Corona is not yet here but its effects are already with us

Wednesday March 18 2020
marketspix

Act now. The coronavirus puzzle continues to ravage the world but how will your business look like long after it is gone. Act now and save both yourself and your business. COURTESY PHOTO

Last week World Health Organisation (WHO) declared coronavirus a pandemic with more than 165,000 confirmed cases globally and about 6,500 deaths.
So far, 147 countries have reported cases of Covid-19 since it was first detected in December last year.

What had been seen as a largely Chinese problem, is now a global crisis with far reaching implications on the global economy.

By the time of writing this article, there had been no confirmed case of Covid-19 in Uganda.
But the impact on the economy and way of life is already visible.

World over, public health, of course has been the first level of concern, with focus put on prevention and containment measures.

However, the impact of the virus on the global economy keeps growing exacerbated by restrictions on movement of people, goods and services.

The closure of China, “the world’s factory” and second largest economy, is hurting the global economy.

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China makes up a third of manufacturing globally, and it is the world’s largest exporter of goods.

Currently, about 20 per cent of global trade in manufacturing intermediate products originates from China, which is a growth from 4 per cent about 20 years ago.

Given its status, any disruption of China’s manufacturing output and supply of intermediate inputs, was always going to have a negative impact on the global economy.

Businesses across the globe, including here in Uganda, are suffering from lost revenue and disrupted supply due to shutdowns of China’s factory.

China’s rising importance in the global economy is not only related to its status as the leading global manufacturer and exporter of consumer products, but it is also the main supplier of intermediate inputs for many manufacturers elsewhere in the world.

Effect on oil demand
The slowdown in the global economy has led to a huge decline in oil demand. Economic slowdowns generally lead to lower demand for oil, and this is exactly what the world is witnessing.

China is the world’s largest consumer of oil but with corona hitting the country’s manufacturing and aviation sectors, this has forced a huge drop in global oil demand.

In situations like this, oil producers often respond to market dynamics by cutting supply to boost prices.

In fact, early this month, the Organisation of Petroleum Exporting Countries (OPEC) members and a few other major oil producers met to discuss an additional cut in global oil production of 1.5 million barrels per day to end of June.

Unfortunately, there was no agreement on this, thus, Saudi Arabia went it alone cutting prices to apparently punish Russia for refusing to agree to production cuts.

The decision saw Brent Crude sharply fall by more than 20 per cent, the sharpest for a single-day drop since the Gulf War in 1991.

The increased uncertainty in the global price of oil has led to financial market volatility last seen during the global financial crisis.

In theory, lower oil prices should help oil-importing countries, such as Uganda. However, the depressed activity in the country as well as the pressure on the shilling may limit that benefit.

How does all this impact Uganda?
Uganda’s economic performance is influenced by developments in the global economic environment.
Therefore, a slowdown in the global economy negatively impacts the local economy, and in many ways.

Supply chain disruptions
China is Uganda’s major trading partner, and the effects of coronavirus are already being felt, albeit slowly.

Already, Chines importers are cancelling orders from Uganda due to port closures, which will result in a reduction in the demand for Uganda’s agricultural commodities and natural resources exports.

For example, the three-day China International Coffee Specialty Expo that was scheduled this week has been suspended indefinitely.
China is a major market for Uganda’s coffee and Uganda was going to be the “portrait country” at this expo.

This was going to offer Uganda an opportunity for awareness, visibility and market penetration in China and Asia Pacific.

Beyond this, the impact will also be felt in the manufacturing sector with supply delays for raw material and increased costs worsening.

For now, it is difficult to envisage how supply chains could be adjusted rapidly because if this persists, it will go deeper to affect operations of small and medium enterprises.
SMEs, which constitute 13 per cent of Uganda’s economy, mainly trade with China, especially in the trade and retail sector (abasubuuzi).

These, which sell nearly 20 per cent of all the goods traded in Uganda such as textiles and apparels, electronics, building and construction material, pharmaceuticals, heavy machinery, raw materials, iron and steel, as well as household consumer goods, import from China.

There will be a decline in FDI and remittances
China is the second largest recipient of foreign direct investment (FDI) in the world.
Therefore, there will be a significant decline in FDI inflows into China as a result of the coronavirus.

A decline in FDI into China together with lost revenue and lower profits, which will translate into lower earnings, will affect China’s ability to make investments elsewhere.

For example, in the last financial year, China topped the list of planned investments in Uganda with 45 per cent of planned foreign direct investments, coming from the Asian country, according to Uganda Investment Authority.

This means we should expect a slowdown in FDI and a decline in foreign currency inflows and remittances as a result of disruption in business and economic activities in many of the source countries where Ugandan diaspora live and work.

The tourism sector and related industries will suffer
Governments across the globe, including Uganda, have been issuing travel advisories and bans emphasising “social distancing” in order to prevent and contain infections.

In Uganda, tourism is the number source of foreign exchange constituting 7.7 per cent of the country’s GDP and employing close to 700,000 people.

The “social distancing” policy, which was recommended by WHO, will definitely have a negative effect on the travel and hospitality industry with the most hit sectors being hotels, travel and tour agencies, bars, restaurants and international conferences.

Already, the third UN G77 summit, which had been expected in Uganda has been postponed and the country will miss out on hosting at least more than 6,000 international delegates from 135 countries.

The conference was expected to discuss trade between countries, investment and humanitarian aid.

Tax collections will also be affected
Currently, about 42 per cent of Uganda’s tax is collected from international trade through value added tax, import duty and excise duty on petroleum products.

A slowdown in international trade is likely to negatively impact tax collections this year, worsening the already off target collections.

The situation will worsen due to reduced activity in retail and trade, services, hotels, tourism and manufacturing sectors, which will result in reduced value added tax remittances and corporation tax payments.

So what does a business man or woman faced with this situation do?
As a business, doing nothing is not an option. You will need to be creative and innovative to mitigate economic disruptions.

If you are in manufacturing and you are now faced with the risk of running out of raw materials, consider scaling back production.

This may involve temporarily closures of a section of your production lines and saving on operating and running costs.

It is important to ensure that you communicate with, and notify all your key stakeholders, especially customers, suppliers, creditors, staff and your bankers on whatever key business decision you take because your decision will impact them as well.

Trade and retail
If you are in trade and retail, review your current stock levels and assess how long they are likely to last. Carry out a robust and regular review of your cash flow.

Assess what impact a reduction in sales will have on your ability to pay suppliers, creditors, your staff and repayment of bank loans.

If you foresee any cash flow challenges, consider renegotiation of payment terms with suppliers and creditors, and even your landlord.

Most importantly, talk to your bank early enough if you foresee any challenges with regular loan repayments.

This is a time to look very critically at all your business costs and scale back on non-critical ones to preserve cash flow.

Do not lay off staff instead consider flexible working arrangements at reduced pay. Have an open and honest discussion with your staff.

They also see what is happening to the business and they will understand.

Review your business contingency plan if you have one, if you do not have one, this is the time to develop one.

Get professional help with this. Check your business risks insurance policy. Does it cover these losses?
If it does, talk to your insurance broker for assistance on making a claim for loss compensation from your insurer.

If you do not have a business risk insurance policy, again this is the time to consider getting one.

Do not sit back and lament and hope it will go away. Take action. This is not one of those “Government Etuyambe” situations, you will need to be proactive to protect your business.

You may even want to start exploring alternative sources for your goods and merchandise now the China is still closed.

Countries such as Turkey, Indonesia, Thailand and Vietnam may be worth looking at.

In fact, over the last two years, the value of goods imported into Uganda from these countries has doubled, which confirms that these countries are now credible sources of imports.

More is needed
Government must be commended for the way it is currently responding to the coronavirus pandemic.

It has kept the citizens updated on the current state in the country and providing advice to the public on what they need to do to stay safe. However, more needs to be done. In order to keep the citizens safe from this pandemic, there is need for coherent, coordinated, and credible policy responses from all government ministries, departments and agencies.

There should be continuous and consistent advocacy and sensitisation for all government ministries and agencies as well as international NGOs and development partners, faith based institutions and communities at large.

There should also be a large-scale distribution of information, in all local languages, to the general public with guidelines on how to stay safe, what signs and symptoms to look out for and how to respond in case of suspected infections.

There is need for very clear guidelines to community leaders, health workers and the general public with regards to case detections, contact tracing as well as surveillance guidelines.

The public should be provided with guidelines on how to contact medical surveillance teams and rapid response at both national and local level.

WHO has declared coronavirus a pandemic, which means it is now a global emergency.

Scientists have explained that they do not yet have a clear understanding of the virus’s behaviour, transmission rate, and the full extent of contagion.

This means there is still a lot to learn about the virus but the good news is scientists across the globe have been working overnight to find a cure.

As you patiently wait for the cure and vaccine do whatever is within your reach to protect your business, your livelihood and your family.

Francis Kamulegeya is the Uganda Country Senior Partner of PwC

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