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.
US economy stalls out in March
- Our forecast for 2020 US GDP has been sharply cut, to -5.5% YOY, amid mounting evidence of a significant collapse in US consumer spending activity taking place in late March. These trends are expected to grow worse in April, as COVID-19 restrictions on local activity have spread significantly.
- Retail sales data for March, released on April 15, showed an 8.7% YOY contraction from February. We had already revised down our US forecasts after earlier data from card servicers indicated a drop in card activity of around 30.0% YOY in late March.
- We expect a gradual relaxation of the harshest COVID-19 restrictions to begin in 2H2020, but there will continue to be local restrictions on domestic activity. Demand for domestic services is not expected to fully return until a vaccine is made and broadly distributed, which we do not expect until late-2021.
Fiscal and monetary support will prevent COVID-19 from resulting in a second great depression, and we expect a gradual recovery to take hold in 2H2020. But we still expect a significant amount of unemployment to result from the COVID19 shock, as some firms will go bankrupt, and other firms will make permanent reductions to employment due to the weaker global demand environment.
Continue to focus on making sure your online channels are able to provide a complete customer experience. With this, continue to invest into your online channels, as the COVID-19 disruptions to traditional B2C and B2B channels will remain disrupted into 2020, with the risk of secondary outbreaks leading to new quarantine periods after the initial local quarantines.
Ryan Connelly, Practice Leader for Global Economics and Scenarios
Argentina defaults on locally issued debt, external credit obligations looming
- Argentina’s government unilaterally announced that it would push all locally issued, foreign currency debt obligations (totaling US$ 9.8 billion) until 2021. Delaying these debt payments constitutes a technical default of this debt.
- All three major rating agencies (Fitch, S&P Global Ratings, and Moody’s) downgraded Argentina’s sovereign credit rating to “restrictive default” afterwards. Fitch has since revised its rating for Argentina to “CC” but warns that another default or distressed credit swap is highly likely.
- Meanwhile, President Alberto Fernández confirmed that the government would formally issue its restructuring offer to external debtholders in the next two weeks. The government confirmed on April 15 that it would submit a formal offer to private creditors the day after, which will include a haircut of 60.0%.
- Argentina’s next external (i.e., New York law) coupon payment is due on April 22 and equals US$ 503 million. Argentina’s government will have the option of entering a 30-day grace period on that date, if necessary. This effectively gives Argentina’s government approximately a month and a half to reach a deal with external bondholders before potentially falling into a hard default.
- All of this comes amidst the health and economic crises caused by COVID-19. Argentina’s government will seek out immediate interest expense relief to allocate more funds to critical economic stimulus measures.
We believe that the government’s local debt decision is a sign of prioritizing economic and healthcare spending in the immediate term. In theory, it also provides the government near-term funding to address the rest of Argentina’s external debt obligations during 2020. However, we lack confidence that the government will pay all its external debt obligations this year because of the more pressing need to provide relief for Argentines amid the pandemic. We also highly doubt that private creditors would accept a debt restructuring that involves a 60.0% haircut on principal. As such, we envision that the government would skip the April 22 payment, enter a 30-day grace period, and reach some sort of agreement with creditors during that timeframe to at least push debt negotiations and obligations (i.e., a “standstill” agreement) until 2021. The most optimistic scenario is that the government ends up reaching a full restructuring deal this year. The downside scenario is that Argentina cannot reach any agreement with creditors and defaults on all its debt.
Firms should ensure that they have contingency plans for a potential hard default in the short-term. The most likely business impacts from that event would be significant depreciation pressure on the country’s parallel exchange rate, stoking inflation. The government would then likely need to choose between devaluing the peso or tightening capital and import controls to protect the official exchange rate. Conversely, assuming a temporary agreement with creditors, firms should expect less pressure on the official exchange rate and higher government spending to bail out Argentina’s stalled economy. We expect a severe economic contraction this year even under the most optimistic scenario.
Alex Schober, Senior Analyst for the Southern Cone
FrontierView clients: Contact your client services manager for an individualized analyst briefing
Oil prices reach new lows despite announced global oil production cut
- The US Benchmark WTI crude fell below US$20 on Wednesday following larger-than-expected inventory builds in the US, with Brent Crude trading around US$27.50.
- After an early March oil price war, OPEC reached a new agreement along with Russia and the US to restrict output, agreeing to cut close to 10mm bp/d of oil production. However, as we wrote in this newsletter last week, a production cut of this size would not lift oil prices nor prevent inventory builds amid the massive demand shortfall caused by the global COVID-19 outbreak.
- Oil prices will begin to gradually recovery in 2H2020, due to a combination of rising demand and falling supply. However, ongoing COVID-19 travel restrictions will prevent a full recovery to pre-coronavirus demand levels for some time.
In the short term, the issue remains on the demand side of oil. Expect prices sub-$40 to persist across 2020, and for large inventories to weigh on prices into 2021. There is no real risk of an upside break-out to prices until at least 2H2021.
Low oil prices are not of much benefit to the world economy at the moment, as the main beneficiaries of lower oil prices are seeing domestic demand (for countries) and product demand (for airlines/autos/manufacturing and chemicals firms) fall for reasons unrelated to cost structure. It provides minor relief to countries that rely on petroleum-based baseload energy generation or where households and firms rely on off-grid generation.
Ryan Connelly, Practice Leader for Global Economics and Scenarios
Indian companies expect significant demand and production disruptions
- The number of COVID-19 cases in India continues to grow at an alarming rate, doubling every week. Even these numbers are likely to be severely underreported due to the dismal rates of testing in the country.
- As the virus continues to spread, the nationwide lockdown that began on March 25 has been extended until May 3.
The rapid spread of COVID-19 in India, combined with the government’s lockdown measures, will significantly disrupt business in 2020. Weak demand and production halts remain the most pressing concerns, while payment delays are getting worse. Companies should also expect significant challenges with logistics and the movement of goods and labor. In recent conversations, executives have shared that even the movement of essential items is being disrupted due to uncoordinated actions between states and poor infrastructure. As the number of cases in India continues to climb, we expect the existing supply and demand disruptions to last well into 3Q2020.
B2B companies should align with local teams on the impact of the pandemic on their business operations and on expected timelines for recovery. Firms should also continuously engage with government officials to prepare for further lockdowns and get ahead of any upcoming regulatory changes. In the meantime, companies should take all steps necessary to preserve cash to survive this period of significant disruption in an already-challenging market.
Kinnari Gurnani, Analyst for South Asia
FrontierView clients: See our recent Asia B2B Outlook Webinar for further insights