(EBRD), March 18 – According to the European Bank for Reconstruction and Development, the actual and feared impact of the coronavirus is affecting supply and demand simultaneously, i.e. through a parallel supply and demand shock. The latest report of the Bank, states that the final economic impact will depend on the duration of the pandemic, as well as the policy response by the national authorities and governments in key export markets.
Countries are affected directly by public health measures enacted to fight the virus as well as by precautions taken by individuals. Although in some sectors remote work allows employees to carry on with their tasks, in other sectors production will be disrupted. Containment efforts will lead to lower consumption of services, such as restaurants, recreation, and to some extent transportation. They will also negatively affect household consumption of goods. Moreover, households may postpone some consumption due to uncertainty created by the pandemic.
As demand decreases, many firms, especially SMEs, may experience a sharp decrease in revenues, tightening their liquidity. Overleveraged firms will record higher liquidity constraints, increasing the risk of bankruptcy. This may be mitigated by the banking sector, which could allow delayed payments, and depends on the health of the banking sector, as well as the crisis measures imposed by the authorities.
There will be also indirect effects due to disruption of global supply chains, weaker foreign demand, lower oil and commodity prices and wide regional declines in tourism and travel.
Some countries are already experiencing disruption in input supply due to temporary closure of Chinese factories, although this effect may not be large, due to a limited exposure of most countries. Countries integrated into Italian supply chains are also being affected. Oil and commodity exporters are hit by lower Chinese demand and a fall in prices.
As regards the tourism sector, arrivals are expected to decline in 2020 globally, down from a 3-4% growth forecast before the COVID-19 crisis (UNWTO). We expect the economic impact to be particularly severe in Adriatic and Mediterranean countries, as well as SEMED and the Caucasus, where tourism is a crucial contributor to GDP growth.
The flow of remittances to CoOs could drop significantly if emigrants lose their jobs (global downturn) or cannot travel (flight and border restrictions), this would affect the BOP and consumption, particularly in some Central Asian countries and the Western Balkans.
In a more severe scenario of a prolonged crisis, a number of companies may resort to laying off employees. This will exacerbate the demand shock. This may especially affect those employed on temporary contracts. This effect could in fact be instantaneous for workers on zero-hour contracts or self-employed. In some countries of the region, the prevalence of such forms of employment is very high.
Also, as global uncertainty increases due to the unknowns of the crisis, capital markets become more sensitive to certain country specific vulnerabilities, as external financing becomes stricter.
Finally, the ultimate impact of the crisis will also depend on the policies taken by the authorities. For instance, monetary policy response in the CEE region directly depends on the actions of the ECB. However, the monetary policy stimulation in Poland, Hungary or Romania would face significant trade-offs, as inflation has been growing above targets of late. Fiscal policy response will depend on the fiscal space of each of the country. In the current circumstances, we would expect market access to be the only fiscal constraint to be reckoned with.