by Gabriel Olano 13
Feb 2020
As the threat of the COVID-19 outbreak continues
to spread, centring on Hubei Province in China, the global economy is feeling
the negative effects, as cities are put into lockdown, travel bans are
enforced, and trade slows down.
Research by Allianz’s trade insurance arm Euler Hermes
showed that the longer the outbreak goes on, the risks of supply chain
disruption grow rapidly. According to a report by the insurer, several
industries, such as chemicals, transport equipment, textile, and electronics, are
particularly vulnerable to disruption from an extended pause in Chinese
economic activity.
The insurer expects a global trade shock of
US$26 billion per week due to the various lockdowns and restrictions put in
place. This is likely to keep the manufacturing sector in recession throughout
the first half of 2013. The following markets are also the most vulnerable to
disruption due to their trade links with mainland China: Taiwan, South Korea,
the Netherlands, Hungary, and Indonesia.
Furthermore, China’s year-on-year GDP growth
could also suffer by as much as one percentage point, mostly over the first
quarter of 2020. By comparison, during the SARS epidemic in 2003, China’s GDP
growth took a two percentage point hit. According to Euler Hermes, the effect of
COVID-19 may even be higher due to the Chinese economy’s higher dependence on
private consumption today compared to 2003.
However, the report estimated that the Chinese
economy can recover within one or two quarters, based on previous experience
with SARS.
How can companies deal with the outbreak?
According to Imogen Page-Jarrett, research analyst for China at the Economist Intelligence Unit, companies must implement business continuity plans to mitigate the impact of the COVID-19 outbreak, which she does not expect to be contained until end-March under its baseline scenario.
According to Imogen Page-Jarrett, research analyst for China at the Economist Intelligence Unit, companies must implement business continuity plans to mitigate the impact of the COVID-19 outbreak, which she does not expect to be contained until end-March under its baseline scenario.
Page-Jarrett cited a survey of Economist
Corporate Network members across Asia between January 31 and February 06, which
found that 76% of respondents reported a negative impact by the virus outbreak
on their businesses, while 80% have or are working on a contingency plan.
“When planning, we recommend that companies be
flexible in their approach in order to protect revenue by switching to
alternative product lines, sourcing alternative suppliers and focusing on
regions exempt from strict quarantine measures,” she said “Financial
departments will need to revise budgets for 2020, taking into account a drop in
Chinese demand in the first quarter of the year, while still needing to meet
operational costs. Human resources departments should support flexible working
hours, and working from home, where possible during the public health
emergency, while also complying with legal requirements to ensure the health
and safety of staff.”
Meanwhile, Matthew Wells, regional market
management, commercial underwriting, and distribution director at Euler Hermes
Asia-Pacific, stressed the importance of trade credit insurance (TCI) in
safeguarding international trade during events such as the COVID-19 outbreak.
“TCI provides two crucial functions at such a
time – firstly, due to our extensive proprietary risk knowledge, we are able to
support our customers in making real time credit management decisions,” Wells
said. “Having several insured suppliers (across different trade sectors) to any
specific ‘debtor’ gives Euler Hermes a 360-degree view of the whole supply
chain. This allows us to notify our customers when other suppliers are not
being paid on time, or allowing our customers to supply safely on credit terms
ahead of uninsured competitors.
“Secondly, Euler Hermes is there to pay claims
when the worst happens in the case of an insolvency. We see so called ‘blue
chip’ companies get into financial difficulty all the time, and this is where
the pure insurance aspect of our business is important. With the coronavirus
creating business uncertainty, there has never been a greater need for one’s
largest asset on the balance sheet to be insured by TCI.”
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