TOUGH TIMES

Mitigating the economic impact of COVID-19

New Corona virus could push world into recession

In Summary

•Closed borders and the controlled movement of people, may plunge the global economy into a recession.

•Tax incentives and corporate bailouts can prevent the Kenyan economy from plunging into a recession

The accelerated growth and spread of the COVID-19 pandemic, colloquially known as coronavirus, has ravaged through public health systems and economies worldwide. With the World Health Organisation (WHO) reporting in excess of 180,000 cases as at the third week of March 2020, with no foreseeable end in sight, the global pandemic presents a dual challenge to governments worldwide. On one hand, the rapid spread of the COVID-19 virus has heralded a public health emergency that, according to various medical analysts, may easily amount to the worst public health crisis seen in modern times. On the other hand, the raft of measures targeted at mitigating the spread of the virus, such as closed borders and the controlled movement of people, may plunge the global economy into a recession.

With a focus on the economic impact of COVID-19, it is evident that the virus presents significant economic threats. With stock markets tumbling from the wake of COVID-19 (FTSE, Dow Jones and Nikkei markets recorded a drop of 33%, 29% and 27% respectively as at 17 March 2020), and entire industries evidencing destress signals, governments worldwide are setting in place measures aimed at mitigating the economic threat posed by the pandemic.

Measures being considered include the reduction of interest rates (for instance the US government has slashed benchmark interest rates downward from 1% - 1.25% to 0% - 0.25%) with a view to cushion borrowers and increase consumer spending, corporate bailouts aimed at protecting businesses from the disruptive effects of the virus and the implementation of moratoriums on the mortgage and rental payments to protect consumers from the worst impacts of a cash crunch. In order to implement the aforementioned measures, governments have signaled stimulus packages amounting to USD 240B, with the World Bank pledging USD 12B and the International Monetary Fund pledging up to USD 50B targeted at alleviating financial crises in emerging and developing economies resultant of the pandemic.

Closer to home, the Kenyan Government has implemented a number of measures aimed at protecting the Kenyan citizenry from the economic backlash of COVID-19. The measures, primarily purposed at protecting consumers, include the elimination of transaction charges with respect to the various bank to mobile and mobile to bank transactions, increased the transaction limits imposed with respect to e-Wallets, and further, indicated the possibility of moratoriums on personal loan repayments for a period of up to one year, provided that the loans were in good standing as of 02 March 2020.

While the above measures are indeed welcome and may serve to protect the Kenyan populace from the worst economic impacts of COVID-19, it is imperative that the needs of corporate Kenyan be considered as well. Noting the disruptive impact of COVID-19, it is in Kenya’s best interest that key corporate interests are protected and supported to the extent possible, for instance through tax incentives and corporate bailouts, so as to prevent the Kenyan economy from plunging into a recession once the worst of COVID-19 is dealt with.

Karen Kandie – MD IDB Capital