UNCTAD warns COVID-19’s economic fallout will long outlive the health crisis

Geneva is not only a global trade finance hub; it is also home to United Nations and many of its agencies. One of the most prominent ones among these agencies is United Nations Conference on Trade and Development (UNCTAD).

Having established in 1964 as a permanent intergovernmental body, UNCTAD is the main authority of the General Assembly in the sphere of trade and development. Its purpose is promotion of trade and development, particularly in developing countries.

UNCTAD released a report in end-November, where it concluded that COVID-19’s economic fallout will long outlive the health crisis. Announcing the report, UNCTAD Secretary -General Mukhisa Kituyi warned also of an increase in extreme poverty.

Let me set-out the forecasts of the report first: UNCTAD estimates 4.3% decline in global GDP in 2020, a figure very close to that of the IMF at 4.4%. The report sounds also rather unconvinced regarding the rapid commercialisation of a vaccine against Covid-19.
Based on these forecasts the agency draws a rather bleak picture.  Since UNCTAD’s main area of interest is developing countries, the report is quite realistic from my point of view. I would like to highlight some excerpts from the report:

  • The crisis could send an additional 130 million people into extreme poverty.
  • It finds that the pandemic’s impact has been asymmetric and tilted towards the most vulnerable, both within and across countries, affecting disproportionately low-income households, migrants, informal workers and women,
  • Global poverty is on the rise for the first time since the 1998 Asian financial crisis. In 1990, the global poverty rate was 35.9%. By 2018 it had been curtailed to 8.6% but has already inched up to 8.8% this year and will likely rise throughout 2021
  • Additionally, COVID-19 has had an excessive effect on two sectors – tourism and micro, small and medium-sized enterprises – which employ many vulnerable groups

These and other setbacks, such as school closures that threaten 20 years of progress in expanding access to education, especially for girls, will have strong negative impacts on the productive capacity of countries well into the future.

The report calls for a more vigorous international assistance, including debt relief to many poorer nations so they can tackle the pandemic’s economic impacts.
Secretary-General of UNCTAD  said “The Covid-19 pandemic has seriously undermined the global economy, with far-reaching consequences for all. The spread of the virus has benefited from the interconnectedness that underpins the global economy and played on its weaknesses, transforming a global health crisis into a global economic shock that hit the most vulnerable hardest. The time has come to address the weaknesses of globalization that have led to the rapid spread of the virus around the world and its uneven economic impact.
The UNCTAD report also highlights the possible positive impact of the health crisis on the organisation of trade and the fight against global warming. The UN agency also sees this as an opportunity to be seized. According to the report, the crisis can “catalyse the emergence of new, more resilient production networks based on shorter, more regional, sustainable and digital value chains”. It is also, according to its editors, an opportunity to make production “greener”.

FINMA 2020 Risk Monitor

FINMA independent supervisor of the Swiss financial market, has published its annual Risk Monitor. This report specifies the most important risks that supervised institutions are currently encountering and portrays the focus of FINMA’s supervisory activity.

After having reviewed the report, I can easily say that the omnipresent word is undoubtedly COVID. The pandemic has triggered a whole series of pressures on financial institutions, like everywhere else in the world. According to FINMA, the main pressure stems from the risk of losses on loans to foreign companies.

In mid-2020, Swiss banks held claims on foreign companies totalling USD 78.1 billion (CHF 72 billion), according to figures from the Bank for International Settlements.

According to Swiss National Bank statistics 75% of these loans are held by two biggest banks, Credit Suisse and UBS. Coupled with bankruptcies and international fraud in the first half of the year that Swiss banks faced in commodity trade finance segment, I believe it is safe to say that FINMA will be monitoring the activities of the banks ever more closely.

As for the other main topics or the report, I think the most important ones are the critical exposure of insurance companies to pandemic-hit bond markets as well as a probable bursting of a real estate bubble. Low and/or negative interest rates are further complicating this story in my view.
On the other hand, FINMA considers the risk of domestic credit losses to be lower in Switzerland. Although, the recession was less severe in comparison with other countries and the economy was supported by public measures, I believe as we enter a long and bleak winter with degrees of confinement all over the country, a series of bankruptcies especially in hotels, restaurants and transport as well as jobs cuts across sectors is inevitable.

IEA – WEO 2020 – Gov. role and scenarios

International Energy Agency (IEA) published its World Energy Outlook (WEO)2020 report on 13 October. The new report provides the latest IEA analysis of the pandemic’s impact: global energy demand is set to drop by 5% in 2020, energy-related CO2 emissions by 7%, and energy investment by 18%.

The report suggests that, although the pandemic and its aftermath can suppress emissions, low economic growth is not a low-emissions strategy. The report concludes that during this time of extraordinary uncertainty, only the governments have unique capacities to act and to guide the actions of others. I feel that the voices against more government intervention in every area increase everywhere.

The established methodology of the report is to put forward different scenarios, within which the probable developments in the energy sector are discussed. I think, these discussions are very useful especially during these turbulent times.

I would like to briefly summarize these scenarios from the outlook below:

  • The Stated Policies Scenario (STEPS), in which Covid-19 is gradually brought under control in 2021 and the global economy returns to pre-crisis levels the same year.  As I see it, this one is the least realistic scenario.
  • The Delayed Recovery Scenario (DRS) is designed with the same policy assumptions as in the STEPS, but a prolonged pandemic causes lasting damage to economic prospects. The global economy returns to its pre-crisis size only in 2023, and the pandemic ushers in a decade with the lowest rate of energy demand growth since the 1930s.
  • In the Sustainable Development Scenario (SDS), a surge in clean energy policies and investment puts the energy system on track to achieve sustainable energy objectives in full, including the Paris Agreement, energy access and air quality goals. The assumptions on public health and the economy are the same as in the STEPS. I think, this is a very optimistic scenario.
  • The new Net Zero Emissions by 2050 case (NZE2050) extends the SDS analysis. A rising number of countries and companies are targeting net-zero emissions, typically by mid-century. All of these are achieved in the SDS, putting global emissions on track for net zero by 2070.

RCEP – The Regional Comprehensive Economic Partnership

Following almost a decade of negotiations, 15 countries in Asia and the Pacific signed a historically important trade agreement on November 15th, forming the Regional Comprehensive Economic Partnership, RCEP.

This China – led agreement aims to create a free trade area between China, Japan, South Korea, Australia, New Zealand and the ten ASEAN (Association of Southeast Asian Nations) countries, which include Indonesia, Thailand, Singapore, the Philippines and Vietnam. Its members account for 30% of the world’s GDP. In addition, it will affect more than 2 billion people.

The agreement provides for reductions in import taxes, harmonisation of customs procedures and also includes clauses on respect for intellectual property. It excludes, however, everything relating to the protection of workers and the environment.

According to my reading of several experts on the subject, the deal could add almost USD 200 bn annually to the global economy by 2030.

In my opinion, if India did not withdraw from the negotiations in 2019 the impact of the deal could have been even larger. We will have to wait and see how RCEP will shape the future of trade in Asia and whether it will become a coherent trading zone . It is expected, however, that it will reduce US’ influence in the region.