Week in Review
March 30, 2020
Global risk is about to skyrocket. Coronavirus continues to spread around the world. Dozens of "second-world" and first-world countries are now where the U.S. was three weeks ago. Three weeks ago, most of America had not come to grips with what was about to happen. Most of the world hadn't either. (Seeking Alpha)
Venezuelan leader Maduro is charged in the U.S. with drug trafficking. Federal prosecutors accused President Nicolás Maduro of participating in a narco-terrorism conspiracy, in a major escalation of the Trump administration’s efforts to pressure him to leave office. (New York Times)
Will the coronavirus end globalization as we know it? The pandemic is exposing market vulnerabilities no one knew existed. (Foreign Affairs)
G-7 foreign ministers spar over virus amid pandemic. Foreign ministers from the Group of 7 leading industrialized democracies sparred on Mar. 25 over whether to call out China as the source of the coronavirus pandemic. (Business Mirror)
Italy's bailout. Italy now requires a bailout to keep its public finances intact. Its public debt now stands at 134% of GDP, and it has long been considered as among the weaker eurozone economies. (Seeking Alpha)
Top geopolitical risks in 2020: Update. For the first time, Time magazine revisits and updates its Top Risks 2020 with the potential impact that the coronavirus will have on each of them. (Time)
U.S. exports to the EU still three times higher than to China. The export of U.S. goods to the EU totaled $337 billion in 2019, an increase of 6% on the previous year, according to the Transatlantic Economy 2020 report, published on Mar. 26. At the same time, that figure was three times higher than the total of goods exported from the United States to China. (EurActiv)
UAE trade finance platform readies to go live, expects global banks to join. UAE Trade Connect (UTC), a trade finance platform to address the risk of double financing and fraud across the United Arab Emirates, is slated to go live in the upcoming quarter and expects a “few more” global banks to join the consortium. (Global Trade Review)
Rise of Sinn Fein: Prospect of a United Ireland. The surprisingly strong showing of Sinn Fein, the left-leaning Irish republican party which fields candidates in both the Republic of Ireland and Northern Ireland, is yet another profound political development for the British Isles in the period since Brexit. (Global Risk Insights)
Asian economies not ready for remote work. The increasing implementation of physical lockdowns puts Asian economies in a bind. The government-instituted halting of people’s movements represents devastating news for Asian countries whose economies depend on close physical interactions, primarily through tourism and manufacturing. (HSN)
The many prescriptions for isolation. There may be only one way to slow the virus spread, but every country is coming up with its own interpretation. (Interpreter)
So you’ve stocked up on food for self-isolation. Now what? Now that people are staring down so much time at home, it’ll be helpful to become familiar with recipes that can be stretched over long periods of time with some versatility and creativity. (Quartz)
Surviving and thriving in quarantine: 3 ways businesses can turn time into opportunity. Millions of small business owners around the country need to grapple not just with the challenge of what to do while their operations are closed, but how to prepare for what lies on the other side of this crisis as the world emerges from quarantine and returns to the business. (Global Trade Magazine)
Three years working in self-isolation – what I’ve learned, so far. A global crisis makes you wonder: Just how much will every topic feel a “social distancing” effect? (Interpreter)
NATO’s Afghanistan withdrawal: Regional interests and civil war fears. A deal has been recently struck in U.S.-Taliban peace talks and progress towards long-term peace seems increasingly possible. However, with a likely NATO withdrawal and recent election results, there continues to be a substantial risk to the country’s security and the likelihood of descent into civil strife. (Global Risk Insights)
How Singapore Escaped the Worst
Chris Kuehl, Ph.D., NACM Economist
The first place COVID-19 appeared was in China—everybody knows this by now. What is generally less known is that Singapore was the second location with cases appearing in early January. This city-state is one of the most densely populated countries in the world, but to date there have been two deaths. Both took place a week ago—both had contracted the disease outside Singapore. The rate of infection is among the lowest in the world. What has it done differently than many other nations?
Analysts from the World Health Organization point to Singapore and assert it did all the right things and in the right order. The borders of the country were closed immediately upon learning of the outbreak in China given that fully a third of the population of Singapore is Chinese and has extensive contacts into parts of China that had been infected. The country immediately engaged in widespread testing and closely monitored those who were carriers. The population deemed at risk was tested very quickly and repeatedly, and were treated aggressively. The message from the government was unified and consistent. People were told very specifically what to do and what not to do. The decision to limit contact in large groups was issued early and enforced. People were issued very specific guidelines regarding personal hygiene.
There are advantages in Singapore that other nations do not have, however. This is a small nation of around six million people, but it is also a densely populated place where strict social isolation is challenging. The population has lived under a semi-autocratic regime for decades and has long been accustomed to following strict rules for behavior (one can still be arrested for littering). The most important lesson to be learned from Singapore is preparedness. Several years ago, the country grappled with one of the most threatening outbreaks of SARS and reacted by strengthening its public health system. There has long been an official pandemic response agency. The country has stockpiled the equipment it assumed it would need at some point. There has been no shortage of test kits, no shortage of respirators or protective gear. Life in Singapore is not normal at the moment, but the economic and health damage has been limited.
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Fitch Ratings: Coronavirus Crisis Is Crushing Global GDP Growth
Fitch Ratings has nearly halved its baseline global growth forecast for 2020, according to its latest quarterly Global Economic Outlook. It now sits at 1.3%, down from 2.5% in December.
"The level of world GDP is falling. For all intents and purposes, we are in global recession territory," said Brian Coulton, chief economist at Fitch Ratings.
The revision leaves 2020 global GDP USD850 billion lower than in the previous forecast. The firm warns that an outright decline in global GDP could occur this year if more pervasive lockdown measures have to be rolled out across all the G7 economies. Emergency macro policy responses are purely about damage limitation at this stage, but should help secure a “V-shaped” recovery in 2H20, although this assumes that the health crisis eases, Fitch Ratings says.
The shock to the Chinese economy has been very severe. GDP is likely to fall by more than 5% (not annualized) in first-quarter 2020 and to be down by 1% year-on-year. Falling GDP in China is virtually unprecedented and, in the near term at least, these numbers look worse than most previous hypothetical “hard-landing,” scenarios. The good news is that the daily number of new COVID-19 cases in China has fallen very sharply, which should pave the way for a marked economic recovery in 2Q20—high-frequency indicators already point to this starting in March.
Nevertheless, the delayed impact of supply-chain disruptions and lower Chinese demand on the rest of the world will continue to be felt profoundly for some time, particularly in the rest of Asia and the eurozone, the outlook notes.
Moreover the rapid spread of the virus outside China has prompted sharp declines in travel and tourism, and the cancellation of business and leisure events worldwide as “social distancing” takes hold. And some other large advanced countries—most notably Italy and Spain (and more recently in France, though after our forecast numbers were finalized) have engaged in aggressive official lockdown responses similar to those seen in China. These countries are likely to see very sizeable outright declines in GDP in the coming months.
The interruptions to economic activity seen in China, and now in Italy, are on a scale and speed rarely seen other than during periods of military conflict, natural disasters or financial crises. While there is huge uncertainty, quarterly declines in GDP of 3% to 5% (not annualized) in a full-lockdown scenario look feasible. The risk is that we shortly see these abrupt interruptions happening simultaneously across all major economies as the global pandemic spreads.
Fitch Ratings’ baseline global economic forecasts have been aggressively lowered. Even though we expect a recovery in China from 2Q20, Chinese growth is expected to fall just 3.7% for the year as a whole, down from 6.1% in 2019. We forecast Italian GDP to fall by 2% this year and Spanish GDP by almost 1%.
Its baseline forecasts do not yet assume that full-scale lockdowns take place in across all the major European countries or the U.S. (forecasts were finalized on Mar. 16). But even on this basis, we now expect eurozone growth to be minus 0.4% this year. The baseline forecast for U.S. growth is 1% in 2020 compared with a pre-virus outlook of 2% and GDP is expected to fall by 0.5% (or 2% annualized) in 2Q20.
This reflects the likelihood that travel, tourism, and business and leisure events will be disrupted for months, the collapse in the equity market, lower business and consumer confidence, and other disruptions to U.S. economic activity that are emerging as authorities seek to contain the virus. We expect global growth to fall to 1.3% in 2020 from 2.7% in 2019, which would be weaker than global downturns in the early 1990s and in 2001.
The high risk of escalating lockdown responses across the major economies means that the chances of a weaker outcome are very substantial. A downside variant to our baseline forecast shows global GDP falling this year—an extremely rare occurrence in the post-war period, with GDP in Europe down by over 1.5%, U.S. GDP down by nearly 1% and Chinese growth slipping to just over 2%.
Fitch Ratings’ oil price forecast has been lowered to USD41/bbl (Brent) for 2020 (annual average) from USD62.5/bbl in the December GEO. With the collapse of “OPEC+” co-operation boosting prospects for OPEC supply, we now expect oil prices to average USD48/bbl in 2021 compared to our previous forecast of USD60/bbl.
Emergency macro policy responses are being announced on a massive scale, following a similar playbook to the global financial crisis. These include aggressive interest rate cuts, huge injections of central bank liquidity, macro-prudential easing and the creation of credit support facilities. Large-scale fiscal easing packages and the unveiling of hundred billion dollar-scale sovereign credit-guarantee schemes are also being used to help the private sector withstand shocks from measures necessary to contain the health crisis.
"Rapid and large-scale macro policy responses are all about damage limitation in the near term, but policy easing should help GDP normalize and recover quickly in the second half of the year on the assumption that the health crisis subsides," said Coulton. "However, the uncertainties here are huge and we are really only at the beginning of the process of trying to understand the full impact of the crisis on the world economy".
COVID-19 and the (Legal) Ripple Effects of ‘Force Majeure’
The rise, and spread, of COVID-19 has had a global impact, where the human toll has been significant, the economic cost unquantifiable and at this point, perhaps, unfathomable.
Where business relationships, based on contracts, are concerned, legal (and financial) liabilities tied to disruption, to cancellations, to a grinding halt of everyday life are perhaps murky at this point. And what about the contracts themselves? They may spell things out, but where the pandemic is concerned, they might not.
The “Act of God” or “Force Majeure” clauses that cover a range of events—floods and earthquakes, for example--are designed to help insulate firms from the shock of the unforeseen. The literal translation of the French term comes to “superior force,” and this case, in grappling with the vagaries of the coronavirus, it seems we are indeed facing, for the moment, a force to be reckoned with, where the legal liabilities have yet to be illuminated.
In an interview with PYMNTS, Jeffrey Neuburger, partner at Proskauer Rose LLP and co-head of the law firm’s Technology, Media and Telecommunications group, said that much depends on the fine print.
Various studies have looked at the mounting toll of the health crisis. Dun & Bradstreet estimated last month that at least 51,000 companies globally had seen the impact on suppliers; RapidRatings said this week that only three in 10 companies globally (and particularly in Italy, China, South Korea and Japan) could expect to be fully operational amid the pandemic.
A subset particularly hard hit, as noted by RapidRatings, includes smaller firms, with revenues in the $10 million to $100 million range, with 76% unable to operate at full capacity.
All of this translates into a loss of production, stockouts, shortages of critical supplies and full-fledged disruptions up and down supply chains.
In the scrambling to address the fallout from COVID-19, many firms may be unclear as to what contracts cover—whether there’s an escape clause, in other words—and what they do not.
“A lot of people do not focus on the force majeure clauses when they are negotiating contracts,” Neuburger told PYMNTS, “and so, many people do not know what is in the force majeure clause or what it means.”
The reality, he said, is that in situations facing the business world, such as with a pandemic, courts may look to the specific wording of the clause, and depending on the states in which that law applies, may interpret that language strictly.
Asked which verticals might be most impacted as the virus spreads, he said that “I don’t think there’s any industry that isn’t thinking about force majeure in this circumstance.” He pointed to supply chain concerns as being front and center, along with transportation, hospitality and financial services verticals.
But, it’s not always clear just what does constitute a force majeure (and thus, of course, the fine print matters). Asked by PYMNTS whether firms might point to the pandemic as making it simply impossible to fulfill their contractual obligations, he said that “impossibility” is actually a higher standard—such as when a factory might be shut down by order of authority, and cannot manufacture goods to ship.
Force majeure, he said, is a doctrine that states a party is prevented from performing—and depending on contractual language, that may be due to impractical or difficult circumstances.
The ripple effects in a force majeure situation, said Neuburger, can be significant when it comes to supply chains.
As he said, each party is reliant on the performance of the firm “before” them that makes goods and ships them.
Force majeure, he said, “impairs the ability of the subsequent parties to perform.”
If Party A is impaired, Party B may have a force majeure argument, as would Party C—all the way down through the chain to the sale of finished products. The force majeure clauses may allow for delays up to a certain amount of time, after which a firm can terminate a contract.
PYMNTS noted that some contracts might allow for companies to pivot from traditionally exclusive supplier relationships toward alternative suppliers in the event of force majeure—to which Neuburger said: “This is already a fairly common provision. And in supply chain-related contracts, people who don’t have that provision and are experiencing a problem now will probably have that provision in the future.”
On The Other Side
On the other side of the COVID-19, it’s likely we’ll see force majeure clauses include terminology related to epidemics and pandemics.
Amid worries about legal battles and efforts to be made “whole” after delays, stockouts and equipment shortages, Neuburger told PYMNTS: “I think this is a situation where we are all in it together, in a way. Nobody really wants to litigate if they can avoid it.” Though there may indeed be disputes tied to contract provisions, and some cases where significant liabilities are incurred, Neuburger predicted that “I think you’ll see a lot of these situations get worked out through negotiations.”
Reprinted with permission from PYMNTS.com.
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations