Question

Topic: Impact and consequences of covid-19 on international business and financial market.

Answer 1

Covid-19 has certainly impacted majority of industries adversely across economies. Due to social distancing norms implemented in almost all the countries, the overall demand of products and services have dramatically plummeted. Decrease in overall demand is having a ripple effect in all the components of economies - especially sectors with discretionary demand.

Covid-19 has caused liquidity challenges in many companies and even some government organizations causing them to default on borrowings as well as other obligatory payments. This has forced various organizations to lay-off significant portion of their workforce. This in turn has led to a vicious cycle of further fall in demand due to lower income in the hands of consumers and also falling confidence levels. Resultantly, tax collections by Government has materially declined, thus limiting the amount of social benefits that could be provided to public in general. Furthermore, it also restricts public and private investments which otherwise could have helped to boost confidence and liquidity into the system.

In the above context, international business is severely affected due to the pandemic, mostly due to restrictions on movement of people and goods. Needless to say nation-wide shutdowns, closed borders, and halt on transportation has hindered international trade, following are some after-effects of such developments :

• Aviation industry acutely impacted due to social distancing norms. However, the industry is expected to be structurally affected going forward, since working community would be expected to conduct business meetings through video-conferencing and other technology platforms. Many companies are encouraging work from home policies, this would impact transportation and automobile sector in general
• Other industries which are victims of corona are textiles, oil and gas, automobile, metals and mining, retail industry etc. Major companies operating in these industries have international presence. As a result of tepid demand, exports and imports have significantly fallen and would expected to be muted in the medium term.
• Industries depending on these sectors directly and indirectly would also feel the pain due to depleting resources of these organizations
• Hotel, tourism and even entertainment industries have international angles to them, and they have been gravely affected due to Covid
• We can see that geo-political tensions rising as well - especially against China. It must however be noted that China is a significant participant in the international markets - and this will have ramifications in the international trade and businesses going forward

Consequence on the financial markets :

The fundamental shift in the dynamics of demand and liquidity in corporations, government organizations, financial institutions will definitely get mirrored by the financial markets. The impact can be summarized as follows :

• Worldwide equity markets had crashed (for instance S&P 500 index had crashed by over 25% in March, compared to Jan). Most of the major indices had largest weekly declines since 2008
• Oil prices had dipped by 70%
• Yields on corporate bonds have increased, their spreads with respect to government bonds have risen - this is because the markets perceive corporations to have higher chances of defaulting and thus considered to be riskier than before
• Safe-havens such has gold and dollar have appreciated, since during downturns investors tend to invest in these assets for risk aversion