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Published : 04 Mar 2020, 06:27 PM
The coronavirus has unearthed many underlying vulnerabilities to the global economy. The virus, which causes an illness called COVID-19, has already claimed over 3,100 lives worldwide, with more than 90,000 infected cases. Although the infection and death rates have appeased to some extent in China, the birthplace of the outbreak, the rapid spread outside the country has crippled all hopes of a speedy recovery from the epidemic.
Protracted factory shutdown in China, the manufacturing superpower that has tightly held grip of 30 percent of the global output, has jeopardised the global supply chain. Although the Chinese authorities are trying to usher workers back to their workplaces, a month after announcing the unprecedented quarantine of a number of cities, manufacturing activity is slowly normalising with productions currently running between 60 and 70 percent of the pre-outbreak levels.
Like many other countries, Bangladesh has not been spared from the repercussions of an interruption in business. Worth of $56 billion, Chinese goods comprise 26.1 percent of imports in Bangladesh, creating susceptibility for the supply chain of major industries owing to disruption in production activities in the world's largest exporting country. Moreover, not only does Bangladesh's readymade garment sector procure a significant portion of its raw materials (more than 50 percent) from China, it also exports around $506 million to China (as of 2018-19 fiscal year). Apparel retailers such as H&M, GAP, and Uniqlo that source their products from Bangladesh are also experiencing lower demand as many retail outlets are being kept shut or operating on reduced hours with lower traffic in China. The adverse demand side impact in the United States and Europe is unknown but Goldman Sachs revised its earnings estimate for the year for US companies to $165 per share, representing no growth in 2020, which is a dramatic move away from the consensus.
Additionally, given that high-spending Chinese consumers account for approximately 46 percent of global luxury brand sales, that the majority of Chinese citizens are currently trapped indoors is leading to subdued demand within and beyond China's borders. Hence, while import volume from China has plunged 21 percent in volume in the first one and half months of 2020, Bangladesh's ability to export as well as demand for Bangladesh's exports at both supplier and consumer ends is likely to take a beating.
Furthermore, the RMG sector is already handcuffed by a lack of negotiation power, with its trade partners having the authority to turn their heads to other countries if local garment factory owners seek a higher price due to possible increase in production costs stemming from the smothered supply chain.
Other sectors such as leather, pharmaceuticals, consumer electronics, cement, steel, jute, among others, may also be impacted due to their high reliance on China for export and/or imports. As such, banks are likely to experience a spillover if overall industrial activity slows down in the country.
Bangladesh's mega infrastructure projects, that are to be a major driving force for expediting industrialisation in the country, are also in danger of losing their pace as Chinese capital and manpower are highly involved in their construction process. A majority of the suppliers of important construction materials and equipment are based in China, which is another worrying issue. The disbursement of the funds committed by China to Bangladesh may be delayed as well due to the outbreak.
In the global commodities market, oil and other basic materials such as coal, copper, aluminium, and iron ore have witnessed significant downturn (S&P GSCI index for commodities lost 8.39 percent in February alone) due to the outbreak. Tumbling manufacturing activity in China and the fears of a significant global economic slowdown have resulted in weak demand for commodities. While the dip in energy and materials prices might create a breathing space for Bangladesh to curb inflation, it will also create significant balance sheet challenges for the businesses that purchased materials for their inventories at comparatively higher prices before the slump occurred.
According to the results from a survey conducted by Morgan Stanley, Chinese analysts expect the production levels in the country to reach 80 to 100 percent by late March. Production in some sectors such as staple food and beverages, coal, industrial truck machinery and electronics are likely to resume faster than the automotive, cement, and apparel equipment manufacturing industries, as per the opinion of the investment bank. If these predictions stand, then the overall impact may remain within a tolerable level. While a certain portion of the demand may be permanently lost, the remaining demand may later bounce back in the form of a J-curve. At present, central banks in affected countries are considering accommodative policies to help their respective economies prevent a downturn. The US Federal Reserve has cut rates by 50 bps to ease the economic impact of the escalating health crisis, a step that was also taken during the 2008 financial crisis.
The implications of the coronavirus outbreak have sent us a strong message about how vulnerable we can be in the face of storms. Now is the time to proactively develop backward integration and reduce dependencies on a single geographic region so as to minimise volatility from external shocks. Other countries that also have a high concentration of their factories in China may currently or soon be rushing to seek alternate destinations for their production processes. While Bangladesh's name may appear in their list of options due to its low labour costs, the lack of high-skilled workers and product diversification may ultimately deter prospective foreign countries from stepping foot in Bangladesh. As such, proper training needs to be provided to close this gap.
Also, considering the high population density of Bangladesh in general as well as the cramped working conditions within the premises of RMG factories, the infection of a single person or a factory worker may lead to the virus inadvertently spreading like wildfire. The manner in which the virus rapidly infected people in cruise ships such as the Diamond Princess or the prisons in China stands testament to this.
Finally, even though Bangladesh is yet to detect any COVID-19 cases, the healthcare sector needs to adopt more stringent and thorough measures to ensure that the country does not face any hiccups in its growth trajectory due to any ugly contingencies given its weak healthcare infrastructure. The COVID-19 is a wake-up call for all of us. At this point, rather than being complacent about not being among the 62 affected countries that are currently battling with the coronavirus outbreak, we need to maintain a cautious stance and take all necessary steps across private and public sectors before it is too late.
