Fri, Mar 27, 2020

COVID-19: Is It a New Risk for Companies?

The last couple of months have been a reality check for people globally; we are a small component of this universe and are extremely vulnerable to unseen and unknown risks. On March 12, 2020, the WHO declared coronavirus (also known as COVID-19) is now a pandemic. COVID-19 has been classified as a black swan event given that it checks both boxes—rare occurrence and high-impact. In the past eight weeks, a lot has changed, and global economic outlook and growth rates are both revising downwards, almost every day. 

India has been more recently affected by COVID-19. It started in China, where it seemed to be under control, but it’s now spreading rapidly in Europe and the U.S., both of whom have declared a state of emergency. While there is a concerted global effort to manage the risk, things are likely to get worse before they improve.

In India, COVID-19 is impacting businesses by disrupting supply chains, travel, production and consumption, operations and the financial markets. Companies find themselves navigating a new reality, addressing issues from crisis response and cyber threats to valuations and financial stress. Daily headlines and the uncertainty of the infection’s duration are exacerbating these concerns.

It is important for India to stop the spread of COVID-19 early. Given the large size of the country, our relatively weaker sanitation levels and limited healthcare infrastructure, a full-blown virus can have a material impact on the economy and will take months for the country to recover. The country has responded well so far, but the battle has just begun.

While sectors like aviation, tourism and hospitality are suffering the most, other sectors will also face the heat of global slowdown and supply chain issues. Consumer-led sectors including textile (garments), automobile and consumer goods (durable and fast-moving consumer goods) will suffer from poor demand, which may sustain longer than a few months. With the unemployment rate likely to increase soon, consumption-led sectors are likely to bleed. Similarly, sectors like automobile and renewable energy (solar) are heavily dependent on imports from China and will see their supplies tumble due to the shutdown of factories in China. Various experts and economists are currently pegging the impact of COVID-19 on the Indian economy to be 0.25% (best case) to 1% (worst case).

However, it is premature to make any such estimates, as the world hasn’t witnessed an event like COVID-19, over the last 75 years.

In 2018 and 2019, India witnessed its two best years for M&A and PE. While initial expectations were of a repeat in 2020, COVID-19 will have a huge impact on investment flow. M&A other than distress sale will slow down in the coming months due to weakening valuations, inability to raise funds and limited cross-border interest. With the stock markets tumbling down (three days from March 2020 are among the 10 worst days in the history of U.S. stock markets), investor confidence is low, and most companies and funds will focus on conserving cash.

COVID-19 is also going to create new risks for companies, especially with growing dependence on technology. Cybercriminals recognize that governments, public sector institutions and corporations are anxious to learn about the latest information concerning COVID-19, so they will take advantage of this to create opportunities to induce employees to get desperate and act in haste. We are already witnessing a growing rate of system breaches and malware, ranging from ransomware to remote access trojans, providing criminals with ongoing access to your network. This can create serious business risks, as all your data and information may be accessible externally, making you vulnerable and open to litigations and penalties.

It is time for us to slow down but fasten our seatbelts. 

This article was written by Tarun Bhatia, Managing Director in the Business Intelligence and  Investigations practice of Kroll, a division of Duff & Phelps. It was recently published in Business World

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