Week in Review

What We're Reading:

June 8, 2020

As virus toll preoccupies U.S., rivals test limits of American power. The coronavirus may have changed almost everything, but it didn’t change this: Global competition spins ahead—and in many ways has accelerated. (New York Times)

South Africa’s central bank rules out financing government. Government bond purchases aimed at reducing dysfunctionality. Providing direct funding to government could fuel inflation.  (Bloomberg)

IMF prepares Ecuador credit line as government starts debt talks. Ecuador officials beginning bondholder talks this week. IMF is already aiding Ecuador through a rapid finance loan. (Bloomberg)

Trump breaks ties with WHO, ends HK special trade status. President Donald J. Trump has announced that he would withdraw funding from the World Health Organization, end Hong Kong’s special trade status and suspend visas of Chinese graduate students suspected of conducting research on behalf of their government, escalating tensions with China that have surged during the coronavirus pandemic. (Business Mirror)

Sweden: Will COVID-19 economics be different? Sweden’s less restrictive containment strategy may have resulted in a milder economic contraction at the onset of the crisis, but uncertainty remains about its implications for the rest of the year. (IMF)

Lebanon’s economic rescue plan only buys “a few more years before we run into the next crisis.” “Whatever financial technical solutions you put in place, the underlying problem is a political dysfunction here. … What we have now doesn’t work and is never going to work. (Middle East Monitor)

Ecuador starts debt talks as economic strains mount.  Moreno government will convene bondholder call this week. Ecuador has distinction of second-most defaults since 1800. (Bloomberg)

Asia’s factories remain in doldrums as lockdowns ease. Asia’s factory managers remained downbeat about the world’s trade engines in May, even as battered economies start to reopen across the region. (Business Mirror)

U.K. offers 10 billion pounds in guarantees for trade credit insurance. Britain’s government provided more support to businesses hit by the coronavirus crisis, saying it would guarantee up to 10 billion pounds ($12.5 billion) in trade credit insurance schemes which protect businesses against defaults or payment delays. (HSN)

Pakistan rupee hits over 40-day low as demand for USD rises. Pakistani rupee hit over 40-day low on June 3 as demand for the U.S. dollar increased after the government reopened more sectors of its economy following the lockdown due to coronavirus. (Albawaba)

IMF remains “hopeful” Argentina and creditors will agree debt deal. " We are hopeful that an agreement can be reached that will restore the sustainability of the debt," IMF spokesperson Gerry Rice tells reporters. (Buenos Aires Times)

Chancellor Merkel seizes her chance to revolutionize Germany’s economy. On a gloomy Friday in March, with the devastation of the coronavirus becoming clear, senior officials in Chancellor Angela Merkel’s government realized that extraordinary measures were needed to shore up Europe’s largest economy. (Business Mirror)

China takes aim at Australian trade with tariffs as relationship sours. China has imposed an 80% tariff on Australian barley imports and banned beef shipments from four major producers in the country over compliance issues, delivering blows to both Australia’s agricultural industry and the two markets’ trading relationship. (Global Trade Review)

Divorces rise by 30% in Saudi Arabia after quarantine uncovers polygamous husbands. The majority of women who requested divorces from their polygamous husbands were employees, businesswomen, prominent women in the community and female doctors. (Middle East Monitor)

As the decision was made to react to the coronavirus threat with a global lockdown, there were some assumptions made. It is now time to examine these to determine whether they are accurate or not. The first set of assumptions was that an economic lockdown would allow for maximum containment of the virus. The expectation was that limiting contact would slow the progression of the virus. That would mean hospitals would be able to keep pace with the number of people requiring services. The second assumption, which accompanied the containment strategy, was that a lockdown would be very short. This would allow a resumption of normal economic activity quickly. As we enter June, it is apparent that neither of these assumptions have played out as expected. It seems there are no attempts to rethink the approach.

From the beginning, there were critics in the medical community who asserted it was far too late to attempt mass quarantine or containment. There was universal agreement that it would have been much more effective to test a very large segment of the population and subsequently track those that were infected. Those at highest risk could then be isolated and protected. The fact is that there was extremely limited testing, no capacity to track infections, and there was little opportunity to isolate and protect the most vulnerable.

That left mass quarantine, but most judged this as nearly impossible given the spread of the virus. The goal was limited at this point to protecting hospital capability. The aim was simply to “flatten the curve.” Given the data presented at this time, that goal has been reached as there appears to be adequate capacity even in the hardest-hit areas. Somewhere along the way, the goals changed and the focus became eliminating the threat. That is a far more difficult (if not impossible) task. That shift had profound implications for the economic recovery.

Originally, there was an assumption that most of the states in the U.S. would reach a “peak level” in April. This was defined as a point at which new infections started to decline, but a more important consideration was the rate of fatalities. It was asserted that when a state reached that peak level, it could assume that its medical community would be able to keep pace with demand. That would then permit a relatively rapid economic recovery, taking place in May. The peak levels were indeed seen in April, but the goals had changed. Now there was a demand that viral infections decline further. This delayed the expected economic rebound.

The May rebound has now become the June or July or maybe the October rebound. It is not clear what the criteria for “success” is now. The medical community seems to have the needed capacity to deal with the seriously ill. The number of new cases has slowed in most areas and fatality numbers have declined, but they remain high. The latest data shows the U.S. has a death rate of 326 per million (comparable to Spain at 580, Italy at 555 and France at 443). Total cases per million stands at around 5,600. It is not at all clear what the goal now is. That has made economic recovery more uncertain.

There is still some optimism that holds that third-quarter numbers will recover dramatically and take the overall economy out of recession. This optimism is based on several expected developments. The first is that business will be allowed to reopen with a minimum of restrictions. This would allow the business community to rehire those who were essentially furloughed. It would allow consumers to resume most of their old habits. Thus far, this has not been the case in most of the states. There have been very cautious and restricted openings with provisions that have compromised many businesses. Restaurants can open but with much reduced capacity, conferences are still largely banned and events have been declared off limits. These moves have limited the number of people who can be brought back to work. This has been what has led to the more pessimistic assessments. There is a perception that consumers will remain fearful and that government restrictions will remain in place for weeks and perhaps months. If that is the scenario that plays out, there will be a much-delayed recovery.

In the context of weaker activity in China due to the health crisis, Coface’s latest survey on business payments in China shows a deterioration in payment behavior.

Two-thirds of the companies surveyed by the trade credit insurer reported payment delays. The length of payment delays remained stable at 86 days in 2019. Nevertheless, sectors that have been hit the most by lockdown measures will have to delay payments in order to survive in 2020 and the number of corporate insolvencies should increase, the firm finds.

Growth in China will fall to 1%, the lowest level in 30 years, so given the historical correlation between economic activity and payment delays, an increase is expected in 2020, Coface noted. While the average payment terms remained stable at 86 days in 2019, the share of respondents offering average credit terms exceeding 120 days has almost doubled in two years, from 12% in 2017 to 23% in 2019. In practice, 50% of respondents offered maximum payment terms exceeding 120 days.

During 2019, payment delays also deteriorated in China. The proportion of companies experiencing payment delays that exceed 120 days reached 37% in 2019, i.e., six points more than in 2018. More ominously, more than a quarter of companies (27%) experienced ultra-long payment delays (ULPDs, over 180 days), which exceed 10% of their annual turnover. When these constitute a large proportion of total annual turnover, a company’s cash flow may be at risk, which is worrisome in case of exogenous shocks like COVID-19.

An increase in corporate bond defaults and insolvencies amongst sectors that experienced a build-up in cash flow risks in 2019 is expected. The sectors with the highest proportion of ULPDs accounting for more than 10% of annual turnover are construction (30%), transport (30%), energy (29%) and automotive (28%). On the back of U.S.-China trade war disruptions, the ICT sector recorded the highest increase in payment delays (12 days) to reach 102 days. While all sectors are exposed to these risks, sectors that entered the crisis from a position of strength, with sufficient cash flow, have better chances than those which did not.

In fact, Coface finds that companies may be in a weaker position to withstand the impact of the COVID-19 shock relative to last year, with 40% of respondents admitting that they did not use any form of credit management tool to mitigate cash flow risks in 2019, while only 17% of respondents declared using credit insurance.

Five months ago, we set out to write in this issue of Finance & Development about political economy—how politics affects the economy and the economy affects politics. Few suspected then that, instead of exploring an academic question, we would be witnessing real-world political economy dynamics unfolding, tragically, in real time. The pandemic, with its appalling loss of life, has brought the Great Lockdown and frozen the wheels of commerce. People’s lives have been turned upside down, punctuated by furloughs, facemasks and fear.

While this health crisis reoriented our focus, the issue of political economy is more relevant than ever. It underscores the notion that policies are made not just on the basis of economic analysis, but under the influences of non-economic social and political forces. And it compels us to think about how people and the economy will adjust in a post-pandemic world.

This issue features diverse articles related to political economy through the lens of COVID-19. Jeff Frieden, Andrés Velasco and others examine the importance of institutions, identity and trust. Antoinette Sayeh and Ralph Chami weigh policy solutions as this crisis robs millions of migrants of work opportunities, slashing remittances, the single-most important flow of income for many poor countries. Ann Florini and Sunil Sharma argue that dealing with systemic fragilities requires that resilience—society’s ability to absorb and adapt to change—receive equal billing with efficiency. Other articles discuss the need for social cohesion and solidarity, with policies that protect and lift the most vulnerable, as jobs disappear and inequities deepen.

Managing the effects of the pandemic prompts a real discussion of how best to implement the policy response to reach all segments of the population. To a large extent, economic policy will shape society’s resilience to the emergency and its aftermath.

But a crisis of this scale is a global turning point, forcing economists and others to expand their imagination and experiment with radical new ideas about how the world works. Such a reimagining, as Kristalina Georgieva notes in her essay, could lead us to a greener, digitally smarter, fairer and more compassionate world. Perhaps this is a chance to reset the fundamentals of our social and economic life.

The interdisciplinary field of political economy owes its emergence to Alberto Alesina, a great scholar who passed away on May 23. IMF Chief Economist Gita Gopinath reflects on Alesina’s far-reaching influence.

Reprinted with permission from IMFBlog.

/>

 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations