FINANCIAL INSTITUTIONS

NAME: TOOBA WASIF

ID: 23257
SUBMITTED ON: 20TH APRIL 2020
SUBMITTED TO: SIR NAEEM UL ANSARI

COVID 19 - GLOBAL AND PAKISTAN

 OVERVIEW:
The World Health Organization (WHO) first declared COVID-19 a world health
emergency in January 2020. Since the virus was first diagnosed in Wuhan, China, it has
been detected in over 190 countries and all U.S. states. In early March, the focal point of
infections shifted from China to Europe, especially Italy, but by April 2020, the focus
shifted to the United States, where the number of infections was accelerating. The
infection has sickened over 2.1 million people, with thousands of fatalities. More than
80 countries have closed their borders to arrivals from countries with infections,
ordered businesses to close, instructed their populations to self-quarantine, and closed
schools to an estimated 1.5 billion children. 2 In late January 2020, China was the first
country to impose travel restrictions, followed by South Korea and Vietnam. Over the
period from mid-March to mid-April 2020, more than 22 million Americans filed for
unemployment insurance, raising the prospect of a deep economic recession and a
significant increase in the unemployment rate.
After a delayed response, central banks are engaging in an ongoing series of
interventions in financial markets and national governments are announcing spending
initiatives to stimulate their economies. Similarly, international organizations are taking
steps to provide loans and other financial assistance to countries in need. As a result,
the IMF estimates that the increase in borrowing by governments globally will rise from
3.7% of global gross domestic product (GDP) in 2019 to 9.9% in 2020, as indicated in
Figure 1. Among developed economies, the fiscal balance to GDP ratio is projected to
rise from 3.0% in 2019 to 10.7% in 2020; the ratio for the United States is projected to
rise from 5.8% to 15.7%. For developing economies, the fiscal balance to GDP ratio is
projected to rise from 4.8% to 9.1%.5 According to the IMF, France, Germany, Italy,
Japan, and the United Kingdom have each announced public sector support measures
totaling more than 10% of their annual GDP.

 IMPACT ON WORLD ECONOMY:

The global pandemic is affecting a broad swath of international economic and trade
activities, from services generally to tourism and hospitality, medical supplies and other
global value chains, consumer electronics, and financial markets to energy,
transportation, food, and a range of social activities, to name a few. The health and
economic crises could have a particularly negative impact on the economies of
developing countries that are constrained by limited financial resources and where
health systems could quickly become overloaded. Without a clear understanding of
when the global health and economic effects may peak and some understanding of the
impact on economies, forecasts must necessarily be considered preliminary. Similarly,
estimates of when any recovery might begin and the speed of the recovery are
 speculative. Efforts to reduce social interaction to contain the spread of the virus are
disrupting the daily lives of most Americans and adding to the economic costs.

 ECONOMIC FORECASTS:

1. GLOBAL GROWTH:
The economic situation remains highly fluid. Uncertainty about the length and
depth of the health crisis-related economic effects are fueling perceptions of risk
and volatility in financial markets and corporate decision-making. In addition,
uncertainties concerning the global pandemic and the effectiveness of public
policies intended to curtail its spread are adding to market volatility.
The Organization for Economic Cooperation and Development (OECD) on March
2, 2020, lowered its forecast of global economic growth by 0.5% for 2020 from
2.9% to 2.4%. If the virus takes peak in the first quarter of 2020, the OECD
estimated that if the economic effects of the virus peaked in the first quarter,
which is now apparent that it did not, global economic growth would increase by
1.5% in 2020. That forecast now seems to have been highly optimistic.
On March 26, 2020, the OECD revised its forecast of the impact on global
economic growth from the pandemic and measures governments have adopted
to contain the spread of the virus. According to the updated estimate, the
current containment measures could reduce global GDP by 2.0% per month, or
an annualized rate of 24%, approaching the level of economic decline not
experienced since the Great Depression of the 1930s.
Labeling the projected decline in global economic activity as the Great
Lockdown, the IMF released an updated forecast on April 14, 2020. The forecast
concluded that the global economy would experience its “worst recession since
the Great Depression, surpassing that seen during the global financial crisis a
decade ago.” The IMF forecasts that the global economy could decline by 3.0% in
2020, before growing by 5.8% in 2021; global trade is projected to fall in 2020 by
11.0% and oil prices are projected to fall by 42%. The IMF also concluded that
many countries are facing a multi-layered crisis that includes a health crisis, a
domestic economic crisis, falling external demand, capital outflows, and a
collapse in commodity prices. In combination, these various effects are
interacting in ways that make forecasting difficult.

The table below shows IMF and OCED’s forecast of real GDP growth.
Advanced economies as a group are forecast to experience an economic contraction in 2020 of
7.8%, with the U.S. economy projected to decline by 5.9%, about twice the rate of decline
experienced in 2009 during the financial crisis. Most developing and emerging economies are
projected to experience a decline in the rate of economic growth of 2.0%, reflecting tightening
global financial conditions and falling global trade and commodity prices. In contrast, China,
India, and Indonesia are projected to experience small, but positive rates of economic growth in
2020. The IMF also argues that recovery of the global economy could be weaker than projected
as a result of: lingering uncertainty about possible contagion, lack of confidence, and
permanent closure of businesses and shifts in the behavior of firms and households.
The OECD estimates that increased direct and indirect economic costs through global supply
chains reduced demand for goods and services, and declines in tourism and business travel
mean that, “the adverse consequences of these developments for other countries (non-OECD)
are significant.”
According to the OECD’s updated forecast:
 The greatest impact of the containment restrictions will be on retail and wholesale
trade, and in professional and real estate services, although there are notable
differences between countries.
 Business closures could reduce economic output in advanced and major emerging
economies by 15% or more; other emerging economies could experience a decline in
output of 25%.
 Countries dependent on tourism could be affected more severely, while countries with
large agricultural and mining sectors could experience less severe effects.
 Economic effects likely will vary across countries reflecting differences in the timing and
degree of containment measures.
China’s global economic role and globalization mean that trade is playing a role in
spreading the economic effects of COVID-19. More broadly, the economic effects of the
pandemic are affecting the global economy through three trade channels : (1) directly
through supply chains as reduced economic activity is spread from intermediate goods
producers to finished goods producers; (2) as a result of a drop overall in economic
activity, which reduces demand for goods in general, including imports; and (3) through
reduced trade with commodity exporters that supply producers, which, in turn, reduces
their imports and negatively affects trade and economic activity of exporters.

2. GLOBAL TRADE:
According to an April 8, 2020, forecast by the World Trade Organization (WTO),
global trade volumes are projected to decline between 13% and 32% in 2020 as a
result of the economic impact of COVID-19.
r. The WTO’s more optimistic scenario assumes that trade volumes recover
quickly in the second half of 2020 to their pre-pandemic trend, or that the global
economy experiences a V-shape recovery. The more pessimistic scenario
assumes a partial recovery that lasts into 2021, or that global economic activity
experiences more of a U-shaped recovery. The WTO concludes, however, that
the impact on global trade volumes could exceed the drop in global trade during
the height of the 2008-2009 financial crisis.
The forecast estimates indicate that all geographic regions will experience a double-digit drop
in trade volumes, except for “other regions,” which consists of Africa, the Middle East, and the
Commonwealth of Independent States. Although services are not included in the WTO forecast,
this segment of the economy could experience the largest disruption as a consequence of
restrictions on travel and transport and the closure of retail and hospitality establishments.
Such services as information technology, however, are growing to satisfy the demand of
employees who are working from home.

3. ECONOMIC POLICY CHALLENGES:

Initially, the economic effects of the virus were expected to be short-term supply
issues as factory output fell because workers were quarantined to reduce the
spread of the virus through social interaction. The drop in economic activity,
initially in China, has had international repercussions as firms experienced delays
in supplies of intermediate and finished goods through supply chains. Concerns
are growing, however, that the virus-related supply shock is creating more
prolonged and wide-ranging demand shocks as reduced activity by consumers
and businesses lead to a lower rate of economic growth. . As demand shocks
unfold, businesses experience a decline in activity, reduced profits, and
potentially escalating and binding credit and liquidity constraints. While
manufacturing firms are experiencing supply chain shocks, reduced consumer
activity through social distancing is affecting the services sector of the economy,
which accounts for two-thirds of annual U.S. economic output. In this
environment, manufacturing and service firms are hoarding cash, which affects
market liquidity. In response, central banks have lowered interest rates where
possible and expanded lending facilities to provide liquidity to financial markets
and to firms potentially facing insolvency.
Liquidity and credit market issues present policymakers with a different set of
challenges than addressing supply-side constraints. As a result, the focus of
government policy has expanded from a health crisis to macroeconomic and
financial market issues that are being addressed through a combination of
monetary, fiscal, and other policies, including border closures, quarantines, and
restrictions on social interactions. Essentially, while businesses are attempting to
address worker and output issues at the firm level, national leaders are
attempting to implement fiscal policies to prevent economic growth from falling
sharply by assisting workers and businesses that are facing financial strains, and
central bankers are adjusting monetary policies to address mounting credit
market issues.
In the initial stages of the health crisis, households did not experience the same
kind of wealth losses they saw during the 2008-2009 financial crisis when the
value of their primary residence dropped sharply. However, with unemployment
numbers rising rapidly, job losses could result in defaults on mortgages and
delinquencies on rent payments, unless financial institutions provide loan
forbearance or there is a mechanism to provide financial assistance. In turn,
mortgage defaults could negatively affect the market for mortgage-backed
securities, the availability of funds for mortgages, and negatively affect the
overall rate of economic growth. Losses in the value of most equity markets in
the U.S., Asia, and Europe could also affect household wealth, especially retirees
living on a fixed income and others who own equities. Investors that trade in
mortgage-backed securities reportedly have been reducing their holdings while
the Federal Reserve has been attempting to support the market.26 In the current
environment, even traditional policy tools, such as monetary accommodation,
apparently have not been processed by markets in a traditional manner, with
equity market indices displaying heightened, rather than lower, levels of
uncertainty following the Federal Reserve’s cut in interest rates. Such volatility is
adding to uncertainties about what governments can do to address weaknesses
in the global economy.
4. GLOBAL SHARE MARKET:
Big shifts in stock markets, where shares in companies are bought and sold, can
affect many investments in pensions or individual savings accounts (ISAs). The
FTSE, Dow Jones Industrial Average and the Nikkei have all seen huge falls since
the outbreak began on 31 December. The Dow and the FTSE recently saw their
biggest one day declines since 1987.
Investors fear the spread of the coronavirus will destroy economic growth and
that government action may not be enough to stop the decline. In response,
central banks in many countries, including the United Kingdom, have slashed
interest rates. That should, in theory, make borrowing cheaper and encourage
spending to boost the economy. Global markets did also recover some ground
after the US Senate passed a $2 trillion (£1.7tn) coronavirus aid bill to help
workers and businesses. But some analysts have warned that they could be
volatile until the pandemic is contained.

5. FACTORIES IN CHINA SLOWED DOWN:

In China, where the coronavirus first appeared, industrial production, sales and
investment all fell in the first two months of the year, compared with the same
period in 2019. China makes up a third of manufacturing globally, and is the
world's largest exporter of goods. Restrictions have affected the supply chains of
big companies such as industrial equipment manufacturer JCB and carmaker
Nissan. Shops and car dealerships have all reported a fall in demand. Chinese car
 sales, for example, dropped by 86% in February. More carmakers, like Tesla or
Geely, are now selling cars online as customers stay away from showrooms.

6. IMPACT ON THE EMERGING MARKET:

The combined impact of COVID-19, an increase in the value of the dollar, and an
oil price war between Saudi Arabia and Russia are hitting developing and
emerging economies hard. Not all of these countries have the resources or policy
flexibility to respond effectively. According to figures compiled by the Institute
for International Finance (IIF), cumulative capital outflows from developing
countries since January 2020 are double the level experienced during the
2008/2009 crisis and substantially higher than recent market events. The impact
of the price war and lower energy demand associated with a COVID-19-related
economic slowdown is especially hard on oil and gas exporters, some of whose
currencies are at record lows.
Oil importers, such as South Africa and Turkey, have also been hit hard; South
Africa’s rand has fallen 18% against the dollar since the beginning of 2020 and
the Turkish lira has lost 8.5%. Some economists are concerned that the
depreciation in currencies could lead to rising rates of inflation by pushing up the
prices of imports and negatively economic growth rates in 2020. Depending on
individual levels of foreign exchange reserves and the duration of the capital
flow slowdown, some countries may have sufficient buffers to weather the
slowdown, while others will likely need to make some form of current account
adjustment (reduce spending, raise taxes, etc.). Several countries, such as Iran
and Venezuela, have already asked the IMF for financial assistance and others
are likely to follow.

7. IMPACT ON TRAVEL INDUSTRY:

The travel industry has been badly damaged, with airlines cutting flights and
tourists cancelling business trips and holidays. Governments around the world
have introduced travel restrictions to try to contain the virus.
The EU banned traveler’s from outside the bloc for 30 days in an unprecedented
move to seal its borders because of the coronavirus crisis. In the US, the Trump
administration has banned travelers from European airports from entering the
US. Data from the flight tracking service Flight Radar 24 shows that the number
of flights globally has taken a huge hit.
UK travel industry experts have also expressed concerns about Chinese tourists
being kept at home. There were 415,000 visits from China to the UK in the 12
months to September 2019, according to Visit Britain. Chinese travelers also
spend three times more on an average visit to the UK at £1,680 each.
 The drop in business and tourist travel is causing a sharp drop in scheduled
airline flights by as much as 10%; airlines are estimating they could lose $113
billion in 2020 (an estimate that could prove optimistic given the Trump
Administration’s announced restrictions on flights from Europe to the United
States and the growing list of countries that are similarly restricting flights)

8. EFFECTS ON DEVELOPED AND MAJOR ECONOMIES:

Among most developed and major developing economies, economic growth at
the beginning of 2020 was tepid, but still was estimated to be positive. Countries
highly dependent on trade— Canada, Germany, Italy, Japan, Mexico, and South
Korea—and commodity exporters are now projected to be the most negatively
affected by the slowdown in economic activity associated with the virus. In
addition, travel bans and quarantines are taking a heavy economic toll on a
broad range of countries. The OECD notes that production declines in China have
spillover effects around the world given China’s role in producing computers,
electronics, pharmaceuticals and transport equipment, and as a primary source
of demand for many commodities. Across Asia, some forecasters argue that
recent data indicate that Japan, South Korea, Thailand, the Philippines,
Indonesia, Malaysia, and Vietnam could experience an economic recession in
2020.
In early January 2020, before the COVID-19 outbreak, economic growth in
developing economies as a whole was projected by the International Monetary
Fund (IMF) to be slightly more positive than in 2019. This outlook was based on
progress being made in U.S.-China trade talks that were expected to roll back
some tariffs and an increase in India’s rate of growth. Growth rates in Latin
America and the Middle East were also projected to be positive in 2020.

9. HIT ON SAFER INVESTMENTS:

When a crisis hits, investors often choose less risky investments. Gold is
traditionally considered a "safe haven" for investment in times of uncertainty.
But even the price of gold tumbled briefly in March, as investors were fearful
about a global recession.

10. IMPACT ON ENERGY SECTOR:

Economic slowdowns generally lead to lower energy demand, and the fallout
from COVID-19 has proved no different. Often, producers respond to demand
slumps by cutting supply to buoy prices. Last week, members of the Organization
of the Petroleum Exporting Countries (OPEC) and a few other major oil
producers met to discuss an additional cut of 1.5 million barrels per day through
the end of June in response to the outbreak. When the agreement collapsed,
 Saudi Arabia cut prices and lifted output, ostensibly to harm Russia for refusing
to agree to production cuts. Following the Saudi decision, Brent Crude fell more
than 20 percent, the sharpest one-day drop since 1991, with analysts predicting
further declines ahead. The damage from the Saudi-Russian price war sends an
unsettling signal to markets hungry for a coordinated policy response to the
epidemic, especially considering Saudi Arabia’s current role as G20 president.
In response to the price shock, large oil producers, including U.S. firms, could
pare back investment and production, with heavily indebted firms in particular at
risk of layoffs, consolidations, and even bankruptcy. Investors are well aware
that energy company’s account for more than 11 percent of the U.S. high yield
(below investment grade) market, with rollovers nearly impossible under current
market conditions. In theory, lower oil prices should help oil-importing countries,
but depressed activity due to COVID-19 could limit that benefit. In addition, the
boom in domestic U.S. energy production in recent years means the United
States is exposed to price declines in a way not seen in previous economic
downturns.

11. CONSUMER STOCKING:

Supermarkets and online delivery services have reported a huge growth in
demand as customers stockpile goods such as toilet paper, rice and orange juice
as the pandemic escalates.

12. OVERALL IMPACT:

As we grapple with the outbreak of novel coronavirus (or COVID-19), the
pandemic is causing large-scale loss of life and economic mayhem. With over
650,000 confirmed infections and 30,000 deaths worldwide till date, it is now
believed to be a global catastrophe to what was initially viewed as a largely
China-centric theme. The Americas, Australia, Europe, Africa, Asia are all
wrestling with its enormity and aftermath. The deadly virus brings with it the
third and greatest economic shock of 21st century after 9/11 and financial crisis
of 2008. First signs of epidemic’s effects on China’s economy are far worse than
the initial predictions. The official data reveals a widespread slowdown in its
economic activity and signifies the virus caused a 20% GDP decline in the first
two months of 2020. By March, Chinese services and manufacturing sector
slumped to record lows, its automobile sales sank a record 80%, and exports
shrank by some 17% in January and February combined. Likewise, earlier in
March, the US stock market took only 15 days to plunge into bear territory,
which is a 20% drop from its peak. Even mainstream financial firms such as
Morgan Stanley, Goldman Sachs, and JP Morgan, are expecting a contraction in
the US GDP by an annual rate of 6% in the first, and between 24% and 30% in the
second quarter. The US Treasury Secretary has alerted that the redundancy rates
 could rise steeply way over 20%, which is twice the peak levels of 2008 financial
crisis. Despite unparalleled emergency interventions by both European Central
Bank and US Federal Reserve, the international financial markets have continued
to fluctuate wildly. The S&P 500 Index had its worst week since 2008, falling 15%
in the week ending 20th March 2020. Japan and Europe particularly, given their
high dependence on trade and feeble fourth quarter performance, are likely
already in recession. The OECD has projected that corona pandemic could
depress the global GDP growth from 2.9% to 2.4% for 2020. As governments
impose strict lockdowns and consumers stay at home, tourism and travel-related
industries are among the worst hit at sector level. The International Air
Transport Association warns that virus outbreak can cost worldwide air carriers
between $63 billion and $113 billion in proceeds in 2020. With major disruptions
confronting sporting events, restaurants, and other services, shares of main
hotel companies have also nosedived in the last few weeks. Similarly, global film
industry is expected to lose over $5 billion in lower box office revenues. Unless
governments around the world stop Covid-19’s progression and relax social-
distancing controls too soon, the human toll and economic impacts will remain
earth-shattering. The coronavirus is seriously threatening the stability of entire
global financial system. So far, national governments have declared essentially
uncoordinated and country-specific responses to the contagion in order to
cushion their economies.

 PAKISTAN’S PLAN OF WAY OUT OF CRISIS:

What are the biggest sources of economic pain for Pakistan’s economy because of the
Covid-19 lockdown? Mass unemployment and sharp reduction in domestic consumption
and exports. This exacerbates an already fragile economy, where demand was being
compressed over the last two years by raising interest rates and depreciation, to
successfully make our current account deficit collapse faster and bring some medium-
term stability to the rupee’s volatile value.
Announced policy of partial lock down to end the virus and also save the economy,
major industry/businesses and the labour from the losses, can only succeed if the
people of Pakistan display self-discipline to strictly follow the above suggested
preventive measures. Only then it will be possible to combat the virus and the
government will also be able to provide a reasonable support to the industry and
businesses, who will suffer limited losses. Of course the government will also expect the
cooperation of the rich people, to support the jobless and poor families in this crisis
situation.
 The government tried to raise domestic demand by injecting cash and spurring
economic activity through the Ehsaas Emergency Cash Programme, which gives
12 million vulnerable families cash to spur consumption while sustaining
themselves through the lockdown. Opening up the construction sector or
engaging in large public works programs are also ways to create mass
employment, while raising domestic demand.
 There are also two emerging opportunities in a post Covid-19 world order, which
Pakistan can take advantage of to reform our economy. First, dramatically low oil
and commodity prices (the imported inputs), will create a buffer within our
current account, even after considering a 15-20% drop in exports and
remittances. We must take advantage of this buffer and the redesign of global
supply chains (due to US-China tensions) to attract foreign investors and allocate
resources to new industries that fulfil demand for products the world needs
versus continuing to support our rent-seeking industries, which result in a sub-
optimal allocation of our limited economic resources.
 Second, the crisis opens opportunities where Pakistan’s current geo-political
advantages sit. The US will want to exit Afghanistan even faster, which can help
us secure debt relief in the interest of a stable region. China and the US are also
locked in a battle for global influence (with the US stopping funding for WHO
because it’s perceived to be too pro-China) and this can be leveraged by Pakistan
to gain access to both their markets, attract investment and secure debt relief or
re-scheduling.
 The Pakistan Army has been in action from day one and is deploying all resources
to help the government implement the comprehensive coronavirus strategy. The
plan includes screening, isolation, testing, check on suspected cases, and contact
tracing as well as keeping a strict check on all exit and entry points of travelers.
Measures are being taken to make the armed forces’ medical facilities available
for an “extreme emergency” situation, said Major General Babar Iftikhar, the
director general of Inter-Services Public Relations (ISPR).