large sums of money at low rates and usually dominate in their own currencies. 

Some emerging markets are in this same category and can indeed borrow at low rates. But as Simox Cox mentions, there is another group of emerging economies where investors are often reluctant to hold debt in their own currencies. They want to hold debt in euros or in dollars only. These countries can therefore only sell bonds in other currencies. Furthermore, if the exchange rates plummet, debts are harder to hold and pay. Investors may then become worried and start asking for higher risk premiums to hold this debt. As a result, for these countries, it becomes harder and harder to pay their dues. This has been the case for countries such as Argentina, Ecuador, Lebanon, Zambia, among others.  

Dependence on commodities exports and remittances explained by Francis Perrin on France Inter

Strict lockdowns have a severe damaging effect on the production and global demand of exports, causing a drop in the export revenue and remittances. As highlighted by the IMF, commodity exporters are facing growing pressure on their public finances and on real economic activity. This is the case particularly for oil exporting countries which face “the collapse of oil prices, stirred by the pandemic and the Saudi-Russia price war”. 

Countries like Iran, Angola, Venezuela, Iraq, Nigeria and Algeria could find themselves without liquidity. According to Francis Perrin, if oil is an important resource in the economy and provides countries with a large share of their budget revenue, and the prices collapse, it can affect all services of the State. These countries would become unable to provide basic needs to their population, leading to popular discontent and further distress. Indeed as mentioned by Neil Edwards, “low crude prices threatens the economic stability and spending budgets of most oil-producing countries”.    

In Algeria, the fall in prices has also led to a shortfall in the revenues of the state. In this country, 95% of external revenues are obtained from the export of hydrocarbons (oil and gas), in a context where Algeria is just reaching the first year of the Hirak protest movement.

In Nigeria, a member of OPEC, its reserves decreased from 45 billion in 2019 to 36 billion in early March. Oil accounts for over 90% of exports, a third of banking sector credit, and half of government revenues in the most populous country in Africa. Due to this situation, S&P has downgraded Nigeria’s long-term rating to B- due to a weakening external position tied to a sharp fall In oil prices. 

 

In Venezuela, American sanctions, no reserves, reduction in oil production, in addition to an already existing social and economic crisis, has resulted in extreme economic difficulty for this country.

Informal workforce explored by the OECD, the Swedish International Development Cooperation Agency (Sida) and the ILO

As the IMF states, “factors like informality make it much harder for any country that has to deal with this crisis”. According to Anders Gerdin and Alexandre Kolev, “the outbreak and spread of COVID-19 is having and will have a disproportionate impact on informal economy workers across the world, especially in developing countries, where they represent about 70% of the workforce. Many of these informal economy workers are poor and most lack labor, social and health protection”.

As Florence Bonnet from the International Labor Organization highlights, “for many people in the informal economy, to stop working or working remotely at home is not an option”. Informal workers have to work “no matter what” to maintain a basic earning and face several challenges:  they work in precarious conditions in terms of health and safety, often without proper access to water and sanitation. They face, as the ILO confirms, the impossible choice between prevention and starvation. 

The confinement measures have also had an effect on the demand of their workforce since customers have disappeared and continue to avoid public spaces. As highlighted by Anders Gerdin and Alexandre Kolev, informal workers are exposed to a twofold risk: income and health with a low capacity to mitigate either of these. 

In addition to this, certain sectors of the informal economy are particularly hit by this health crisis, including wholesale and retail businesses, agriculture, domestic work, clothing, leather, carpentry, transportation, catering, hairdressing, and beauty salons, among others.   

 

Youri Tabet, contributor on Policy Shift, has further explored the different social responses of various governments to the Covid-19 crisis and the differences between advanced and emerging economies in the following article.   

Fitch Solutions on precarious healthcare systems and lack of medical equipment 

As the article “Emerging Market Healthcare Systems Poorly Positioned To Tackle Covid-19 Pandemic” from Fitch Solutions highlights, “generally, the more developed healthcare systems in Western Europe and North America are better positioned to treat the high volume of patients owing to a higher number of hospital beds, doctors and nurses per capita”.

However, Fitch mentions that “the less developed nature of healthcare systems in emerging markets alongside a lower fiscal capacity to implement similar measures makes them more vulnerable to the outbreak. Indeed, amongst developing states there are notably fewer healthcare resources per capita versus developed counterparts”. Fitch also expects that it will be more difficult for emerging countries to test, diagnose and contain the virus since it demands institutional strength and healthcare access which are usually poor in these countries. This could be exacerbated by the size of the population and the lower levels of health care services in rural areas. 

Multilateralism as a key response

Ensuring the proper use of resources, time and effort is crucial during the current context. Multilateralism can therefore play a vital role. Multilateral institutions can share resources such as equipment and expertise to improve health systems worldwide, while also providing financial assistance to emerging markets and low income countries which are at risk. The G20 for instance, has delayed collecting payment debt from poorer countries to provide them with some breathing room to fight the economic consequences of Covid-19. The African Development Bank president Akinwumi Adesina, has highlighted in a recent interview with the Financial Times, his support for this initiative since it provides least developed countries with much needed fiscal space.

Countries will need to cooperate together to fight against Covid-19 and avoid further financial distress and contagion and to ensure that therapies and vaccines are developed for both rich and poor nations. It will be the individual action of governments, civil society and the private sector, as well as the joint action of the international community, that will help to overcome this crisis and find common responses to the many diverse consequences of this global pandemic. 

 

Policy Shift has contributed to this debate by analysing the impact of the Covid-19 on the Sustainable Development Goals and the various responses developed by different actors in the following article. 

Sources

Anders Gerdin, Swedish International Development Cooperation Agency (Sida), and Alexandre Kolev, Head of the Social Cohesion Unit, OECD Development Centre, “Why protecting informal economy workers is so critical in time of COVID-19”, 17 April 2020. 

Financial Times Interview, “Covid-19 and 'Locust-19' threaten perfect storm for Africa”, African Development Bank president Akinwumi Adesina speaks to the FT's Vanessa Kortekaas about the impact of the coronavirus crisis on African economies, debt relief and how countries can recover from this pandemic, 15 May 2020. 

Fitch Solutions, “Emerging Market Healthcare Systems Poorly Positioned To Tackle Covid-19 Pandemic”, Wednesday 22 April, 2020.

Florence Bonnet, International Labour Organization, “Rapid assessment of the impact of COVID-19 on enterprises and workers in the informal economy in developing and emerging countries”,  28 April 2020. 

France Inter, “Arabie Saoudite, Irak, Venezuela... les pays exportateurs de pétrole fragilisés”, Invités: Francis Perrin, Directeur de recherche à l'Institut des relations internationales et stratégiques (IRIS), chercheur associé au Policy Center for the New South, spécialiste des questions énergétiques et Christian Chesnot, journaliste à la Rédaction Internationale de Radiofrance. Mardi 5 mai 2020

Hortense GOULARD, Les Echos, “Le Nigéria en première ligne face à la chute des prix du pétrole", 10 mars 2020. 

IMF, “World Economic Outlook, April 2020: The Great Lockdown”, April 2020.

iReMMO, “Crise sanitaire, crise pétrolière - Entretien avec Francis Perrin”, Mardi 28 avril 2020. 

Neil Edwards, Forbes, “What Negative Oil Prices Mean To The Top Exporting Countries”, April 21 2020

Rabah Arezki et Ha Nguyen, Banque Mundiale, “Faire face à un double choc : Covid-19 et prix du pétrole”, 14 Avril 2020

Universidad Torcuato Di Tella: "Pandemia, macrofinanzas y respuestas a la crisis global", Participantes:  Guido Sandleris, Profesor investigador, UTDT . Expresidente del BCRA y Nicolás Merener, Decano de la Escuela de Negocios, UTDT . Lunes 30 de marzo. 

Universidad Torcuato Di Tella: “Contexto Macro bajo los efectos de la COVID-19”, Oradores: Federico Furiase, Profesor en la Maestría en Finanzas,  UTDT y Martín Vauthier, Profesor en la Maestría en Finanzas, UTDT , Moderadora: Guadalupe Sanz. Directora ejecutiva de la Maestría en Finanzas, UTDT . Miércoles 29 de abril.

Yahia H. Zoubir, The Conversation, "Why, after one year, protests continue to rock Algeria", 12 March 2020.