The Tribune

In the first of a three-part series, Hubert Edwards examines the dilemmas policymakers will confront as they seek to restart their economies with COVID-19 still lurking.

COVID-19 has wiped out a significant portion of the Caribbean’s income, putting the region at risk as it joins the world in grappling with a looming economic crisis. The crisis is unique in the sense that it its underlining demands treatment that will further damage economies. This is a moment of economic lockdowns, rating agency downgrades and concerns over the ability of emerging economies to finance their recovery.

There were two headlines in separate publications on April 10, 2020, which we think signal the inevitable. Moody’s puts Bahamas rating under review for downgrade, and Fitch Ratings revises Jamaica’s outlook to stable, affirms B+. Economies around the world, including within the Caribbean, are under immense pressure from the effects of COVID-19. The need for social distancing and business lockdowns has resulted in commerce slowing significantly. The economic impact is substantial and devastating. The two mentioned sovereign reviews of The Bahamas and Jamaica, in our opinion, merely represents the first signs of how deep this devastation will become, with no certainty of how long it will last. For policymakers, it would be wise to take a long view of the time to recovery and plan accordingly. With a vaccine as much as a year away, according to the experts, any planning based on a short-term horizon will be imprudent. However, the effort to save economies, time is of the essence.

With all we now know, it is not beyond the imagination to project that the lingering effects of COVID-19 could be with us for as much as 18 months. Any failure to understand that the future health of the economy is directly tied to the virus’s presence will cause serious consequences. A failure to appreciate that lockdowns, which will further devastate economies, will be longer than desired may lead to fatal decisions where the economy and people ultimately suffer. There is a price to be paid for the resolution of this crisis, and every country must pay. There is no choice. What may be optional is whether the payment is on the front or back end. In the case of the former, that price is somewhat controllable. In the case of the latter, the cost will likely be more significant and evidence of a battle lost. Caribbean nations cannot afford to lose the battle, but winning will not be easy. Those willing to make bold moves will improve their chances. Sitting back and waiting could lead to long-term damage.

What, then, are some of the critical issues that may be occupying the minds of policymakers at this time? We think the biggest question surrounds when the lockdowns will be lifted. They are likely thinking of the extent to which the economy of their respective country will be affected. In addition, they must be considering where their respective sovereign credit ratings may end up in the short to mid-term. Policymakers will also be occupied with thoughts about the impact a continued lockdown will have on the ability of governments to afford the stimulus that will be required during and at the end of this crisis, whenever that may be. They must be necessarily concerned that there will be an abnormal global demand for capital among emerging economies, many of whom are likely to see their sovereign debt rating downgraded shortly. They must be considering the systemic risk of increasing debt defaults, and consequently sovereign borrowing attracting risk premiums across the board. With an eye on the post-crisis era, they have to be concerned about the significant level of capital flight taking place to developed countries, seeking safe harbours. The issues are many, connected and complicated. The extent to which they are factored into national planning will be critical to the way forward.

For context, consider the recent meeting where the International Monetary Fund (IMF) announced the suspension of debt payments - for six months - for 25 countries. The total value of the package is pegged at $215m. Haiti was the only Caribbean country to be included in that package for a paltry $4.8m. This action signals the uphill battle for countries in the Caribbean. The financial burden will be huge; the challenges with funding will be significant; the economic future of the region is uncertain, and rests on the ability to restart commerce and secure funding or relief. With the significant loss of tourism revenue, the ability to survive is in question. This is a moment when CARICOM must come together, as a bloc, and fight for its survival. The process will be gruelling and potentially very complex. However, these are the moments when leadership earns credibility and value. Now, more than ever, every country will be looking for effective leadership. The fate of nations will depend on it.

The virus is the economy

All policymakers, we think, understand that opening the economy too soon could come at a significant cost. The pressures to do so are significant, and understandably, so as businesses are at risk of failing the longer they remain closed. The longer the lockdown lasts, the more the devastation being wreaked on the economy. The possibilities of businesses closing increases, and the cost to government increases, reducing its ability to afford the inevitable post-crisis response as we watch time sensitive opportunities wane. In the case of The Bahamas, with its significant reliance on tourism, which has almost 100 percent disappeared, the implications are brutal for the private sector. However, let us consider the very recent experience of Singapore as it grapples with the dilemma of balancing the challenges posed by this economic and health crisis.

On March 5, 2020, the World Economic Forum boldly stated the following on its website: “Singapore contained coronavirus. Could other countries learn from its approach?” The endorsement continued, pointing to the emergence of a potential best practice. The article stated: “As the novel coronavirus starts to gather speed in Europe, the Middle East and the US, there’s one place it is seemingly being contained: Singapore.” An unequivocal vote of confidence for a country that consistently outpaces, topping most major performance indices, especially in the economic and competitive arenas. The endorsement ended with the following: “With no reported virus-related deaths despite 96 cases, and a slowing rate of infection that’s been outpaced by recoveries, the Asian city-state is emerging as a litmus test of whether the deadly pathogen can be, if not contained, then neutralised.”

Let us fast forward to March 22, 2020, when Aljazeera’s headline said: “Singapore closes borders to keep virus at bay, but no shutdown.” The move, it said, followed Singapore’s first two coronavirus-related deaths together with a surge in cases from overseas. By March 9, 2020, the story changes dramatically with reports that Singapore has instituted a partial lockdown until May 4 in order to contain the spread of the coronavirus. This move, it was reported, “could cost the economy about S$10bn ($7bn) in lost output”, approximately two percent of its GDP.

This underlines the seriousness of managing this event. We fully appreciate that the longer the lockdown lasts, the more difficult it will be to restart the economy. The Singapore situation, however, demonstrates the danger and the risks involved. Opening borders will mean that new cases are potentially being imported, leading to another spike in infections. Singapore has, by global standards, a top-notch healthcare system. It was not, however, willing to take the risks of leaving its borders and businesses open, having made a brief misstep in this area. Imagine, therefore, the countries of the Caribbean with weak healthcare systems, which could be quickly overrun and overwhelmed, leading to wider spread and deaths. The decisions to be made are therefore very difficult ones. Open too soon, and exacerbate the health effect. Leave it too long, and decimate the economy, Caribbean leaders will likely be forced to take risks in this area. A country like The Bahamas has a slight advantage due to its archipelagic nature. Unfortunately, most of its economy is concentrated on one island. This is instructive of how creative policymakers will need to be. As they work to recover and fix economies, reducing concentration or expanding - and better devolving - commercial activities and economic centres becomes important.

The sad reality, which should not be ignored, is that without a vaccine, the emerging best practice is mass testing (as in the case of South Korea) and social distancing. The effectiveness of social distancing is enhanced by a lockdown of normal economic, social and community activities. In our view, the lockdown for Caribbean countries is likely to be a bit longer than what may be the norm, largely because of the limitation of health assets and health care machinery. Looked at another way, a longer lockdown period is the cost of not having well-developed facilities with the capacity to take significant numbers of virus victims. Policymakers, the private sector and citizens should quickly come to grips with this fact. The length of lockdowns and the confidence to re-open will, among other things, be a function of bed stock, intensive care capacity and medical facilities available to fight the virus. COVID 19 will exert adverse pressures on all countries where these are lacking. A quick glance at The Bahamas, Jamaica and across the region will confirm weak systems, which therefore point to a lagging recovery compared to countries with more developed and robust healthcare.

The natural outturn of all this is that economically weaker countries with underdeveloped healthcare systems may pay a greater price because of the need to shutter their economies for a longer period. The vicious cycle should be evident. Damage to the economy, increased cost to the Government, further potential downgrades, and a lack of fiscal space to respond leads to the need for borrowing, which become more difficult to access at reasonable rates. From an economic perspective, a classic case of “damned if you do and damned if you don’t”.

To be continued