In case you were still confused, Mir Mohammad Ali Khan puts it bluntly for the reader: 2020 is not a year for business. It is a year of survival. Businesses and economies can be dealt with, only if the people dealing with them, are still alive to deal with them.
Economically, Socially & Politically
The easiest answer to “How has Covid-19 affected the world,?” is, the social aspect to it. Every human being on earth, after almost 103 years since the last pandemic, agrees that we humans are all on the same page, at least socially. We are all affected. Easter came and went, churches were empty.
Ramadan is here, mosques are empty. Iftars are without friends and family. The Vatican is closed and the Kaaba is without millions submitting to Allah’s will. Factories are empty. Malls have neither mature shoppers roaming around or charged up teenagers window shopping. Roads are almost empty and so are the fuel tanks.
Oh, did I say fuel? Never before has the world seen such havoc in the oil markets where the May WTI (West Texas Intermediate) oil contracts went into negative territory. What does a contract going negative mean anyway? What it means is that the seller has possession of the oil, let’s say on a tanker on the port, but the buyer has run out storage facilities.
The buyer is less at risk than the seller because if the seller does not empty the vessel, he is at risk of paying charges that can come into thousands of dollars a day. Perhaps even a higher amount based on the size of the vessel, Ultra Large Crude Carrier (ULCC), or the Very Large Crude Carrier (VLCC), representing two different sizes, both in millions of barrels on-board.
So the seller is more eager to have the oil taken away from his hands than the buyer is willing to take it away. The seller entices the buyer by offering him money to take the delivery of the contract. Take the oil from me, and I will pay you an extra amount, along with a free contract. Imagine the state of panic in the oil markets, when such deals are offered.
In the past two months alone, the oil marketing and exploration companies have absorbed more than $350 billion losses. The word “billion” has become so widely used that even I, as an investment banker, wonder what this virus has brought upon us, we are comparing trillions being spent by countries, which was unheard of just five months ago!
The American Conundrum
Let us talk about why billions have less value these days. The USA has spent two trillion dollars, so far, trying to stabilize its economy. But it has not succeeded. Just two months ago, the United States only had 3.2 million people who had filed for jobless benefits.
Eight weeks later, the number has crossed 31 million individuals. These are some serious numbers by any standards. The number of lost jobs, recently, supersedes the number of jobs that had been created in the United States after the 2008 recession.
The word “billion” has become so widely used that even I, as an investment banker, wonder what this virus has brought upon us, we are comparing trillions being spent by countries, which was unheard of just five months ago!
Municipal Bond markets in America, with a size of 3.8 trillion dollars, are in serious threat of a default. Municipal bonds feed the local economies in the country. Schools, hospitals, transportation, local employees’ pension funds, roads, and many others. The state and municipal governments have to take care of these utilities.
For this purpose, they issue bonds. These bonds are paid back through locally collected taxes and the sales tax on items sold. With malls closed, shops closed, businesses closed, local governments have no revenue streams to depend on, and no reserves to fall back on. American state and local governments only keep, historically, 7.5 percent of their total budgets as rainy day funds.
Meaning that less than a months’ expense is covered through their savings. And Covid-19 is way past the one month mark. Bonds mature every month with different maturity dates. They have to be paid back. If the payments on the bonds are defaulted or even delayed, the ratings on the bonds drop like a rock through a canyon. Low ratings mean no new funds coming in – a disaster for these small governments.
America has a $15 trillion-plus mortgage market including home mortgages, business buildings, farms, and other loans, According to the Federal Reserve, 32 percent of the mortgage market is coming close to the threat of falling under the forbearance category. A step before the foreclosure category. Imagine 5 trillion dollars being defaulted upon. It would create a domino effect that will make the 2008 financial crisis look like a walk in the park.
The corporate sector is not lagging far behind when it comes to facing a disaster. Apple is losing $1 billion a day in revenue due to its store closures. The airline sector has faced over $200 billion in losses and these pile up every hour. Hotels are about to declare bankruptcies unless protected by the government through bailouts.
America has had the longest economic expansion in its history for 11 years in a row. The stock market grew, corporations became trillion-dollar companies, GDP grew, employment was at its peak, and the future looked like it was going to remain that way. And 11 years of progress has crashed in less than 11 weeks. Never before has any economy seen such a fiasco. Europe is not lagging far behind.
The European Fiasco
If any European thinks that the fiasco ends across the Atlantic and will not reach the shores of Europe, well, too late. It already has. EU has already doled out over $2.4 trillion to save the economies of its union.
Germany, the strongest of the European economy, is facing a problem it has not witnessed even during all the wars it has handled. Germany has always been considered a strong economy with no fanfare but a solid record. That record has come crashing down last week.
If this situation persists past July, then we are looking at a world on its knees, economically. And a world on its knees, eventually, can fall on its face. And that is not an option for any country in this globally connected economy
The German Economic Institute or The IFO, just reported that the employment barometer of the country has dropped from 93.4 points in March to 86.3 points in April. Too many of the readers it may not sound that big of a deal, a seven-point, give and take, drop.
But these seven points represent a chaotic number for all four sectors of the German economy; manufacturing, services, trade, and construction. Its export expectations dropped from a positive number to -50.2 in just eight weeks. Never before in its history, since IFO came into existence, has it seen such drastic drops in its calculations.
Other European nations are not too far behind when it comes to facing existential threats. Air France-KLM and Renault SA are looking for immediate bailouts or will have to declare bankruptcies. The United Kingdom had just walked out of the European Union and Covid-19 happened.
UK economic output has contracted by a whopping 35 percent and the Scottish numbers stand at 32 percent according to the OECD. The UK government expects a deficit of 14 percent this year already, and we are only three months into 2020. The worst year in recent memory was during the 2008 crisis when it fell to 11 percent.
So imagine, what we are looking at if the cure is not found soon, and we continue to look into an abyss of uncertainty. Italy, Spain, Portugal, and Greece were already economically troubled for over a decade. This will bring them to their knees, metaphorically speaking.
The total size of the EU GDP is 19 trillion dollars. That number represents 22 percent of the estimated $90 trillion world GDP. Imagine a contraction of 10 percent-plus in the EU GDP and a 23 percent contraction in the world GDP. Now stop imagining because it has already brought us there. And, if any country thinks that it will not be affected by this horrid virus, then it needs to change its Minister of Finance or seek help from a mental health professional.
Speaking of seeking help from a mental health professional, our neighbors’ PM Modi needs it the most. All his claims of India not being affected have gone astray. Indian GDP is looking at a 1 percent growth this year, down from the 5 percent claim by the PM at the beginning of the Covid-19 outbreak.
Pakistan: Where Do We Stand Economically?
We were just beginning to recover, and COVID happened. To me, the situation feels like a patient being released from a hospital after long treatment and he gets into an accident on his way home. I could not put it in simpler terms.
We are one of those countries where the economy is based on very resilient people. Economies are made up of people, and people, if resilient, do not fear easily. And this trait, albeit extremely rare to find, is present in the Pakistani nation. We have been through such disasters that Covid-19 has not scared us. Although it should. That being said, the lockdown is not being implemented strictly either, thus resulting in a lesser economic impact at a micro-level.
Under no circumstances am I saying that our economy is more resilient than the other countries. What I am saying is that two factors have benefitted us. One, we were not at our peak as an economy. Two, we did not have a lot of exports, and our economy was not in an expansion mode before this dreaded virus. So both these facts saved us a little. Just a little.
A major drop in our oil import bill, due to drastically low prices, has helped to bring inflation somewhat under control. Lowering of interest rates has injected an optimistic breath into our capital markets, lowered our corporate loan repayment amounts, and enabled the exit of so-called “Hot Money” without any substantial damage to our foreign reserves. We were expecting a lot worst. And when an economy expecting a disaster, only faces a surprising kick, that kick seems like a blessing in disguise compared to the expectations.
For now, we are alright but if not handled properly, our economy can face some dire consequences. Unemployment will be the biggest challenge, and foreign remittances coming from the GCC will be at risk because of their economies slowing down.
Businesses and economies can be dealt with, only if the people dealing with them, are still alive to deal with them
Their unemployment is our headache as well because millions of our Pakistani brethren live and work there. Besides, millions of others spread across the world, who send funds to their families and friends in Pakistan, in addition to making investments here.
So let us keep our fingers crossed and heads bowed down in prayers. We will God be-willing pull through.
The World of Politics
Not much to be said here except the fact that if your country has elections this year, as America does, you are caught between the devil and the deep blue sea. In all other countries, I feel that the voters, whenever their elections take place, will vote based on the performance of their governments’ handling of this virus.
The only country which will come out a winner would be China. Its people are the most content from their governments’ handling of Covid-19. With a nation full of happy people, its economy will see a V-Shaped recovery. At least domestically. Happy people make happy spenders. Especially after being locked down and facing possible death.
So all in all, 2020 is not a year for business. It is a year of survival. Businesses and economies can be dealt with, only if the people dealing with them, are still alive to deal with them.
Let us keep praying that we find a cure soon, and soon means within the next 60 days, or so, because if this situation persists past July, then we are looking at a world on its knees, economically. And a world on its knees, eventually, can fall on its face. And that is not an option for any country in this globally connected economy.
Mir Muhammad Ali Khan is a finance expert, author of 4 books, and has published over 800 articles. He was the first Muslim founder of an Investment Bank on Wall Street, New York. Twitter: @MirMAKofficial
The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.