POST
COVID-19: EMERGING GEO-STARTEGIC TRENDS AND IMPACT ON ECONOMY AND CORPORATES
By
Col Akshaya Handa
Introduction
Geo-strategic trends have nearly
always impacted the national and corporate economics. Turbulent times more
often than not, change the existing geo-strategic trends and lead to unexpected
results, sometime turning earlier expectations on their head. Corporates too
need to be nimble enough to react to the changes, for seeking the old, often relegates
them to dinosaurs. The ongoing CoVid-19 pandemic has unleashed one such phase. A
world struggling with reduced growths has effectively been pushed into a
recession by circumstances affecting supply, demand and market simultaneously,
a situation with no precedence. Global leaders are under suspicion of being
unable or incompetent of looking after their populations and of fudging data. Whilst
populations are struggling to keep body and spirit together, the blame game has
begun and accusations & suspicions are rampant. Social media is making its
own contribution by adding fuel to fire. The world will sooner or later get
over this Pandemic – modern science will ensure that – but the economic
realignment that it will cause, will have much larger repercussions than just
recession.
Hyper localization and counter
globalization were a reality even before the pandemic. Many commentators trace
its origin to 2010 when China abruptly halted
the export of rare earth ores, salts and metals to Japan, a primary
consumer, as a response to the disputed interests in the East China Seas.
Since, then large numbers of small and large trade wars have occurred between
nations, culminating in the mother of all, US – China trade war. These also
catapulted many nationalist leaders to power across the globe, seeking to
promote local interests while swearing by a globalised world. The closed
borders caused by the pandemic and the consequent supply chain disruptions will
only exacerbate the trend more.
Likely Geo-Strategic and Economic Trends
General
CoVid – 19 may not be totally
eliminated any time soon.
As and when the vaccine is available, it will be costly and will take time to
reach everyone. Building herd immunity will also be time consuming. The
difference would be in that, the disease will be treatable, not threatening to
overwhelm the medical resources and fatality rate would fall, albeit; isolation
of patients and contacts, will still remain the norm. This may lead to an era
where organizations are faced with disruptions when human resources are suddenly
unavailable for short periods.
Multilateral organisations like the
WTO will be over stretched to resolve disputes and implement agreements. With the
effort of each country to boost its own economy, if need be, at the cost of
others, quantum of disputes before such organisations will rise. Dispute
settlement may therefore be delayed and may become unsatisfactory. It may
further become a problem if major donors hold back funding in response to
adverse decisions.
Governments’ internal legitimacy as
well as international standings
will depend upon their ability to ramp up the health services, rejuvenate
industrial production, enable least restrictive control measures and the rates
at which they manage the recovery of the local economies.
Surveillance technologies and their
demonstrated power to fight pandemics will be more widely accepted than earlier. Artificial intelligence
and surveillance would provide a potent dose both for the economy as well as
industry and commerce.
China
Suspicion of China and accusations will grow. The world
wary of their dual currency system and BRI fuelled debt trap will seek but get
few answers of the earliest days of the Pandemic. Its behaviour thereafter – of
selling medical equipment donated by Italy back to the latter and territorial
forays in South China Seas against both Vietnam and Philippines will exacerbate
the same. It will be viewed as profiting from the pandemic. Albeit, its
economic strength will remain a factor, when, nations deal with it
individually. Though an increasingly wary world will attempt to seek and build
alternates.
In the regions
where China has already built capacity
through BRI (Latin America, SE and Central Asia and parts of Africa) China
will gain ground and attempt to monetise it through control over markets and
resources.
Developed
World
The
industrial deficiencies of the developed world including US and Europe have been exposed. Major policies
changes will be sought by their populations who so far have borne the brunt of
the pandemic. Regime changes in a few are a distinct possibility.
The
Eurozone has already seen the return of borders in its attempt to contain the spread. Simultaneously,
mutual mistrust is rising as the rich North is increasingly seen as unwilling
to finance the suffering South. While, its limitations on economy (which was
its main business are exposed) the lack of availability of uniform health
facilities too has become an issue. Undoing the damage to the concept of EU,
will take an effort larger than just battling the pandemic.
Middle
East
Governments in Middle East will face multiple
pressures – the drop in oil incomes will impose budgetary constraints on the
one hand while the inability of some to tackle the pandemic will raise
questions on their legitimacy. Add to it the world wary of those considered
supporting terror or their ideology will not be automatic partners to a world
closing its borders. The reduced consumption of oil with emergence of
alternatives and reduced travel will add to it. To strengthen legitimacy where
required few may turn to ideology while some may turn to increase in terror
activities.
Asia
Asia is likely to recover faster than
the rest of the world. East
(especially South Korea and Taiwan) with its robust response, SE with its response
and population surveillance measures and South Asia with its inherent market and
success in viral containment may well the leaders. However, with high debt to
GDP ratios of many, may create problems and would need to be watched.
National Economies
Increased unemployment and lower
budgetary availability with governments will be a stark reality. Governments will have to make
the difficult choice between bailouts to the unemployed for immediate relief or
subsidising the employment creating industries for long term benefits. The
recovery is more likely to be a fattened U requiring repeated stimulus by the
governments. Cash therefore will be king not only for corporates but also the
treasuries.
National and local economies will
become much more important than global recovery. Countries will simply have less
capacity – both in time of resources and time – to cooperate on economic
interests. With local economies strained, Governments will be hard pressed to
invest capacities in any problem not involving national interests.
All nations will try to rejuvenate
their own economies and promote national exports by any means. IMF chief has already
said that the world is into a recession. To boost GDP and employment at such
times, world governments would have to employ all tools in their arsenal.
Import substitution and export promotions would certainly be considered
seriously.
Governments will feel the need to
raise additional resources and
for this they are likely to look towards non-taxed areas as also resort to
additional printing of money. The latter, unless micro-managed, may lead to
inflationary pressures and additional pain for the under stress populations.
Therefore offshore companies accessing the local markets and contributing
little to the national kitty will be considered albeit; this will raise
tensions with other nations.
Calls for protection of the local
industry will
increase. As demand for products reduces, sales will be under pressure.
Simultaneously, certain nations may directly or indirectly subsidise their
exports and further pressurise local sales and by extension the local industry.
As the issue will directly affect employment, calls for protection of the local
industry will rise. Very few, if any, national governments will be able to
resist them and buy and spend locally will be the order of the day.
Export oriented economies will
struggle to find markets for their goods. Countries like China and Germany produce much in excess
of what their local markets can consume. Whenever, demand for their products
reduces, their economies have suffered. This was a painful lesson learnt during
the 2008 recession. To protect their markets these countries have adopted
various tools. While the EU market became the panacea for Germany, China
reacted with BRI and RECP (Regional
Comprehensive Economic Partnership). While
the former ensured market access and employment; the still under negotiation
latter, aims to reduce tariffs. Export oriented countries are likely to push
these efforts to early conclusion while the rest are likely to resist them and
wrest more concessions.
In a bid to rejuvenate the national economies,
countries who have given loans, may seek better returns. This maybe, in terms
of redemptions, takeover of assets or, cornering critical supplies. In some
cases, it may lead to interference in national sovereignty. China with its BRI,
already has put in place a structure wherein a more than a few countries are in
its debt. In the case of Hambantota, it has already displayed an inclination of
taking over assets if returns are unsatisfactory.
Countries with
high debt to GDP ratios as also high economic
dependency on one nation are likely to suffer the maximum sovereignty
erosion, especially if investments from the latter have been taken for assets. The
higher the debt level, the more costly and economically damaging would social
distancing be. Pressure would exacerbate, if assets are already owned by a
foreign power and / or it has large number of foreign origin first generation
citizens running or owning businesses. The likely candidates can be found in
South Asia, Africa, Europe and South America.
While the secular commodity super cycle is over,
certain commodities (like rare earth minerals, lithium etc) – which have near
monopoly availability in the market – will see artificial scarcity and
therefore rise in prices. For the balance commodities, supplies would increase
as the countries attempt increasing their exports and, therefore further
reduction in prices.
Sovereign debt defaults would
increasingly be likely.
Lebanon and Argentina have already defaulted, others may follow. These may lead
to flight of capital from other nations too as the financial institutions try
to recover their investments in time. Commodity exporters engaged in dollar
funding are likely to be the most vulnerable as commodity prices decline. Many
others who borrowed substantially in dollar may also feel the heat in meeting
their debt obligations.
These trends may trigger realignments where blocks of interdependency are
defined by proximity, natural resources, markets access and security interests.
Banks holding
large debts may well be faced with increasing
NPAs. To save the savings as also the banks, nations and central banks may
try to print their way out of the problem. This would fuel inflation and dampen
the effect of lower commodity prices.
Implications
for Corporates
Intermittent
shutdowns involving
opening up, returning to work followed by a repeat shutdown is likely to be the
order of the day.
Sudden
non-availability of some personnel
may continue for a few years at the minimum. While the latter can be managed
for a few, by permitting remote working, it cannot become a norm for the common
blue collar employee. Contractual employees not provided adequate security in
such times may drift away to other jobs, if an option is available, leading to
loss of talent. The trend is already visible in terms of non-availability of
labour for the harvest of standing crops.
Supply
chain disruptions would
continue to be plague most organisations. Just in time supply chains would face
the maximum pressure necessitating certain minimal levels of stocking. Albeit,
the lower prices of commodities would certainly help cut costs. Availability of
multiple suppliers too would be a necessity so that temporary shutdown of one
does not lead to a cascading effect for industries higher in the supply chain.
Social
distancing norms will
have to be followed for at least the medium term. Industries wanting to return
after lockdowns would have to ensure them both on and off sites. These would
require additional investments. Smaller businesses, in the supply chain of the
industry, may not have the fund availability and would require, help from the
bigger players higher up in the chain.
Small
businesses which invariably are the least liquid and
yet an important component of both the supply chain and market access
mechanisms are likely to feel the maximum heat. They would therefore require
help not only from the Government but also the industry and companies they
support.
Within
an industry too small businesses will lose to the bigger ones leading to creation of virtual
monopolies or duopolies. Timely legal mechanisms and Governmental actions would
have to be used to avoid such situations.
Manufacturing
would increasingly move
towards automation. This would reduce the scope for both small businesses as
well as the unskilled employment. Skill upgradation for industry requirements
would therefore become essential.
As the confidence in technology increases,
the companies dealing in automation, robotics and Artificial Intelligence will
see an opportunity. This would change the contours of education as the demand
for these skills increase.
Reduced demand and
protection for local industries would imply that exports would be under stress. Corporates catering for the
local markets, with efficient local network and last mile connectivity would
reap the benefits.
Corporates with debt portfolios requiring interest outgo
larger than the earnings would be under pressure and may not be able to
service their debt. This in turn would impact the lenders and unless the
national governments and central banks intervene (by either printing more
currency and /or open market operations) the individual savings maybe adversely
impacted.
A sense of suspicion would remain with respect to the
nations which are suspected to have hidden or fudged data regarding this
pandemic. Corporates are likely to be discouraged by their national governments
to have too large a dependence on such nations.
Corporates catering for off shore markets would try their best to regain
and increase their market share even at some additional costs. For this
they would be ready to accept additional restrictions or regulations, if any
are imposed by the local governments.
For nations like India
who missed the manufacturing cycle
and are striving to profit from it, this would be a good opportunity to seek
local manufacturing as well as increased local content, from the off shore
manufacturers. Large markets will be able to leverage the same and ensure not
only employment but comparatively earlier recovery compared to the rest of the
world.
Business
travel will reduce
and this would adversely affect the travel industry. Simultaneously, the travel
industry would voluntarily and possibly under legislation, incorporate medical
norms which would raise its costs.
Conclusion
Turbulent times more
often than not cause upheavals in the Global order. Simultaneously they provide
an opportunity to both nations and organisations, which if availed, can help
them leapfrog to a higher pecking order. The ongoing CoVid pandemic is one such
upheaval. Recognising and utilising the trends to leverage the strengths and
overcome weaknesses can help growth and recovery in these times of recession.
https://usiofindia.org/publication/cs3-strategic-perspectives/post-covid-19-emerging-geo-startegic-trends-and-impact-on-economy-and-corporates/
