Col Akshaya Handa Writes :

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. This 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 against it 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 be the leaders. However, the high debt to GDP ratios of many, may create economic 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 latter, still under negotiation, 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, has already put in place a structure wherein more than a few countries is 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 sometime, 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 sector, 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.