The Lens is a weekly newsletter published by FrontierView’s Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Our teams of analysts are conducting research into the potential impacts of the novel coronavirus (COVID-19) on the global economy and business environment. Subscribe today to receive the latest insights on COVID-19 business impacts in your inbox every Thursday.
Read this week’s edition of The Lens below as you prepare your business for coming changes.
Government responses to COVID-19 diverge across LATAM countries
- Latin American governments have assessed COVID-19 risks and necessary containment measures differently. While Peru reacted fast and boldly imposing a national quarantine on March 15 (Argentina and Colombia would later follow), the presidents of Brazil and Mexico have been more dismissive of healthcare related risks and have actively encouraged business continuity. This does not mean that Brazil and Mexico are not implementing social distancing measures as both countries are heavily decentralized at the state and municipal levels.
- The extent to which governments are implementing stimulus measures to help people and businesses stay afloat financially also varies by country and has not been proportional to the stringency of social distancing measures implemented. Peru has taken two weeks to announce a stimulus plan since shelter-in-place was implemented, while Colombia and Brazil were more aggressive at proactively stimulating their economies. Most central banks have decreased interest rates taking advantage of the Fed’s rate cuts and low inflation rates.
- Stimulus measures will not be sufficient to stave off an economic recession in 2020 given the severity of domestic and external demand contraction this year. Most markets should start to recover in H2 as social distancing measures are relaxed both in Latin America and in the markets that the region trades with.
The tradeoffs that governments around the world are facing as they compare different virus containment strategies are likely to be more acute in Latin America. Not properly resourced healthcare systems, insufficient hospital infrastructure, and poor sanitary conditions in economically-depressed communities can increase mortality rates if governments decide to prioritize the economy over virus containment. On the other hand, maintaining quarantines for weeks on end will prove more complicated in Latin America given high informality levels and low savings rates, potentially leading to protracted recessions and heightened insecurity. It remains unclear as to which policy choices will hurt incumbent governments the most as they seek reelection in the coming months and years.
Companies operating in Latin America are likely to face stronger liquidity pressures than in developed markets given shallower financial markets in the region and because of FX exposure, making cash protection measures more important to ensure business continuity. Strong scenario planning will be key to properly forecast the timing and vigor of an economic rebound in 2020 and 2021.
Pablo González Alonso, Managing Director Latin America Research
FrontierView clients: See our recent COVID-19 Scenarios for LATAM webinar for further insights
ASEAN Governments are implementing substantial stimulus packages
- The Southeast Asian economies are facing significant economic disruptions. Exports and industrial production are affected by a slowdown in imports of intermediate goods and global demand. Meanwhile, consumer spending is declining due to lockdowns declared in major cities.
- These disruptions are having a negative impact on both business and consumer sentiment. Business sentiment is adversely affected as companies struggle with low revenues and weak cashflows, while consumer confidence is weak due to increased unemployment following a fall in production and tourism.
- To minimize the impact of COVID-19 on businesses, consumers, and the overall economy, governments across the region are introducing substantial stimulus packages with targeted benefits for those most affected.
Relatively low public debt levels will allow ASEAN governments to boost spending during the year and provide stimulus to their economies. In addition to the stimulus, most governments have announced that they will not make substantial reductions to other areas of spending in 2020. This will likely support demand for B2G companies throughout the year. Tax breaks, soft loans, and cashflow assistance highlighted in most stimulus packages will help support small and medium sized enterprises and prevent large-scale bankruptcies. Meanwhile, food assistance programs and extensions for utilities payments will support consumers, particularly those in the low-income bracket.
A fall in demand across sectors is likely to worsen distributors’ financial conditions. Companies should ensure their channel partners are capitalizing on the funds made available by the government to manage their finances effectively. B2B companies in Indonesia and Vietnam should take advantage of the stimulus provided for companies in the manufacturing sector. Consumer and healthcare companies should consider engaging with governments as they support low-income households’ access to a constant supply of essential items.
Ashu Agarwal, Senior Analyst for Southeast Asia
FrontierView clients: See our recent ASEAN Market Review for further insights
Indian government’s stimulus measures fall short
- The number of confirmed COVID-19 cases in India has accelerated rapidly, increasing to 1,637 cases and 38 deaths as of April 1.
- In an effort to limit local transmission of the virus and reduce the strain on the country’s under-resourced healthcare system, the government announced a nationwide lockdown for a period of 21 days starting March 25.
- The Finance Minister announced a US$22.5 billion stimulus package that would be disbursed through food security measures for low-income households and direct cash transfers.
The unprecedented containment measures, while necessary, will choke supply chains and halt industrial production, at a time when the Indian economy was already struggling. It will also have a disproportionate impact on daily wage earners, contract workers, and other informal sector workers. The current stimulus package is not sufficient enough to offset the massive economic costs associated with the COVID-19 outbreak and nationwide lockdown. India’s high public debt to GDP ratio (70.0%) and wide government deficit, gives the government little room to provide a larger stimulus package, closer to the scale of other G20 countries and emerging markets in APAC. The package announced by the Indian government amounts to under 1.0% of India’s GDP.
Given the already-weak financial environment, it is critical that companies operating in India need to use this time to consolidate their finances to survive this period of uncertainty. B2C companies in the consumer staples sector should plan for a sharp contraction in demand in Q2 followed by a quick recovery. However, companies in the heavy machinery, consumer durables, capital equipment, and construction sectors should prepare for a prolonged period of weakness.
Kinnari Gurnani, Analyst for South Asia
FrontierView clients: See our brand new COVID19 hub for further insights
Russia facing notable slowdown, strong macro fundamentals will help
- Russia’s economy is set to slow notably, from forecasts of 2.0% YOY growth to near stagnation on account of the double impact of the virus outbreak and extremely low energy prices in H1.
- The government responded later than most European countries in terms of social restrictions, but has now taken a firm stance, including a lockdown in Moscow, to combat the outbreak.
- Anti-crisis measures have been implemented, though are minor in total (US$4 billion), including more unemployment benefits, tax deferrals, and loan support for distressed firms.
- The ruble has been one of the worst performing currencies this year in the world, falling to historic lows (~80 to the US$) in line with the drop in oil prices towards US$ 25/bbl.
Russia’s record high fx reserves, budget surpluses, very low external debt, low inflation, and mild interest rates will help the economy manage the crisis in H1, and allow for a gradual recovery in H2 as energy prices and demand revives. In the near term, further state assistance is also likely coming to aid the economy. Helping diminish the negative impact, Russia’s quarantine-sensitive sectors (hotels, restaurants, entertainment, etc.) comprise less than 2.0% of GDP and just 5.0% of those employed, while small and medium sized enterprises’ share of GDP is comparatively small (~20.0%). Still, consumer demand, investment, and exports will all contract notably in H1 as a result of prolonged global uncertainty and social and economic restrictions. Firms should monitor Russia’s ability to manage the outbreak as its relatively late restrictions allowed for the virus cases to grow exponentially, which could prolong the duration of the outbreak in the country and thus the impact on the economy.
The lockdown on major cities is likely to continue at least through April, as is occurring in Western Europe, putting a pause on demand in Q2. B2B demand will recover slower and only after consumer spending revives and the global economy normalizes, which will likely begin in Q4. Firms should remain in strong contact with key accounts and local partners in this difficult time, which will pay dividends later in the year as demand recovers, while assessing risks to their supply chains.
Mark McNamee, Practice Leader for Europe
FrontierView clients: See our recent Russia Outlook for further insights
Firms should adjust strategy as the CE enters a recession
- In response to the COVID-19 outbreak across Europe, Central European (CE) governments have implemented wide quarantine measures.
- Authorities have implemented a wide range of fiscal and monetary stimuli to minimize the impact of the outbreak on their economies.
- Factories across the region are seeing a prolonged period of shutdowns, as workers are put in technical unemployment.
- Regional currencies have devalued massively as capital moves into safe-haven currencies, such as the US$ and the EUR.
The rapid spread of the COVID-19 and the subsequent measures to contain it will cause a recession in CE this year. We have revised down our growth forecast for the region, from an average expansion of 3.0% YOY to a contraction of 1.3% YOY, built around the assumption of a sharp decline in exports to the eurozone, an uptick in unemployment, and declining domestic consumption. Our bias on the forecast remains to the downside, meaning that further downward revisions are possible, based on ongoing developments.
Firms across all business segments face significant disruptions and declines in demand, as governments scramble to minimize the economic impact of the pandemic. The introduction of additional measures remain highly likely, and executives should monitor upcoming policies and assess their impact on customers and partners on a market-by-market basis as market impact will vary.
Martin Belchev, Senior Analyst for Central Europe
FrontierView clients: See our recent COVID-19 in Central Europe for further insights