Source: www.silkroadbriefing.com Op/Ed By Chris Devonshire-Ellis, Adam Livermore, Rohit Kapur, Maria Kotova and Patricia Varejao, Dezan Shira & Associates
Complete On-The-Ground Analysis From Dezan Shira & Associates Regional Offices
While global attention has been geared towards first towards China and Asia, followed by the EU and United States, little attention has been paid to other regions. The media imbalance is in part a reflection of the Western bias of the global media industry, however is also dangerous – countries and regions that are in desperate need are being drowned out of the overall picture by the constant discussions and debates largely taking place in Washington and Brussels. All other countries and regions have become secondary. This has the effect of presenting a biased look at the Covid-19 outbreak on a global scale.
The BRICS group of countries – Brazil, Russia, India, China and South Africa are important, not just because of their inter-continental ties but because they are 50% of global future GDP. The BRICS are expected to reach that milestone within the next decade
. What happens there now impacts on future trade flows. So how are the BRICS nations coping with the Covid-19 pandemic?
As a basic introduction, we can summarize as follows:
Brazil: A delayed response may already decrease the ability for an already stressed economy to rebound. There is potential for the situation to get out of hand. The stock market and currency are at historic lows.
Russia: Russia is expecting to take a hit but has enough resources to overcome these. The state is now supporting industry and individuals although will need to do more. There is some confusion concerning differing regional approaches.
India: India also appears to have enough to ride out the economic impact and return to work. However there is possibility of racial tensions while poverty levels among the poor can be expected to increase.
China: China is largely ahead of the game and appears to be the most disciplined in terms of population management. However a second wave of infections cannot be ruled out. Businesses and public gatherings will remain only partially open for months with employees still expected to work from home at any given time.
South Africa: Underlying health issues with sanitation, access to clean water, malnutrition and high rates of TB and HIV are expected to create problems not just in South Africa but across the continent. Poor infrastructure and health care could decimate parts of the continental economy.
For detailed reports from our staff on the ground please see below: Brazil – By Patricia Verejao, Dezan Shira & Associates Sao Paulo
Brazil has 1,123 deaths and 22,169 confirmed cases of coronavirus according to the Ministry of Health in a report released this Sunday (April 12). There is community transmission of the virus in the main cities of the country. The evolution of cases in Brazil follows a trend of European and North American failure.
The coronavirus pandemic caused the federal government, states and municipalities to announce several measures to try to contain the transmission of the disease in Brazil.
Commerce was closed, schools and colleges suspended their classes, Brazilian public transport redoubled attention, tourism trips were canceled indefinitely. In health services, holidays for health professionals were suspended, as well as leave. In all Brazilian states there was an increase in ICU beds, an increase in basic health units and the setting up of field hospitals. Cultural events have been canceled. Prison visits were prohibited. Home insulation is recommended for everyone. Public services are restricted with collective events canceled.
The Government has restricted the entry of foreign passengers on international flights, however this does not apply to Brazilians born or naturalized or to immigrants with a residence permit. Brazil's borders with neighboring countries in South America are now closed. Brazil entered the Easter holiday with falling isolation, rising deaths and pressures against quarantine. As the country faces the initial phase of the epidemic, Brazil is preparing to go through two holidays in a context in which Brazilians begin to relax their isolation and increase circulation on the streets in all Brazilian states.
The individual loosening adds to the scarcity, until now, of tougher measures by the government to reduce the flow of trips. This begins to be observed at a time when the country has not entered the most acute phase of the crisis when there is uncontrolled transmission of the disease, but the health system is already under pressure from the pandemic.
The relaxation of social distancing measures has divided government and specialists, putting on the one hand those who seek to avoid an economic recession, on the other hand those who prioritize saving lives in the midst of the new coronavirus pandemic. Social distancing measures are intended to prevent the Brazilian health system from becoming overburdened and collapsing. It is estimated that Brazil as a whole has not yet overcome the peak of the pandemic. Brazil faces increased social distance, where all groups of society must remain inmates to avoid uncontrolled acceleration of the disease. There are no cases of blockade in Brazil yet.
Brazil's Business Confidence Index, which gathers data from Industry, Services, Commerce and Construction, is already impacted by the Coronavirus. The Business Confidence Index (BCI) fell 6.5 points in March compared to February. It is the lowest rate since September 2017. The coronavirus pandemic in Brazil has significantly impacted business confidence since March. It took BCI to its biggest drop since the 2008-09 recession. Expectations worsened significantly in all sectors, especially in trade and services. As long as the pandemic impacts on the country persist in the coming months, the declining confidence scenario should remain. The confidence of all sectors that make up the BCI has declined since March. The biggest falls occurred in the Service and Commerce sectors, with falls of 11.6 and 11.7, respectively. Confidence in the industry fell by 3.9 points and in construction 2.0. All sectors were influenced by this drop in expectations.
The scenario for the coming months is worrying, with a strong economic and social impact. Although it is difficult to imagine any recovery of confidence in the visible horizon, we hope that the success of the isolation measures to reduce the spread of the virus may at least contain part of the discouragement that will come with the drop in GDP and the increase in unemployment.
In the face of the Covid-19 pandemic, restrictive measures to contain the spread of the coronavirus that are being taken in Brazil at the national, state and municipal levels are impacting the economy and the routine of Brazilians. There are impacts on both the public and private sectors, with operating restrictions, suspensions, prohibitions and postponements.
Interruptions in economic activity and uncertainties about the future have caused shakes in the Brazilian market. The value of the Brazilian Real against the US dollar has surpassed US$5.30 for the first time in history. The main Brazilian stock exchange, the Bovespa, has lost 70,000 points, dropping more than 40% this year to date. In March alone, companies listed on the stock exchange lost R$1.1 trillion (US$540 billion) in market value.
Concerns about the impacts of the coronavirus have weighed down in the downward revisions to the projections for the growth of the Brazilian economy in 2020. The increased uncertainty generated by the fall in oil prices and the advancement of the coronavirus in Brazil contributed to the increase in pessimism in the future of the economy. There was a loss of confidence for consumers in all income classes, influenced by the increase in pessimism regarding the economic situation in the coming months.
In families with lower purchasing power (up to R$2,100 or US$396 per month) the fall was influenced by the strong reduction in purchase intentions, whose indicator fell by 9.9 points. Among the income classes, the biggest fall comes from families with monthly family incomes between R$ 2,100 and R$4,800, whose confidence index dropped 10.8 points. In this scenario of a more difficult economy in the coming months, consumers also foresee a reduction in the supply of jobs and a worsening of the financial situation of families.
In yet another measure to contain the impacts of the new coronavirus, the government announced the creation of an emergency credit line to pay the salaries of employees of small and medium-sized companies. It is a loan, and is exclusive to pay employees. The program will finance employee salaries for two months.
The Santander bank predicts that unemployment in Brazil will increase by 2.5 million people at the peak of the economic crisis caused by the coronavirus. The worst moment in the labor market will occur at the end of June. With the expectation of an improvement in economic activity as of the third quarter, the job market, according to the bank, should have some positive response, but the contingent of unemployed people will still end this year with an increase of 1.5 million workers. As a result, the average unemployment rate is expected to be 12.3%, above that observed in 2019, when it was 11.9%.
"We are going to leave with the economy hurt from this inevitable process to save the largest number of lives", said the chief economist of Santander bank, Ana Paula Vescovi.
If social isolation has to be expanded to help contain the number of people infected with the disease and only start to be relaxed from mid-June, GDP may plummet 6%. The fiscal stimulus measures announced by the government to help mitigate the effects of the crisis and the drop in revenues caused by the economic slowdown should lead Brazil to end the year with a primary public sector deficit of R$452.5 billion (US$2.4 trillion). Brazil's debt is expected to reach 83.9% of GDP.
All the Provincial capitals of Brazil have ordered all commercial activities to cease in order to contain the coronavirus. Mandatory quarantine allows only certain services to function. More than 30% of companies in all sectors have already felt the impacts of the coronavirus pandemic on their businesses, according to a survey by the Getúlio Vargas Foundation (FGV).
The institution included in its polls for the month special topics to research the effects of the crisis on companies and consumers. So far, Industrial manufacturing has been the most affected sector, with 43% of companies reporting impacts of the coronavirus on their business in March, followed by trade and commerce (35%) and services (30.2%). In all sectors, the negative effects are expected to increase in the coming months: 68.5% of industry, 59.1% of trade and 49.7% of services.
Regarding the impacts in the following months, 15 of the 19 segments surveyed by FGV had percentages above 50% of the companies projecting negative effects, with emphasis on electrical machines and materials (91.5%), oil and biofuels (90.5%) , cleaning and perfumery (90.2%) and information technology and electronics (89.4%).
In trade, most of the impacts reached resellers of durable and semi-durable goods in March. The sectors most affected were vehicles, motorcycles and parts (46.4%), construction material (39.9%) and fabrics, footwear and clothing (37.2%). Only 18.8% of hypermarkets and supermarkets reported problems so far.
With regard to the coming months, the sectors that expect the worst effects are clothing and footwear (74.7%), automotive vehicles (71.6%) and furniture and household appliances (71.5%). In the service sector, the greatest impact so far has been felt in information and communication services (35.9%), followed by services provided to families (35.2%) and transport and auxiliary services to transport and post offices (34, 0%). For the coming months, transport has the greatest expectation of negative effects (62.9%), followed by services to families (54.5%).
Predicting the end of this crisis in Brazil remains an unknown quantity. The economy may start showing signs of improvement in the second half of 2021. The country is already in a recession and a recovery had been expected in early 2021. The economic recovery, next year depends on the result of the containment of the pandemic and a reduction in the level of uncertainty.
The solution found by many small business owners has been to focus on virtual sales. Before the coronavirus pandemic, internet sales were already on the rise, mainly due to convenience and lower costs to tenants, but today the concern is different.
Online purchases prevent customers from exposing themselves to Covid-19 contamination, delivery companies, for example, have changed their delivery protocols to avoid physical contact with customers. Buying food in this way, in addition to avoiding a trip to the supermarket, helps local restaurants, which otherwise would have no way to keep working.
Many supermarkets that had applications for delivery as a complement to sales, today already have most of the revenue coming from digital sales. This type of service is so sought after that it already has long queues for delivery. Outside the food industry, the demand for health items, mainly alcohol gel and masks, also increased. Companies such as Mercado Livre, one of the main marketplaces (platform with third-party products) in Brazil, increased the number of logistics employees to speed up deliveries.
The increase in online time has also increased with the epidemic. Confined at home, people are accessing even more social networks and applications, favoring contact with brands that position themselves well in the digital environment. On the other hand, companies that sell durable goods (technology items for example) will face difficulties, even selling online. Russia – By Maria Kotova, Dezan Shira & Associates Moscow
On March 28, most regions of Russia introduced 'Recommended Restrictive Measures' due to the situation with coronavirus. Cafes and catering establishments, shopping and leisure centers, cinemas and cultural institutions were closed. In some regions, a ban on visiting religious institutions came into force and public transport stopped working.
President Putin announced the week of 28th of March to 5th of April as paid, non-working week while asking citizens to keep self isolation regime and stay at home. Later he extended quarantine till the end of the month (30th April). The measures were imposed based on the analysis of the experience and measures in other countries. The government wanted to ensure that the increasing curve of the cases is not that sharp and the pressure on the medical institute is spread gradually and the system will have the capabilities and beds to take in people with the virus. If the curve was sharp, the system would not be able to cope as in many European countries. Although it is early to make conclusions. It is estimated that the hardest are 4-5 first weeks which means that Russia would have another 2-3 weeks before it may get to the peak and so called "plateau" where the daily number of cases stop to grow.
The total confirmed cases in Russia as at April 12th is 18,328, with 148 deaths. Most of the cases are in the Moscow region with 11,568, St. Petersburg with 557 and the Komi republic in Russia's Northwest with 208.
The government of the Russian Federation, in order to prevent the spread of a new coronavirus infection in Russia, temporarily limited the entry into the Russian Federation of foreign citizens and people without Russian citizenship, including those arriving from the territory of Belarus, as well as citizens of Belarus, from March 18. The restriction will be valid until May 1, 2020.
On 27th of March, Russia suspended all charter and regular international passenger flights from and to any country. There were only export flights that were arranged by the government to evacuate Russians who could not return from other countries.
The Russian capital, Moscow is an international hub with thousands of people travelling through. This had the effect of bringing more cases of infection into the country. Moscow is in the most difficult position with the highest number of cases in the country (around 70% of total), with ambulance services operating at peak limits. Cases doubled over the past week and heavy cases increased (where 85% of virus infection caused pneumonia). Self-isolation now operates in the Moscow region for all residents. It is not allowed to leave the house unnecessarily. It is permitted to leave the apartment in cases of dog walking, going to work (for those who operate in special industries), going to a pharmacy, to a store (within 100 meters) and for taking out garbage. People returned from abroad or have been in contact with those as well as people older than 65 year are mandatory quarantined at home. Those who break the restrictions are fined.
This weekend government decided to lock down the capital completely. Transportation with the capital and suspended everyone who wants to drive a car or a bike within the city without online permit which will be granted if the applicant has specific reason ( e.g. medical staff traveling to work). Domestic transportation flows between different regions have decreased, although varying federal government didn't choose to close all transport, freight, passenger traffic between regions, massively restrict the work of enterprises when only isolated cases of infection are recorded in the region. It is instead suggested to carefully evaluate measures and damage and take a case by case approach.
However, to date 15 regions (of 85) of Russian Federations have now limited transportation within the region and between the regions. These may vary from one region to another, but in many cases it means that it is restricted to drive within/across the region without special documents issued to the workers of certain essential sectors (medical, housing and communal services).
To eliminate misinformation, the government proposed new measures that came into effect in the end of March that impose criminal liability and penalties for those who made public statements that government would consider to be "fake news". These are identified as those that pose a threat to the life and safety of citizens, or about measures taken to ensure the safety of the population and territories, methods and methods of protection from these circumstances. Such acts are punishable by a fine of Rs.300,000 to 700,000 ($4,000-$9,500), disciplinary labor for up to 1 year, or detention up to 3 years. While these measures might work well specifically against publications on "miracle" drugs that can cure coronavirus, at the same time it can be used by local authorities who may try to take advantage of the situation and target unpopular individuals.
The Government already building sixteen additional hospitals across all the regions in Russia. By the end of the April, there will be additional 100,000 beds with required equipment prepared across the country. The hospitals are being built by the military working in 3 shifts each 24 hours.
The federal support to the medical care services has already been allocated and has arrived in the regions. In addition to all the additional features, infectious departments. Another 13 billion rubles was allocated for the purchase of medical equipment, including artificial ventilation and ambulances, which were initially received in the regions in exchange.
The government is forming teams of specialists capable of working with new equipment in the hospital, who were requalified to treat people with coronavirus infection. Last week additional payments were provided to doctors, nurses, medical personnel for special working conditions and increased workload fighting coronavirus. Funds from the federal budget for these purposes – more than Rs.10 billion (US$140 million) – are allocated to Russia's federal regions.
Additional monthly pay for medical staff will be Rs.80,000 (@US$1,000) per month to the doctors, and Rs.50,000 rubles (around US$676) for mid-level paramedical personnel and nurses, as well as ambulance staff. For junior medical personnel, paramedics, nurses and drivers of car crews – an additional salary of Rs.25,000 (around US$340) is payable.
The Federal government imposed special procedures for the payment of sick leave due to quarantine. Payments of benefits to families with children aged from three to seven years will begin in June. A payment of Rs.5,000 (US$69) per child under three years of age for those who have the right to maternity capital will be paid in April-June.
Remote payments of benefits, including unemployment have been arranged, while the formation of a list of essential goods and operational monitoring of their availability in trade organizations is underway, as are the remote sale and delivery of over-the-counter drugs.
There is a moratorium on the calculation of fines and penalties for non-payment of utilities. It is forbidden to collect penalties for late or incomplete payment for housing, utilities and overhaul.
The number of qualified laboratories for testing the population has been increased, including through the involvement of private organizations. New regulations have also come into effect on the retail prices for medicines and medical devices to prevent profiteering.
Russia's Federal government has proposed the following measures to support the economy:
- Deferred payments of budget loans, as well as compensation for losses of regional budgets;
- Deferral of tax collection for enterprises of the most affected sectors of the economy.
- A moratorium on business audits, including tax audits, with the exception of issues that pose risks to the life and health of citizens;
- Expansion of the soft loan program;
- Increase in the amount of subsidies for small and medium enterprises;
- Launching a service to help employees and employers on-line inspection;
- Facilitation of lending conditions for industries affected by coronavirus;
- Lower property taxes for lessors in exchange for lower rental rates or deferred payments for tenants of certain business categories;
- Green Corridor for the import of certain categories of goods at customs.
- On the regional level, each head of region of the Federation was authorized to form preventative norms for the spread of coronavirus in consistence with the specific situation in each region.
The Government also proposed deferred payments for existing credits and loans, however, the thresholds confirmed are relatively high in that less than 50% of the borrowers qualify to use it (and less in Moscow where mortgages etc. are higher).
Below are the threshold of the loans that can be deferred ( if exceeding below amounts, the loans should be still payed on time)
- Mortgage loans – Rs.1.5 million (US$20 000)
- Auto loans – Rs. 600,000 (US$8 225)
- Сonsumer loans for individual entrepreneurs – Rs.300,000 (US$4,115)
- Consumer loans for individuals – Rs.250,000 (US$3,430)
- Loans for credit cards – Rs.100,000 rubles (US$1,370)
Each Federal region of Russia has its own regional list of enterprises that play an important, systemic role for the economy of the regions and will not be fully closed. The priority is to ensure their sustainability, maintain employment, and seek targeted solutions.
Current projections by Russia's Center for Macroeconomic Analysis and Short-term Forecasting indicate negative 20% of GDP for Q1 2020 and up to 15 million unemployed.
According to the consulting company Finexpertiza, a week of self-isolation costs Russian businesses Rs.123.3 billion rubles. A full month of temporary closures will cost private sector businesses Rs.530 billion rubles. One months of self-isolation in April will cost Russia 1.5% – 2% of annual GDP. Business losses in terms of unrealised income are estimated at Rs.917 billion a week and Rs5.5 trillion a month, which is 5% of GDP.
Businesses have asked the State to provide cheap loans and tax holidays. Tour operators, hoteliers, airlines, restaurateurs and other industries are asking for help, whose turnover has fallen sharply due to the fact that people are sitting at home. The authorities have announced certain support measures, but small-medium business community believes that they are not enough. Entrepreneurs are preparing to fire employees.
Federal unemployment benefits will be paid on the upper bar – Rs.12,130 within three months (from April to June). If there is a minor in the family where the parent lost his job, an additional monthly payment of Rs.3,000 per child shall be paid.
In Moscow, those who lost jobs due to coronavirus, the unemployment measures will allow to obtain compensation in amount of Rs.19,500 rubles (US$220) starting from 9th of April till 30th of September (where Rs.12,130 rubles is from the federal allowance, and Rs.7,370 rubles from the Moscow city budget). The period of the application is simplified online and should not take longer than 3-5 days.
Russia will be under pressure from quarantine measures in the EU – the EU countries account for 43% of Russia's foreign trade. In addition, the regime of self-isolation in Russia means the closure of all entertainment venues, restaurants and shopping centers. Alfa Bank analysts forecast unemployment in Russia at 5% by the end of the year.
At the end of March, the index of business activity in the services sector of Russia fell to 37.1 points from 52 points in the middle of the first quarter. IHS Markit, which calculates the index, explained that demand for Russian services fell at the fastest pace after the financial crisis.
There is no doubt that April will be the most disastrous month in the Russian economy in modern history.
In mid-March, authorities announced that Rs.300 billion rubles would be allocated to eliminate the consequences of the coronavirus. At a meeting with President Putin on April 1, Prime Minister Mikhail Mishustin announced that Rs.1.4 trillion had been reserved for this purpose.
At the same meeting, the head of the Accounts Chamber, Alexei Kudrin, said that most likely, it would be necessary to spend 5% of GDP or higher, that is, from Rs.5.5 trillion to support the economy. The economist believes that Kudrin's assessment is at the lower end of the anticipated need.
Western countries take the approach" no matter what it costs us "and are ready to spend 10-15% of annual GDP. In Russia, so far the amounts indicated are an order of magnitude less.
In case of loss of the main source of income, 42% of Russians will be able to pay expenses without the help of loans only for one month, a survey of the NAFI analytical center showed. The results of the study show that most Russians did not make savings and did not have the necessary financial cushion in case of job loss. Today's crisis will force a significant part of citizens to apply for loans. This is especially true for vulnerable categories. Another survey commissioned by Rosgosstrakh Life and Otkritie Bank showed that 63.6% of Russians have no savings at all.
Experts at the HSE Institute for Social Policy in the study predict a decline in payments to social funds in connection with the expected cuts in salaries, rising unemployment and falling real incomes of Russian citizens. Payments to the Pension Fund, as well as social and health insurance funds, already began to decline in March 2020. Depending on the development of the situation, the number of workers in Russia may be reduced by 2.6-10.2 million, the payroll will also decrease as will taxable income for the treasury and State budget.
In the most positive scenario, payments to state funds will collapse by Rs.200 billion (2.5% of contributions in 2019), and in the most negative scenario, by Rs.2.3 trillion (30% of contributions).
According to bank economists, in a positive scenario, the global economy will quickly recover, and Russia's GDP will grow by 1.5% in 2020, while the Ruble will rebound to 75 against the US dollar by the year end. However, this basic scenario assumes that Russia's GDP will fall by 0.8%, and the dollar will be 79 rubles. In the basic scenario, the bank assumes that the quarantine will last 2 months, after which the slow recovery of the world economy will begin (based on Renaissance Capital's economic analysis).
The bank's negative scenario suggests a 2.5% decline in the Russian economy and an increase in the exchange rate to 82 rubles per dollar. The underlying forecasts of other analysts are generally similar. Standard & Poor's predicts economic decline of 0.8% in 2020. The economic downturn will lead to an increase in bad loans from 8% at the end of 2019 to 15% at the end of 2020. The accumulated capital, state assistance and weakening regulatory requirements will allow banks and other organizations to withstand stress (based on S&P analysis).
According to Alexei Kudrin, Chairman of the Accounts Chamber, even in a fairly moderate version, the fall in GDP this year could be from three to five percent. "But the situation may be similar, as it was in 2009, when GDP fell by almost 8%," he said at a meeting with President Putin on April 1.
If the global economic recovery begins in the third quarter of 2020 and is accompanied by an increase in the price of oil and other Russian export goods, then most likely the economic growth this year will be slightly higher than zero. This appears more likely as a truce has now been agreed between Russia and Saudi Arabia to fix the price of oil.
However should the negative effect of the spread of coronavirus turns out to be deeper, and foreign government support programs are not effective enough, then the National Wealth Fund will require significant additional funding, but even with this a decline will be at least 3%.
The Russian government is counting on a quick quarantine. The Russian authorities believe that the shock state of the world economy will not last long, and in the second half of the year a quick recovery will begin. Alfa bank believes that protection from a deeper failure in the structure of the Russian economy, where the share of small and medium-sized enterprises is small; that Russia is a net importer of services and its financial sector does not suffer from a liquidity crisis and from rising interest rates. On the positive side, Russia is one of the least-indebted countries in the world, has the worlds fourth highest foreign reserves, and possesses 30% of global natural resources. It is fiscal prudence and sound management in the face of sanctions and Covid-19 that will see how quickly Russia can rebound. At present it is hard to call.