Covid-19 and its impact on global economy
The pandemic, as we all know, hit us at the beginning of 2020 and within just a few months, the world as we know it changed forever. Even in parts of the world like Thailand where the Coronavirus has thankfully been contained, the economic ramifications are still extremely troubling, and recoveries will be the theme of the next couple of years going forward.
The conditions surrounding Coronavirus continue to evolve. Now, we are in the phase of shifting focus in getting back to work, gearing towards new restrictions, requirements as well as making sense of new opportunities.
Currently, the vaccine for Covid-19 has not been fully proven, which means we will most likely be living with this virus for some time. Across the world, the number of infections are surging. We are at over 20 million cases as of today, with the United States reaching over 5 million in total. The quantifiable impact on employment, bankrupt businesses, struggling SMEs to banks’ dealing with negative loans is staggering.
We’ve lived with the pandemic for half a year now, so with this, we’ll be taking you through the financial and economic outlook of H1 2020.
Covid-19’s impact on Thailand
Thailand was fortunate enough to have seen a total of 3,351 cases of Coronavirus, and within the past two months, local infections have been at 0, sharply contrasting with our neighbors. However, the global trend suggests that a local transmission can return at any time. The pandemic has, however, taken a big swing at our most important industry; tourism which makes up for approximately 20% of our GDP. The number of tourists is expected to go down by 75% this year because of the lockdowns.
Another crucial sector that has been affected? Export. However, export has once been our shining star, but has seen its own set of challenges over the recent years, and further exacerbated by the pandemic. Weaker global demand has led to a contraction in global trade, which, in turn, has hit Thailand’s exports and disrupted global value chains
Since 2019, the government has blamed a GDP growth of 2.3% on low domestic demand and flagging exports. “The sustained decline in export growth has spilled over to domestic demand growth,” according to a note written by financial firm Nomura in 2019.
It’s important to note that Thailand has been seeing a significant slowdown on our own for some years, especially as neighboring countries like Vietnam has been enjoying steady growth and a younger population, and the pandemic just further highlights our shortcomings.
Thailand’s GDP growth in Q1 2020 was -1.8%, with the obvious affected industries being automotive, petroleum, textile and even beverage. Overall, Thailand’s economy is set to contract by 8.5% this year, against an initial projection of 2.4% growth.
The key takeaway? As long as tourism continues to be sluggish, it is unlikely that our economy will see a significant uptick in recovery. The government’s “Rao Tiew Duay Gun” scheme, a THB2.2 billion domestic tourism push to help boost domestic travel and hotel stays has seen success, but ultimately we strive to attract international tourists. The road to recovery will be long, as long as there are external factors that will disrupt the supply chain.
Covid-19’s Impact on the economy
The global economy has seen a severe blow, mainly from lockdown closures and as cases begin to spike up in different countries across the world, governments are tasked with the challenging balance of containing the pandemic and sending economies down a further spiral.
Europe’s economy contracted by over 12%. However, confidence has been somewhat bolstered by a groundbreaking agreement struck in July within the European Union to sell 750 billion euro ($892 billion) worth of bonds that are backed collectively by its members and will be distributed to the hardest hit countries like Italy and Spain.
The image below is regarding the credibility index of each country after Covid-19. Okay, basically what this shows is the cost of loans for each country. When countries want to obtain a loan, it can either be in the form of a bank or a government bond. A country’s credibility rating will directly affect the cost of loans. To put it simply, if the credibility is high, the cost of loan(interest) will be lower, and vice versa
According to Moody’s and Fitch, they both decreased many countries’ credibility, from Mexico and South Africa. This means if they apply for a government bond loan, they’ll most likely be hit with higher interest. Some countries which have very low credibility won’t be able to get a loan to stimulate the economy.
Covid-19’s Impact on stock and crypto market
When the pandemic initially broke out, markets went on a frenzy. This made sense; it was something completely new that caught the world off guard. Analysts were anticipating the end of a functioning stock market. However, what eventually happened was some very strong gains, particularly powered by NASDAQ tech stocks. Back in May, the US’s NASDAQ index recovered all its earlier losses, boosted by gains from the likes of Amazon and Netflix as global lockdown caused reliance on technology companies and software.
The real interesting story here though, is gold and digital assets. As we covered last week, both have been on a rise. Let’s take a quick look at what happened.
One interesting index we’d recommend to take a look at is called “Crypto Total Market Cap”. It’s basically the total market cap of all digital assets, similar to Thailand’s SETIndex.
You may have noticed that during Covid-19, stock market index in many countries like Japan and Thailand saw significant drops, and even though the indexes have bounced back, it hasn’t fully recovered.
Digital assets now give 70% return in just 8 months. The reason why digital assets prices went up is that the liquidity decreased during the pandemic. People sold many “risky” assets without considering the economic fundamentals or long-term value, this is also known as “Panic Sell”.
Now that the global outlook has somewhat recovered, or at least stabilized, assets which aren’t affected by economic fundamentals recover very quickly. Cryptocurrency is slowly growing in its credibility and becoming more recognized by institutional investors As many as 36% of institutional investors in the US and Europe own crypto assets, according to a survey of 774 firms by Fidelity Investments.
Whilst digital assets like bitcoin has not yet been considered a “Safe Haven” like gold, it has been considered in the same category of an alternative money storage when trust in the financial system decrease. Its long term value can only be proven with a good track record and more time.
- Ultimately, research shows that Thailand’s GDP will contract significantly from the blockage of foreign tourists and slow recovery of our key money-making sector; tourism.
- The recovery period tends to be long because the cost of countries making a loan is higher.
- The recovery of the crypto assets market has been fast because it doesn’t rely on real world economic fundamentals. Then again, it could slip anytime.
- People should be more cautious about how to allocate their money now because the economy is uncertain, making a high volatility of many assets. Researching for an alternative “store of value” is highly recommended. For more on this, check out our write-up last week on gold as a viable store of value here.