Earlier this month, G7 finance ministers and central bank governors vowed to use “all appropriate policy tools” to contain the economic threat posed by the coronavirus. The question left unanswered is what is appropriate and what will work.
The immediate response took the form of central bank rate cuts, with the US Federal Reserve fast off the mark. Though central banks can move quickly, however, it is not clear how much they can do, given that interest rates are already at rock-bottom levels, as it was shown by European Central Bank (ECB).
Yields on long-term U.S. government debt — a port in a storm for nervous investors — fell to all-time lows, a clear indicator of a looming recession that could come more quickly than many experts feared. Almost all major stock markets around the world are now in the bear-zone.
Coronaviruses are a large group of viruses that can cause illnesses as minor as a cold. This new virus was initially described by authorities as a new strain of pneumonia, however, it was later confirmed to be a novel coronavirus, or new coronavirus. On February 11, World Health Organization (WHO) chief Tedros Adhanom announced the official name for the disease is ‘COVID-19’. There are over 140,000 people who have been tested positive, while over 5,000 people have already died all over the world.
China, where the virus first broke out, seems to have passed the peak of its crisis, and economic activity is slowly returning. The concern is that other major economies, including the United States, is seeing a big spike in the number of virus cases with the corresponding impacts on trade, travel, and manufacturing.
It is the manner in which Coronavirus has spread in a deeply-interconnected world that is alarming. Many countries that use commodity price benchmarks has not figured out how to weigh Black Swan events – i.e. low probability, high impact – of which the Coronavirus is arguably one, in their budget assumptions.
Impact on Banks
The coronavirus is proving to be a significant shock to our economies. Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties. There are several ways that companies could struggle with coronavirus lower demand for products and services as consumers go out and shop less, or supply chain disruptions due to factory suspensions in China.
Affected businesses may need financial assistance to weather the storm, opening an opportunity for banks to create relationships with new customers that are likely to remain after the crisis is over.
Banks should continue to apply sound underwriting standards, pursue adequate policies regarding the recognition and coverage of non-performing exposures, and conduct solid capital and liquidity planning and robust risk management.
Banks should review their business continuity plans and consider what actions could be taken to enhance preparedness to minimise the potential adverse effects of the spread of the coronavirus.
Impact on Iraqi economy
As per the World Bank report, Iraq’s overall security situation improved after the defeat of ISIS on Iraqi territory in 2017, but recovery since has been slow. The defeat of ISIS in Iraq left the government with the daunting task of rebuilding infrastructure, re-establishing security and stability, and providing services for the return of the displaced.
A period of higher oil prices offered Iraq an opportunity to rebuild and tackle longstanding problems by improving some basics services. The country’s economy was gradually recuperating, with GDP estimated to grow at 4.8 percent in 2019, reversing the contraction of the previous two years. Growth was projected at 5.1 percent in 2020.
Crude futures plunged more than 20 percent after Saudi Arabia said it would raise production and give discounts on its oil. Hammered by withering demand due to the coronavirus, the oil market is sinking deeper into chaos on the prospect of a supply free-for-all. As the global oil benchmark plummeted to as low as $31.02 a barrel, Goldman Sachs Group Inc. warned prices could drop to near $20 a barrel.
Should lower oil prices endure for a protracted period, this could be a testing period for Iraq with a significant impact on the economic outlook. The consequence of an over-reliance upon energy exports, long understood to be a structural weakness in Iraqi economy, has become even more apparent.
Turkey’s closure of its only border crossing with Iraq amid a spike in coronavirus cases in its southern neighbour has disabled a major trade route, threatening the livelihoods of millions of people, from street vendors at the crossing to big industries on the other side of the country. Turkey’s exports to Iraq stood at $10.2 billion in 2019, while its imports amounted to about $2.7 billion.
“Health comes first, but trade should not be affected.”
Iraq closed its border with Iran in late February, only allowing Iraqi citizens that were returning, after the pandemic in Iran spread. The volume of trade between Iran and Iraq is around $12 billion.
Iraqi authorities have ordered the closure of Najaf province, home to holy Muslim Shia sites, for non-residents to prevent the spread of the coronavirus, the state news agency said. Najaf is a major destination for Shia pilgrims. This is going to affect the revenues generated from religious tourism. Each month, more than 40,000 Iranians visit Shiite holy sites such as Najaf and Karbala, buying religious souvenirs and supporting the economy through tourism.
Higher spending together with lower oil prices will result in a fiscal deficit projected at around 3-4 percent of GDP in 2020 and remain in a similar range in 2021. Lower oil prices and increased imports will cause the current account balance to remain in deficit and international reserves to decline.
The country does not have a financial cushion to cope with the impact of a sharp drop in exports as well as oil prices. In January, Iraq’s federal oil revenues, and according to Iraq Oil Report, dropped by around 8 percent compared to December to settle at $6.195 billion due to lower crude exports and a drop in oil prices. And that was before coronavirus threw the global markets into turmoil.
Iraq is the second-largest oil producer in OPEC, with output nearing 5 million barrels a day. Iraq is vulnerable to a prolonged period of low oil prices. For Iraq, its path to quickly ramp up production is limited by operational and infrastructure challenges.
Let’s hope the spread of the coronavirus is contained at the soonest and the normalcy returns soon.
In an effort to stop the spread of the coronavirus, more people, including global leaders, are using the Indian greeting of Namaste, which the Indians have been practicing for ages. Namaste has been derived from two Sanskrit words — Namah, meaning bow and te, meaning you. Namaste is basically a gesture of saying that “I honor the spirit in you which is also in me”. So it’s no more ‘hello’, but ‘namaste’ — COVID-19 proof!
Stay safe, be a responsible citizen, and follow basic protective measures advised by WHO.