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The economic fallout from the coronavirus pandemic: Bangladesh and beyond
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The economic fallout from the coronavirus pandemic: Bangladesh and beyond

Coronavirus Pandemic (COVID 19)- A Bad Message For The World Economy

The outbreak of COVID-19

The world today is jeopardized by the rapidly globalized outbreak of COVID-19 – a disease caused by the novel coronavirus (SARS-nCov-2). When infected by COVID-19, a person suffers from the severe acute respiratory syndrome, which as of today remains non-curable due to non-existence of a specific vaccine or medicine. The outbreak began from Wuhan – an industrial city of Hubei province in China during late December 2019. Given the scale and span of the outbreaks across countries in just about three months, the World Health Organization (WHO) declared it as a pandemic on 11 March 2020.

Coronavirus update (as of 8th April 2020)
Figure 1: Coronavirus update (as of 8th April 2020)

The number of infected cases across 200 countries and territories has crossed one million marks, with a death-to-case ratio or fatality rate of about is 5.7% as of 8th April 2020.

Top 10 affected countries
Figure 2: Top 10 affected countries

The chart shows the top 10 countries in terms of the number of infected people, with the US, Spain, and Italy at the top as of 8th April 2020.

The top 3 countries as per death-to-case ratio are Italy (13%), the UK (11%) and Spain (10%)

A snapshot of the global economic shock

The pandemic is producing an economic meltdown on a global scale. Lives of people including economic activities, cultural practices, and social habitation are disrupted. According to many economic experts, the coronavirus outbreak will not only be responsible for human death counts but also for bankruptcy of millions of people and plenty of organizations worldwide. Thus, the COVID-19 pandemic is set to result in an economic and financial pandemic at the world level. The likely global economic shock of the pandemic is wide-spanning, complex, and enormous; and thus is difficult to capture in a simple framework. One way is looking at the effects on different economic sectors or indicators that constitute the overall economic shock. The likely global economic shock can be viewed as a combination of shocks in five broad categories of economic activities or indicators:

Global economic effects of COVID-19 pandemic
Table 1: Global economic effects of COVID-19 pandemic

Table 1 portrays high adverse observed impact on global demand, supply, and trade & supply chain. However, it’s expected that the situation would be improved by the end of 2020 and June 2021 especially due to either resumption of economic activities embracing a ‘new normal’ alongside the development of an effective COVID-19 vaccine. Observed impacts so far are moderate for financial markets, commodity markets, and welfare. However, commodity markets and economic growth indicators could worsen by the end of 2020 and could take up to mid-2021 to recover.

Demand and supply shocks

Unlike the known historical financial and economic crises, the COVID-19 pandemic is producing both aggregate demand and aggregate supply shocks globally. Aggregate demand in China and Hong Kong combined is reduced by 4% in the Q1 and 2% in the Q2 of 2020, reflecting sharp declines in both investment spending and private consumptions (OECD, 2020). This is primarily driven by non-essential demand falls, such as automobiles and non-essential shopping (Jones et al., 2020, March 22; Santos, 2020, March 23). Retail shopping of essential goods and consumables has increased, resulting in empty retail shelves and emergence of ‘daigou’ shoppers across the world including China (Greg, 2020, March 20; Zoe, 2020, March 21). Demand in China and across economies is also affected by reduced demand for transportation, restaurant, travelling and tourism, and cinemas as people maintain social distancing and lockdown at homes, while increased demand for internet usage as people stay home. Demand slowdown is further aggravated by rising unemployment as a result of the pandemic. During the pandemic about 701,000 job cuts took place in the US that is reported by the US Labor Department (Reuters). The leisure and hospitality sector shed the most (about 65%); of which the largest share (91%) came from restaurants and bars.

Demand is also declining in the international market. While Chinese import demand for medical supplies increased, overall import demand of China decreased by 2.9% from January 2019 to January 2020 (ITC, 2020). The International Energy Agency (IEA, 2020) suggests that as China is the world’s largest oil importer in the world, global oil demand is likely to fall by 435-kilo barrels per day (kb/d) year-on-year in the first quarter of 2020 (the first quarterly contraction in more than 10 years) and demand growth in 2020 could fall by 30.7% to 825 kb/d (the lowest since 2011).

The COVID-19 pandemic is causing a severe aggregate supply slump globally, driven by production shocks across economies including China. Latest data and reports show a substantial decline in industrial and services output across major economies. For example, China’s official Purchasing Managers’ Index (PMI) fell to a record low of 35.7 in February from 50.0 in January, according to the country’s National Bureau of Statistics, which is well below the 50-point threshold and indicates a significant level of contraction in factory and production activities (CNBC, 2020, February). Other different PMIs of China also show similar signs; for example, the Caixin manufacturing PMI sank to 40.3 in February is down from January’s 51.1 and the lowest reading since the survey began in 2004. Similarly, the official non-manufacturing (i.e., services) PMI measuring the services sector skidded to 29.6 in February from 54.1 in January (He, 2020, March 2).

Changes in Purchasing Managers’ Index of major affected economies
Figure 3: Changes in Purchasing Managers’ Index of major affected economies; Source: Barua (2020)

Analysts and economists globally warn of a downturn in output for the rest of 2020 for all the affected economies worldwide leading to a global slump in manufacturing and services output. Figure 3 shows the latest available PMIs of major economies compiled from different sources. It clearly shows that economic activities throughout major economies face a great slump. Being an epicentre of the pandemic, business in the whole of Europe is collapsing like China. In March 2020, the flash Eurozone PMI declines to 31.4 from 51.6 in February, which is the record low since July 1998 and the manufacturing PMI stands at 39.5 compared to 48.7 in February (lowest in 131-month); similarly, the flash Services PMI is 28.4 falling to half of 52.6 in February (a record low since July 1998), while Manufacturing PMI stood at 44.8 from 49.2 in February – a 92-month low. Similar negative dive of all PMI indexes are observed in the US economy. While global production and supply will continue to see slump through 2020, it may see a slight recovery in mid-2020.

Trade and supply chain shock

According to WTO (2020a) estimates, world merchandise trade in 2020 is set to plummet by 13% (optimistic case) to 32% (worst case) due to the pandemic, a magnitude much larger than the Global Financial Crisis (2007-08). Latest data support the estimate; the WTO’s Goods Trade Barometer stands at 95 in December 2019 (benchmark 100), lower than the previous reading of 96.6 in November, signalling likely weaker trade volume growth in early 2020 (WTO, 2020a).

Trade effects are primarily the results of global supply chain shock, particularly of production shock in China. As per global statistics, During the last two decades, China has become crucial to the global economy, as the country occupies 60% of world supply and demand (GDP), 65% of world manufacturing, and 41% of world manufacturing exports (Baldwin & di Mauro, 2020). The recent downturn in China’s manufacturing orders from abroad and shut down plenty of factories in China, makes the country remarkably affected. The major consumers like the US and the EU and the UK will likely to restructure their portfolio of sourcing of manufacturing products, and it would result in a dramatic change in the global manufacturing scenario. Almost one-third of companies in China’s southern manufacturing hub is facing a supply shortage as the coronavirus takes its toll around the world, a survey of companies showed. The survey by the American Chamber of Commerce in South China also showed that 15% of the 237 companies which took part in the survey conducted from March 9 to 14 said they had already run out of some supplies (business insider). A slump in the supply chain is manifested in significantly constrained goods shipped from China and worldwide. According to Agility – a global supply chain technology firm, 46 out of 47 countries monitored have reduced capacity where 25 have constrained or significantly constrained capacity, as of April 9, 2020. Figure 2 shows the RWI/ISL Container Throughput Index, which accounts for 60% of global container shipments through 89 international ports, dropped significantly since December 2019, with a recent fall by 10.9 in February from 115.4 points in January 2020. The fall indicates a major reduction in international port and shipment activities, which is expected to aggravate further.

RWI/ISL Container Throughput Index, July 2019 to February 2020
Figure 4: RWI/ISL Container Throughput Index, July 2019 to February 2020; Source: Barua (2020)

There are reports suggesting Mexico’s potential to grab market shares of China, mainly because of geographical proximity and similar or lower production and transportation cost. According to a Foley & Lardner LLP’s 2020 International Trade and Trends in Mexico survey (released on February 2020) of 160 executives from across manufacturing, automotive and technology sectors said they intended to move the business to Mexico from other countries and they plan on doing so within the next one to five years. There will be fallout, likely in the form of FDI being redirected south of the Rio Grande, says Sebastian Miralles, managing partner at Tempest Capital in Mexico City.

Financial markets shock

Markets globally regressed substantially in response to the ongoing pandemic. From stock markets indices to yield of government senior bonds, all asset classes tumble rapidly. The following charts better illustrate the contemporary economic shock worldwide. Top 9 indices underperformed substantially from the first day of 2020 that accounts between -33% to -10%, of which the Russell 2000 regressed most (a drop of 33%) and the Shanghai Composite regressed least (a drop of 10%). Investors around the world face the fear of a probable global recession that is somewhat reflected by the massive correction of the global bourses.

Global Equity Markets’ Indices
Figure 5: Global Equity Markets’ Indices; Source: Bloomberg

The US Federal Reserve Bank lowered its target for the federal funds rate; the benchmark for most interest rates to a range of 0% to 0.25% on March 15, 2020. The US 30-year Treasury Yield experienced a massive rate cut that has been triggered by the FED as a mean of monetary stimulus for the US economy; signals financial instability of the global economy.

A sluggish in the Yield Curve of the US treasuries
Figure 6: A sluggish in the Yield Curve of the US treasuries; Source: RIL developed based on US treasury department’s data

Commodity market shock

The pandemic ravages world market for major commodities, e.g., crude oil (Brent), Gasoline, Metal, Steel, and Gold. The global commodity market giants, e.g., Saudi Aramco, Chevron, Conco Philips, and Arselor Mittal have rolled out production and supply cuts of commodity products as they forecast further fall in demand worldwide. The oil market particularly faces debacle due to the recent change in Saudi Aramco’s production cut announcement. There is a chance that the Gold market will be in trouble since China is the top player in global gold production. In 2018, China produced 404 tonnes of gold, which accounts for 11.5% of the world’s total gold production. The case is similar for Crude steel production as China holds the top market share (51% of world supply). As the US is the largest extractor of natural gas (766,200-million-meter cube per year), the US gas extraction companies are likely to face drastic demand cut, resulting in a significant production cut this year. The following charts of major commodities better illustrate the ongoing crisis of the markets:

The global crude oil price slumped from $50 to $28 per barrel
Figure 7: The global crude oil price slumped from $50 to $28 per barrel; Source: Bloomberg

The world may soon run out of space to store its extra oil as Saudi Arabia prepares to increase its fossil fuel production even as global demand for energy continues to fall due to the Covid-19 pandemic. Oil storage levels across the world’s storage facilities have climbed to about three-quarters full on average since January shutdown of major refineries in China’s industrial heartlands.

Global Crude Steel Production is being plummeted since December 2019
Figure 8: Global Crude Steel Production is being plummeted since December 2019; Source: Worldsteel

Global steel production is in a negative trend from December 2019.

China experienced a steep fall in steel production with the ongoing COVID-19 pandemic effect

Cotton prices hit ten-year low on uncertainty over coronavirus
Figure 9: Cotton prices hit ten-year low on uncertainty over coronavirus; Source: Trading Economics

The exchange determined price level of cotton plunged from mid-February 2020, coupled with an increased degree of variability

Growth shock and possible recession!

Implications by GDP Components
Figure 10: Implications by GDP Components

The OECD estimates that global GDP for 2020 would drop to 2.4% from 2.9% YoY. The monetary loss as per the best-case scenario would be $77. This sluggish trend in growth undoubtedly would lead to a massive cut in consumption and investments that influences poverty and unemployment. Although some leading countries the US, the UK and China are pursuing the Keynesian Economic model i.e. monetary stimulus by pumping billions of dollars into the financial system, it would be tougher to integrate the approach with smoothing international trades and fiscal expansion.

Global GDP growth of 2020 would be plunged by 17% (from 2.9% to 2.4%) YoY
Figure 11: Global GDP growth of 2020 would be plunged by 17% (from 2.9% to 2.4%) YoY

Economists worldwide agree that the coronavirus pandemic will push the world to a deep recession, and then possibly to depression. While economic and financial data sets take some time to be gathered, many economists concur that the recession is already happening. Some economists infer that this pandemic is much more dangerous than the 2008-US subprime mortgage driven recession. The recession is unique in the sense that the pandemic produces negative shocks to both global demand and supply, stretching the world economy in a stagflation trap. Many economists agree that traditional monetary or fiscal policies may not be enough to prevent or survive the looming recession. In general, massive supports to both demand and production will be necessary to restore the global economic equilibrium, and this might take one or more years after the pandemic is over.

The effects of COVID-19 pandemic on Bangladesh economy

The coronavirus pandemic was confirmed to have spread to Bangladesh on March 2020. The first three cases were reported by the country’s Institute of Epidemiology, Disease Control and Research (IEDCR) on 7 March 2020. Up to 29th March 2020, the Government of Bangladesh has confirmed there is a total of 48 confirmed cases, 15 recoveries, and 5 deaths in the country. The low number of positive cases and deaths were attributed to low testing in comparison to other countries.

The pandemic would hit Bangladesh economy under the following categories:

  • Aggregate demand and supply
  • Trade and supply chain
  • Financial market
  • Commodity market
  • Growth shock

Trade and supply chain shock

The pandemic is has forced the country’s production and supply chain to practically come to a halt. If the pandemic situation lingers any longer, it might substantially affect the country’s industrial supply chain which relies heavily on a Chinese import. Fashion clothing and apparel are one of the largest hit in the world, as demand plummets according to Bloomberg. Bangladesh is likely to face a dire consequence as a result of this since the country’s 80% exports revenue is generated from Ready-made Garment (RMG) exports. Bangladesh to see a large decline in exports as RMG exporters face an unprecedented cancellation of about 85% of previous orders from buyers across the world, especially from the EU, the US and the UK. The value of RMG export orders cancelled or put on hold by global buyers due to the worldwide coronavirus outbreak neared $1.5 billion, according to BGMEA data. A total of 1,089 factories informed the BGMEA about order cancellation or shipment delay notices they had received from the buyers. It’s assumed that the buyers would not be involved with the buying activities as long as the pandemic continues and even months after the pandemic is over. Bangladesh’s exports earnings, according to Bangladesh Bank statistics, fell by 4.9% in the first eight months of the current fiscal year to $26.24 billion from $27.56 billion in the same period of the previous fiscal year.

On the other hand, imports are also dropping significantly due to a fall in local demand for non-essential goods, intermediate goods, and capital machineries. Demand for non-essentials sharply fall as people tend to save for an emergency or consume up to their existing savings for during lockdown, and millions lose jobs and income due to country-wide shut-down.

From RMG industry to computer accessories; from the light engineering industry to heavy manufacturing industry, all will be under a great threat due to the disruption of supply chain triggered by the coronavirus pandemic. The prolonged lockdown effect results in a significant cut in trading activities inside and outside the country. Besides, many experts, engineers and workers are employed to the implementation of the mega projects taken by the government aren’t workable for nowadays and the major raw materials of these projects are in a position of a halt as there is no communication between the countries which will increase the project completion time to an unknown end.

Bangladesh export growth was 5% negative till Feb 2020 & the sluggish continues
Figure 11: Bangladesh export growth was 5% negative till Feb 2020 & the sluggish continues; Source: The Financial Express BD

Financial market shock

The International Chamber of Commerce Bangladesh’s president Mahbubur Rahman in a press release issued on the day urged coordinated action from the government and businesses to agree on an overarching policy framework in the face of growing uncertainty and volatility to overcome this impending danger. The banking sector will be in big trouble due to the lockdown effects. The halt of business activities will squeeze the balance sheets of the large corporates. The country’s SME sector will suffer the most as those businesses are less capital intensive and thus vulnerable to revenue and cash flows to survive. Therefore, banks having large lending exposure to the SME sector will be affected severely. Besides, banks may be further affected by the slump in remittances & exports. The country’s stock market has been normally tumbling since the breakout introduces in March 2020, which is aggravated by the pandemic effects (Figure 13).

DSEX plunged by 10% with a daily standard deviation of 2.39%
Figure 13: DSEX plunged by 10% with a daily standard deviation of 2.39%; Source: RIL developed based on exchange data

From the beginning of 2020 DSEX is in a declining trend (a drop of 10%) with a trigger sell by the institutional investors and panic sell by the retail investors. In March 2020, when the coronavirus outbreak took place the market plunged by 9%.

The daily standard deviation was 2.39% throughout the year refers to a greater risk to the investors.

A meltdown of DSE Market Capitalization and Trading Frequency
Figure 14: A meltdown of DSE Market Capitalization and Trading Frequency

The country’s leading bourse has plummeted with a drop of 8.2% market capitalization of the listed securities since January 2020 to date. Since February to date, aggregate market capitalization fell by 8.5%, especially during the tenure of the coronavirus outbreak in the country. Trade experienced a substantial reduction by 25.1% during the period, mainly driven by the spread of panic among investors. In the mid of March, 2020 Bangladesh Securities & Exchange Commission (BSEC) set a floor price of the bourse as a measure of tackling the free fall of indices, however, its efficacy remains in question.

Commodity Market Shock

The pandemic will adversely affect major commodities’ production locally. Major agricultural commodities like Rice, Wheat and Potatoes are in a supply shortage at a higher demand. The shortage of supply is induced by the shortage of farmers and labors due to the lockdown effect. Local producers of rice, wheat, sugar refineries, and salt are in labor and working capital shortage due to the lockdown effect. The retail prices of the agricultural commodities are already soaring as there is a shortage in supply in compared to the demand. In addition, as there is no import of seeds, pesticides and other necessary agro production ingredients, local producers or farmers may be in shortage of raw materials supply for their cultivation that may create a national food crisis.

Growth Shock

The ongoing pandemic is very likely to be responsible for the prolonged delay of development projects in Bangladesh that would lead to a higher cost of capital to our country. Thereupon, our expected GDP growth rate for the fiscal year 2019-20 would substantially deviate that might have an adverse impact on our country’s credit rating and risk profile. More than the public sector, the private sector will face a catastrophic situation including production halt, delay in payments, aged debtors, non-performing loans, working capital difficulties, capital shortfall, erosion of market capitalization of stock exchange-listed companies, unemployment and so many economic events.

Implications by GDP Components
Figure 15: Implications by GDP Components
  • Consumption:

    With the country locks to fight the pandemic, almost all economic activities have stopped. Transportation, shopping malls, banking, stock market, manufacturing etc. are closed up to 11th April 2020. Due to shutdowns, consumption and production drop in them drastically. People possess lesser money for spending and eats up savings, as income drops or become due for the wage earners and businesses. Thus, aggregate demand falls, influenced by the cash crisis that led to a reduction of consumer spending ultimately.

  • Investment:

    Investment activities in both public and private sector stops. Private sector investment and lending are lying in the worst position, causing squeeze in balance sheets at a rapid pace for some businesses. These halt in investment activities would cut the GDP growth forecast for the FY2019-20.

  • Government Spending:

    Government spending has been injured seriously due to this pandemic. The megaprojects taken by the government is supposed to be delayed to complete due to the broad adversity of the pandemic. From the capital budgeting perspective, it’s likely that the Internal Rate of Return (IRR) and the cost of capital of the projects would be increased that makes the projects’ Net Present Value (NPV) unattractive. The government is currently looking for borrowing from international agencies such as the International Monetary Fund (IMF) to support the emergency economic stimulus package and the fight against COVID-19.

  • Net Export:

    COVID-19 is a worldwide issue; RMG buyers from the US, the UK and the EU cancelled a significant volume of buying orders that makes the RMG industry in big trouble. More than $2.6 billion of orders in Bangladesh’s RMG sector has been cancelled within the past couple of weeks. RMG comprised 84.2% of Bangladesh’s total exports worth $40.5 billion in the FY2018-2019, (Bangladesh Garment Manufacturers and Exporters Association (BGMEA)). Of the sum exported, more than 60% of the garments were shipped to the EU. These cancelled or delayed orders could lead to serious problems for Bangladesh, where RMG factories are likely to struggle to pay some 4.1 million workers in the sector, who already earn very low. Raw materials import have been totally stopped that have much adverse impact on the sustainability of the local manufacturing industries. Inward remittances have experienced a steep fall and the FOREX activities went down which will worsen our foreign exchange rate. Overall, the trade deficit will rise which will damage the country’s financial strength and fiscal efficiency. This comes with increased challenges for refinancing trade deficit.

COVID-19: A Special note on Bangladesh capital market implications

The risk to the investors due to the ongoing pandemic belongs to the poor financial performance of the listed companies which will lead to variability in profits and cash flows. The following table illustrates the potential impact of the ongoing pandemic for the listed sectors and/or companies.

Potential financial performance impact of COVID-19 on DSE listed securities
Table 2: Potential financial performance impact of COVID-19 on DSE listed securities
Potential financial performance impact of COVID-19 on DSE listed securities
Table 2 (contd.): Potential financial performance impact of COVID-19 on DSE listed securities

For the ongoing crisis, industries like Travel & Leisure, Hotel, Transport, RMG, banking & finance will be highly affected due to their nature of business and revenue models. Besides, some industries like pharmaceuticals, healthcare and social security would be benefited as those industries are working for alleviating the pandemic. The scenario of the country’s High Powered Money (Cash and most liquid deposits) would be dramatically changed as people and corporations are in the position to survive with liquidity. Although in naked eyes, the industries’ consequences can be drawn narratively, it’s very difficult to quantify the impacts due to unavailability of real-time data and contexts.

DSE sectors’ impacts on the coronavirus pandemic
Figure 16: DSE sectors’ impacts on the coronavirus pandemic

The figure 14 illustrates that most of the sectors (11 sectors out of 18) would be highly affected in the form of weak profitability, cash flows, and dividends; this could have adverse impacts on their share prices and the broad indices, particularly because the 11 sectors weighs most on the free-float market capitalization of the entire exchange. According to RIL research, two sectors could be negatively and moderately affected, and only 1 sector would be negatively affected at a low degree. Only 4 sectors out of 18, could have a positive impact on their financial performance and share prices as well.

Closing remarks

Bangladesh is yet to be equipped with the necessary health care facilities to deal with serious cases of the coronavirus despite having much time since the virus first emerged in ground zero, China. There are a serious lack of Intensive Care Unit (ICU) beds with facilities, shortage of Personal Protective Equipment (PPE), testing kits and other resources, including a national fund to fight the COVID-19 outbreak. With the high risk of human lives, the country’s economic prospect is under threat because of the ongoing pandemic. Only the country can do are to lockdown for sufficient time in an effective manner with a high level of monitoring and close collaboration of international development organizations to have sufficient measures to combat against coronavirus. There is few crucial guidance for the people including washing hands using soaps/alcohols for at least 20 seconds, keeping adequate social distancing, self-isolation of the COVID-19 positive people, a quick medical test for the symptom appears. All we can do to alleviate the crisis by following the WHO guidance and hoping for the best.

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  • May 22, 2020

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