Wed, May 13, 2020

Richard Dailly Featured in Business Times Discussing the Impact of COVID-19 on Emerging Economies

The coronavirus (COVID-19) crisis engulfing the world is creating impact globally in many sectors which had hitherto been unforeseen. Corporates initially bunkered down into crisis mode. However, depending on the location and the number of weeks spent in isolation, business is increasingly looking to the future to try to understand what the new world might look like.

One such impact, which is likely to be devastating for emerging markets in Asia and Africa, is an immediate cancellation of orders and potential re-evaluation of supply chains.

Major retail corporates in developed markets are cancelling orders with suppliers in Bangladesh, Vietnam and other South-east Asian countries, and other markets where supply chains have been longstanding owing to their low labour costs. On April 1, it was reported that Bangladesh is facing a US$6-billion cancellation of orders in the garment sector, possibly affecting two million employees. On April 2, it was reported that cancellations of orders in the wood sector would cost Vietnam millions of dollars and risk hundreds of jobs. The World Bank reported on April 13 that the disruption, reshaping and shortening of supply chains would have a disproportionate effect on poor communities in South and South-east Asia.

With so many unemployed in the developed nations, consumption-driven demand is unlikely to return any time soon. In addition, no one can yet predict how second and third waves of infection, long-term resistance to secondary infection, and the widespread availability of a vaccine might further affect economies around the world and thus demand from manufacturers in emerging markets.

The likely dire consequences on the world's emerging economies would have the following effects:

Firstly, mass unemployment and a grim economic outlook in most developing countries in the medium term are likely to bring about a change of politics in these countries. Social development and modernisation are likely to be put on hold as governments will need to focus on the essential needs of their populations. This could result in an increase in populism and nationalism, already on the rise, to even greater heights. The differences between those with means to weather this crisis, and those without, will increase social divisions, thus increasing social unrest, and in response, more authoritarianism from governments. It is possible to foresee such situations evolving in Thailand, Myanmar and Cambodia, with huge gulfs between the rich and the poor, and where the military plays a crucial part within their respective governments, or the Philippines, where President Rodrigo Duterte has issued stark warnings to anyone breaching quarantine laws.

Secondly, because of these implications and likely impacts, corporates will need to understand their supply chains better. Understanding quality and compliance issues will no longer be enough. As social divisions emerge, corporates will need to understand the security environment of those countries in which they have supply chains, to ensure the safety of contractors, workers and visiting executives. Corporates will need to understand the political risk of basing key elements of their supply chains in certain countries. It is possible to foresee Western companies reconsidering the risks to their employees and supply chains, if a company is manufacturing something seen as giving the home country of that company a geopolitical advantage. This might include the defence, fintech and pharmaceutical sectors.

In the future, it may not be acceptable for in-house risk professionals to accept that a nation could decide to withhold supplies of critical products for political purposes. Further, corporates should understand transparency issues relating to critical countries within their supply chains. Going forward, it may not be enough to believe local media, which, in many emerging markets, may not be independent. During a crisis, it may not be enough to believe government denials on the potential harsh treatment of the population. In the new world, it is possible that, like modern slavery, investing in a country that is known to abuse its population may be something that will influence consumer behaviour. It may affect a company's reputation and ultimately have a potential impact on its value.

Many corporates are already taking a hard look at their global supply chains. Where they can be shortened and localised, this is likely to happen. But where cheap labour, rare minerals or other geographical realities impact international supply chains, corporates need to factor in new challenges, many of which are currently emerging, and which are likely to become clearer over the next few weeks and months.

'This article was first published on The Business Times on May 7, 2020'

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