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The Financial Impact of the Pandemic

Paper written by Richard Goddard.

 

Introduction

 

This paper is divided into two parts. The first will focus on the negative finacial impacts of COVID-19 and the second part will focus on the possibilities of the new normal as a result of COVID-19.

 

Part 1

The Financial Impact of the Pandemic: Uncertainty breeding a lack of confidence

 

Across the world we are bombarded with news headlines of the potential financial impact of the COVID-19 on both local and global economies. Stockmarkets have been highly volatile, experiencing extreme ups and downs in share prices. This uncertainty in the markets has been exasperated by what is known  about the virus to date. The questions on everyone’s mind is: What is the correct policy to follow? Do you adopt a South Korean approach, an Italian approach or an American approach to the pandemic? What is the golden number of days for lockdowns? What happens if lockdowns are extended? All of these questions help fuel an already volatile and uncertain global and local economy, which then feeds on confidence levels which then again increases volatility and financial uncertainty within markets (McKinsey and Company, 2020).

 

Financially, global governements are reacting to the pandemic. For example American President Donald Trump has signed off on 2 trillion dollars of aid, and 3,3 million Americans have already signed up for unemployment (McKinsey and Company, 2020), which to date, is the fastest number of people signing up for unemployment, over the shortest period, in American history. Locally the South African Rand has plumeted to all time lows against various currencies, such as the dollar, reaching an all time low of over 18 Rand to one dollar on Monday 30 March (FIN24, 2020). The World Bank has warned of an unprecedented shock as globally confirmed cases of COVID-19 pass the 800 000 mark (Gayle, 2020). The volatility of the situation is best explained through the following graphics.

Source: McKinsey and Company, 2020

SIX DAYS LATER: 31 March 2020

 

Source: Worldometer, 2020

 

Six days apart how things can change! Infection rates have almost doubled and deaths have more than doubled, uncertainty fueling confidence levels. The financial impact here is extensive and many argue, virtually impossible to determine at this point in time, due to lagging indicators. The potential financial impact will only be visible months from now according to some (McKinsey and Company, 2020). The challenge financially is that many businesses have adopted reactive strategies to this pandemic. Recent commodity indicators highlight this below. A demand for orange juice and a 58% drop in the price of Crude oil! Who would have guessed this financial gain and loss two months ago.

 

Source: Quartz, 2020

 

Reactive strategies are also evident in global and local governments. In South Africa for example, the National Development plan has been in play now for some years. However, government has only now reacted to the pandemic by buying all available water tanks in South Africa (Business Insider, 2020). A much needed tool for cleanliness, but what will the financial impact be? According to Business Insider (2020) Water and Sanitation Minister Lindiwe Sisulu said her department had bought all water tanks that were available in the South African market. This equates to approximately 400 000 water tanks in South Africa. The tanks will be distributed across the country in areas without running water, most will be distributed in the Eastern Cape, Sisulu said (Business Insider, 2020). Tanks range in price from below R2000 to and above R13500 (Google search, 2020). A simple exercise of taking a low average of R5000 per tank gives an indicative price paid by government for these tanks of 200 million rand. Even if government got a 50% reduction on this, it still equates to a 100 million rand outlay of unbudgeted funds, causing further strain  on an already constrained fiscus. The point here is that re-active strategies can become financially catastrophic in the long run.

 

However, this panademic also impacts the people financially. How do, particularly poor people, protect themselves without running water? So there is a paradox here between supplying the very people that need the water tanks, which in the end will be to their detriment in the future. This reactive financial management strategy needs to come from somewhere and only time will show the impact of this reactive strategy. Are the very poor people the strategy was meant to protect, left worse off? Monies that were meant for upliftment in other areas now need to be shifted around to accommodate reactive policies.

 

But what is the alternative? Sanlam is a good example here. According to Omarjee (2020) Sanlam has warned of the Covid-19 impact on their growth, but says it has a R760m pandemic reserve. This is a more proactive strategy, having contingencies in place for uncertainties termed Black Swan events. The financial impact of companies who are not prepared to deal in a VUCA environment, is catastrophic in the long run.  Sanlams group’s policy liabilities as at 31 December 2019 included a pandemic reserve of R760 million, it was created a number of years ago for an event of this nature, Sanlam said. “This reserve is available to cover increased mortality emanating from Covid-19” (Omarjee, 2020). Sanlam notes that the full financial impact of the Covid-19 pandemic on the company could only be determined more accurately after the SA lockdown has been lifted. The return to normality will more fully determine the financial consequences of the pandemic once properly assessed (Omarjee, 2020).

Like the fall of the Berlin Wall or the collapse of Lehman Brothers, the coronavirus pandemic is a world-shattering event whose far-ranging and far-reaching consequences we can only begin to imagine. According to Foreign Policy, (2020) uncertainty is prevalent but this much is certain: Just as this disease has shattered lives, disrupted markets and exposed the competence (or lack thereof) of governments, it will lead to permanent shifts in political and economic power in ways that will become apparent only later. These shifts in thinking, processes and ways of working will result in a new normal (Foreign Policy, 2020) for most organisations and global economies.

In conclusion, according to Walt (2020), a professor of international relations at Harvard University, the effects of the pandemic will be two fold, strengthening the state and reinforcing nationalism. Walt predicts that governments of all types will adopt emergency measures to manage the crisis, and will not want to relinquish these new powers when the crisis is over. COVID-19 will accelerate the shift in power and influence from West to East.  South Korea and Singapore have responded best, and China has reacted well after its early mistakes. The response in Europe and America has been slow and haphazard by comparison, further tarnishing the aura of the Western “brand.” According to Walt (2020) what won’t change is the fundamentally conflictive nature of world politics.  “Previous plagues—including the influenza epidemic of 1918-1919—did not end great-power rivalry nor usher in a new era of global cooperation. Neither will COVID-19. We will see a further retreat from hyperglobalization, as citizens look to national governments to protect them and as states and firms seek to reduce future vulnerabilities” (Walt, 2020). In short, the COVID-19 pandemic will create a world that is less open, less prosperous, and less free (Walt, 2020). With more proactive strategies, it did not have to be this way, but the combination of a deadly virus, inadequate planning, and incompetent leadership has placed humanity on a new and worrisome path, possibly formulating a new future normal (Foreign Policy, 2020).

 

Part 2

The Financial Impact of the Pandemic: Uncertainty breeding opportunity

 

The negativity around COVID-19 is all around us, however, personal and business opportunities emanating from this ‘new normal’ are extensive. As Alvin Toffler, a famous futurist, noted “The illiterate of the 21st Century will not be people that can not read and write. But those who can not Learn, Unlearn and Relearn.” Through this re framing of existing paradigms and business processes both business and individuals can re invent themselves to benefit from the new normal. The ‘new normal’ will be formulated through rapid change. Speed and the ability to creatively adopt to opportunity will be the financial tools to guide both business and individuals through these uncertain times.

 

There are positive business models indicating the power of seeing an opportunity in challenging times. Manufacturers of alcohol, such as Bacardi and SAB InBev are re processing certain alcohol plants to now manufacture Hand Sanitizer, a much needed essential item. Car manufacturers such as Ford and Mercedes re tooling certain parts of their plants to manufacture much needed breathing ventilators for patients that are infected with COVID-19. Tesla, has re tooled a solar panel factory to manufacture Medtronic ventilators.

Source: SAB InBev, 2020

 

These examples of reinvention during challenging times is only possible with a systems thinking approach to business. Seeing the interconnectedness of everything around you. Both collaborative and cooperative models are needed during these challenging times. We cannot hope to do everything. Collaboration and co operation is needed for business to focus on what they do best and to ask for help through collaborative and cooperative modelling from other competitors in the market. Potential relationship building will in future be done via online platforms, possibly establishing business ventures with individuals you have not personally met.

 

Of key importance here, is an understanding of how to operate in a VUCA environment. If there is no clear vision or understanding of the surrounding business environment by both leadership and management, then there will be little or no positive financial impact on business. Change is inevitable over these challenging times, exasperated by the pandemic. In conclusion, I would like to argue against Walt (2020) who asserts that the pandemic will create a world that is less open, less prosperous, and less free (Walt, 2020). With more proactive strategies, there is a high probability that businesses could benefit from these challenging times as they begin to re-invent themselves and in so doing, formulate a ‘new normal’ creating a world that is more open and more prosperous. The general consensus is that the true financial impact of the pandemic cannot be quantified in numbers as yet, due to lagging indicators. The true financial quantitative impact of the pandemic will be defined later, once business resumes and a ‘new normal’ is defined.

 

LIST OF REFERENCES

 

Allen, J., Burns, N., Garett, L., Haass. R., Ikenberry, J., Mahbubani, K., Menon, S., Niblett, R., Nye, J., O’Neil, S., Schake, K. and Walt, S. 2020. Predictions for the global order after the pandemic. Available at: https://foreignpolicy.com/2020/03/20/world-order-after-coroanvirus-pandemic/ (Accessed: 23 March 2020).

Gayle, D. 2020. Coronovirus Live. Available at: https://www.theguardian.com/world/live/2020/mar/31/coronavirus-live-news-usa-confirmed-cases-double-china-update-uk-italy-spain-europe-latest-updates (Accessed:  31 March, 2020).

 

Mckinsey and Company. 2020. COVID-19: Briefing Materials. Available at:

https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Risk/Our%20Insights/COVID%2019%20Implications%20for%20business/COVID%2019%20March%2030/COVID-19-Facts-and-Insights-March-25-v5.ashx

(Accessed: 26 March 2020).

 

Omarjee, L. 2020. Sanlam warns of Covid-19 impact on growth, but says it has a R760m pandemic reserve. Available at:

https://www.fin24.com/Companies/Financial-Services/sanlam-warns-of-covid-19-impact-on-growth-but-says-it-has-a-r760m-pandemic-reserve-20200330

(Accessed: 30 March 2020).