Chronicles of a capital allocator in a POST-COVID economic crisis: Global and local outlook.
As we approach the start of the third quarter of 2020, looking in retrospective it is difficult to believe that the first two quarters would be about survival and all economic activities coming to a stand-still due to the health pandemic of Sars-Covid 19. Looking in retrospective at the beginning of the first quarter of year 2020, we could observe a surge in financial assets classes epically in the corporate debt market and the growing strong dollar of 10% from 2018 against the Yuan and Euro as of Jan 2020. With the outbreak of the Covid 19 crises in China in the province Wuhan in China as December 2019, and global spread of the virus in February brought about massive mass economic erosion of wealth and disruption of the world economy.
Drastic monetary measures and aggressive fiscal policies have been undertaken by central banks and governments globally. In the US alone congress alone congress has approved USD 3 trillion stimulus bill and the central bank has slashed interest rates to zero, while repurchasing financial assets, and increase lending to support small businesses and households. However, the London based rating agency, Fitch predicts contraction of global economy by 4.6 in 2020 in its Global Economic Outlook report of June this year. Meanwhile China’s GDP expected forecast of 1.2% and the US on the other hand is predicted to have a GDP 0f -5.6%, with an expected decline by 9.9% (34% annualized in the 2Q 20 as the recent increase in daily new cases increase downside risk. The risen geopolitical tension between the two leading economies and world trading countries continuous to make headlines in the media coupled with the lockdown effect is having a serious impact on world trade and capital flows, as most investors run to starch their wealth in safer asset classes with a fear of confrontation between the east and the west. More so actions worldwide by policy makers with loose monetary policies and fiscal policies by government to curb the economic damages of the lock down and bolster the economy has led to currencies been devalued, leading to investors to flee to precious metals as a better store of value, which also explains the recent surge in gold and declining dollar. Despite the fact that 63% of global foreign exchange reserves of central banks holdings are in dollars, and only about 12% of foreign transactions are not in dollar and almost half of all debt securities around the world are in dollars.
The world has experience a massive economical earthquake, which equally affected African countries and our local economies and is expected that the Cameroonian GDP to contract by 2.1% from 3.7% in 2019. As a result of this negative shocks Standard & Poor’s rating revised Cameroon ratings from stable to negative with a B rating for its long and short term in local currency. This rating is due to the economic and political risk resolving from internal tensions notable the crises in the English speaking region. The external debt of Cameroon continuous to increase public debt to GDP ratio. In the sub region Fitch London based rating gave a downgrade Caa1 positive rate to neighboring country Gabon reflecting its reliance on oil for growth, exports and government revenue as well as very low institutional strength. Government liquidity remains tight with continues arrears to domestic suppliers and creditors. The report predicts a 2% drop in GDP resulting from negative spill-offs of the COVID 19 coupled with drop in oil prices.
In order to booster economic recovery the central bank measures to inject liquidity involve a maximum 600 billion repurchase of government asset after its extraordinary session of 22 July, which would be for a duration of 6 months, and a prolongation period of an additional 6 months. The central bank also revised is indicative rate from 3.5% to 3.25% and encourages banks to adopt flexible loan classification procedures that will differ impairments and ease pressure on capital ratios.
The lockdown has enabled policymakers to revise their spending priorities and also have priorities especially for countries weak health infrastructures systems notable in Sub-Saharan Africa. World trade has slowed down overall and a drop in company investment activities due to a fall in revenues of households, governments, and firms. The climb to previous GDP levels will be a tough climb as fears of near waves of outbreak ligger around with uncertainties. Fitch expects global GDP to rise by 4.9% in 2021. World growth is expected to continue at an above-trend rate of 3.4% in 2022 as the impact of policy support persists and the output gap closes. While the Euro remains the number one trading currency in the CEMAC followed by the dollar, the Us GDP is expected to regain its 4Q2019 levels in 2Q22, and the Eurozone in 4Q22 a relatively tentative slow. Uncertainties (beta) lie ahead as well as opportunities (alpha) for efficient top-notch capital allocators.