COVID-19 – Of Lockdowns, Downgrades and Cost of Stimulus

THE STATE OF AFFAIRS

COVID -19 has wiped out a significant portion of the income of the Caribbean region putting it at risk and the world grapples with a novel financial crisis. Novel in the sense that it is attached to an underlining cause the nature of which demands treatment that will continuously further damage economies. This is a moment of economic lockdowns, downgrade by rating agencies and worry of the ability of emerging economies to finance their recovery.


There were two headlines carried in separate publications on April 10, 2020 which we think signals the inevitable. “Moody’s Bahamas rating under review for downgrade” and “Fitch Ratings revises Jamaica’s outlook to stable, affirms B+”. Economies around the world and certainly within the Caribbean are under pressure from the effect of COVID-19 virus. The need for social distancing and necessary lock downs of businesses has resulted in significant slowing of commerce. The economic impact from the COVID-19 event is substantial and devastating. The two mentioned sovereign reviews of The Bahamas and Jamaica, from is, in our opinion, the start of the unfolding of how deep this devastation will become, with no certainty of how long it will last. For policy makers, it would be wise to take a long view of the time to recovery and plan accordingly. With best case of obtaining a vaccine, according to the experts, as much as a year away, any planning based on a very short time horizon will be, in our opinion, imprudent. However, in all efforts to save economies, time is of the essence.


With all we now know, it is not beyond the imagination to project that the lingering effects of the virus could be with us for as much as eighteen months. Failure to understand that the future health of the economy is intrinsically attached to the resolution of the virus will lead to serious consequences. Failure to appreciate that lockdowns, which will further devastate economies, will be longer than desired, will lead to fatal decisions and ultimately the economy and the people will suffer! There is a price to be paid for the resolution of this event and every country must pay this price. There is no choice. What may be optional is whether the payment is on the front or back end. In the case of the former, that price is somewhat controllable. In the case of the latter, the cost will likely be more significant and evidence of a battle lost. Caribbean nations cannot afford to lose the battle but winning will not be easy. Those willing to make bold moves will improve their chances thereof. Sitting back and waiting could lead to long-term damage to countries.


What then are some of the critical issues that may be occupying the minds of policy makers at this time? Foremost, we think the biggest question on the minds of policy makers surround when the lockdowns will be lifted. They are likely thinking of the extent to which the economy of their respective country will be affected. In addition, very likely they must be considering where their respective sovereign ratings may end up in the short to midterm. Policy makers will be occupied with the thought of the impact continued lockdown will have on the ability of government to afford the stimulus which will be required during and at the end of this event, whenever that may be. They must be necessarily concerned about the fact that there is an abnormal global demand for capital by emerging economies, many of them likely to see their sovereign debt rating downgraded shortly. They must be considering the systemic risk of default increasing and consequently sovereign debt attracting risk premiums across the board. Amongst others things, with an eye on the post crisis era, they have to be concerned about the significant level of capital flight taking place to developed countries, seeking safe harbors. The issues are many, connected and complicated. The extent to which they are factored into national planning will be critical to the way forward.


For context consider the recent meeting where the IMF announced the cancelling of the debt payments, for six months, for twenty-five countries around the world. The total value of the package pegged at $215 million. For the region Haiti was the only country to be included in that package for a paltry amount of $4.8 million. This action is an immediate signal of what the uphill battle will be for countries the region. The financial burden will be huge; the challenges with funding will be significant, the economic future of the region is uncertain, resting on the ability to restart commerce and secure funding or relief. With the significant loss of tourism revenue, discussed further below, the ability to survive is at risk. This is a moment when CARICOM must come together, as a bloc, and fight for its survival. The process will be grueling and potentially very complex. However, these are the moments when leadership earn credibility and concretize value. More now than ever every country will be looking for effective leadership. The fate of nations will depend on it.


THE VIRUS IS THE ECONOMY

All policy makers, we think, understand that opening the economy too soon could come at a significant cost. The pressures to do so are significant, understandably so as business are at risk of failing the longer they remain close. The longer the lockdown lasts, the more devastation is being wreaked on the economy. The possibilities of businesses closing increases, the cost to government increases, reducing its ability to afford the inevitable post crisis response, as we watch time sensitive opportunities wane. In the case of The Bahamas with its significant reliance on tourism, which is almost 100% gone, the implications are brutal for the business sector. However, let us consider the very recent experience of Singapore as they grapple with the dilemma of balancing the challenges faced with this economic and health crisis.


On March 5, 2020, the World Economic Forum boldly stated the following on its website “Singapore contained Coronavirus. Could other countries learn from its approach?” The endorsement continued, pointing to the emergence of a potential best practice since the start of the event. The article stated “As the novel coronavirus starts to gather speed in Europe, the Middle East and the U.S., there’s one place it is seemingly being contained: Singapore.” An unequivocal vote of confidence of a country that consistently outpace, topping most major performance indices especially in the economic and competitive arenas. The endorsement ended with the following, “With no reported virus-related deaths despite 96 cases, and a slowing rate of infection that’s been outpaced by recoveries, the Asian city-state is emerging as a litmus test of whether the deadly pathogen can be, if not contained, then neutralized.”


Let us fast forward to March 22, 2020 and Aljazeera’s headline states “Singapore closes borders to keep virus at bay, but no shutdown”. The move it said followed Singapore’s first two coronavirus-related deaths together with a surge in cases from overseas. By March 9, 2020, the story changes dramatically with reports that Singapore has instituted a partial lockdown to the fourth of May in order to contain the spread of the coronavirus. This move, it was reported, “could cost the economy about S$10 billion ($7 billion) in lost output”, approximately 2% of its GDP.


This example underlines the seriousness of managing this event. We fully appreciate that the longer the lockdown lasts the more difficult it will be to restart the economy. The Singapore development, however, demonstrates the danger and the risks involved. Opening borders will mean that new cases are being imported leading to a flare up of cases. Singapore has, by global standards, a topnotch health care system. It was not however willing to take the risks of leaving its borders and businesses open, having made a brief misstep in this area. Imagine therefore the countries of the Caribbean with weak healthcare systems, which could be quickly overrun and overwhelmed, leading to wider spread and deaths. The decisions to be made are therefore very difficult ones. Open too soon and exacerbate the health effect. Leave it too long and decimate the economy! Caribbean leaders will likely be forced to take risks in this area. A delicate matter required careful and deliberate planning. A country like The Bahamas has a slight advantage due to its archipelagic nature. Unfortunately, most of its economy is concentrated on one island. This is instructive of how wide policy makers will need to look. As they work to recover and fix economies consideration matter such as reducing concentration or look at another way, expanding and better devolving commercial activities and economic centers.


The sad reality, which should not be ignored, is that without a vaccine, the emerging best practice is mass testing (as in the case of Korea) and social distancing. The effectiveness of social distancing is enhanced by a lockdown of normal economic, social and community activities. In our view, the lock down for Caribbean countries is likely to be a bit longer than what may emerge as a norm, largely because of the limitation of health assets and health care machinery. Looked at another way, a longer period of lockdown is the cost of not having well developed facilities with the capacity to take significant numbers of virus victims. Policy makers, the business sector and citizens should quickly come to grips with this fact. The length of lockdowns and the confidence to reopen will, amongst other things, be a function of bed stock, intensive care capacity and medical facilities available to fight the virus. COVID -19 will exert adverse pressures on all countries where these are lacking. A quick glance at the Bahamas, Jamaica and across the region will confirm weak systems and therefore points to a lagging recovery, compared to countries with a more developed and robust systems.


The natural outturn of the preceding is that economically weaker countries with underdeveloped healthcare may pay a greater proportional price because of the need to shutter its economy for a longer period. The vicious cycle should be evident. Damage to the economy, increased cost to the government, further potential downgrade,