Author: Varun Mann
The BRB Bottomline:
The coronavirus has had a profound negative impact of international markets, leaving many developing nations in a precarious situation. However, while the situation is serious, there are solutions that will lead to a better outcome.
As the coronavirus pandemic rages on, global economies continue to sink as unemployment and decreasing consumer good demand pose serious long term threats. Developing nations are particularly vulnerable as they lack the required infrastructure to bail local enterprises. The most noticeable example being Africa, which in the past 5 years, has consistently experienced increasing growth. However, coronavirus demand shocks have left the continent where most people live off less than $5.50 in a lurch. While Africa is made up of a vast array of diverse countries with differing economies and industrial capacity, the coronavirus has had certain similar impacts on these countries’ financial markets that show that the situation is serious, but hope is not lost yet.
Coronavirus is causing people, including investors, to turn inwards. As a result, foreign investment in African industries has practically dried up. With increasing levels of risk due to the pandemic, emerging markets have become even more unpredictable as developing nations have a higher chance of facing price volatility, supply shortage, and overall more vulnerability to economic destabilization. Furthermore, interregional commerce is now facing new challenges due to social distancing, making short term foreign investment infeasible. For many nations, foreign capital and loans function as a life blood to fund regional operations. Without access to foreign cash, many companies are unable to conduct key international transactions, and going bankrupt as they are not liquid enough (not having the needed forign cash). This is shown with countries like Angola that are struggling without foreign investment, while the economies of Namibia and Botswana, which have large amounts of domestic assets, have largely recovered. However, in some situations, lacking foreign investment can be a new opportunity. Without substantial domestic assets, lacking foreign investment can be crippling, but many countries have found new ways to access capital. Uganda and Rwanda have increased their use of green bonds, debt that carries environmental benefits, to attract foreign interest. Nigeria is taking steps to unify foreign exchange rates to increase access to cash, making their markets more liquid. Furthermore, the African Development Bank issued $3 billion of corona bonds to mitigate the severity of the capital shortage. Thus, while the situation is bleak, there are still solutions.
Another major pain point is falling commodity prices. The majority of African enterprises revolve around the extraction and sale of natural resources. These commodities are naturally volatile and susceptible to international fluctuations, which have only been exacerbated by coronavirus. Currently, Africa is facing a “twin supply-demand shock” as falling prices due to slowing demand has been coupled with internal operational supply issues. Moreover, currently 90% of African trade is conducted with countries outside the continent, making coronavirus a major roadblock. Falling prices have cut the bottom lines of many regional companies, giving them another reason to halt operations. However, this can also act as a way to solve Africa’s deeper economic issues. The pandemic has forced some African nations, like oil rich Nigeria, to diversify their economies and no longer rely on one key resource. Moreover, it is an amazing opportunity to boost inter-African trade, and has pushed forward the adoption process of treaties like African Growth and Opportunity Act (AGOA). Thus, while a large issue in the short term, it can lead to slow benefits in the long run.
Thus, the road to recovery for African economies and financial markets may be long, but it can still be taken.
Varun is a junior in the Global Management Program at UC Berkeley, double majoring in Business and Statistics with a minor in Conservation Resources. His interests in emerging markets and the changing investment landscape led to join BRB’s investment column, which he hopes will continue to become a thought leader by publishing unique articles. Outside of class, you can find Varun sleeping on the glade, dancing with AFX on Sproul, or hiking by the BIG C.