CORONAVIRUS - SOLUTION COULD BE MAKING THE PROBLEM WORSE

Cyprus Mail 15 March 2020 - article by Elias Hazou

With hotels closing their doors and the airport only open to residents of the island, the economy as a whole is already starting to feel the squeeze from the coronavirus but experts say assessing its economic impact is no better than taking a wild guess

With Cyprus firmly in the grip of the coronavirus crisis – others might say frenzy – the government has telegraphed a stimulus/relief package to tackle the anticipated economic slowdown. But if we are candid, analysts tell the Sunday Mail, it’s still early days to estimate the scale of the financial impact, either here or globally.

Finance Minister Constantinos Petrides this week announced a coming stimulus and relief package for businesses and individuals alike.

“Undoubtedly there will be a substantial fiscal cost, the growth rate will be affected,” he said.

Whenever an official says ‘substantial’, think ‘gigantic’.

The government began hammering out a package when a number of interest groups wasted no time showing up and asking for support – hoteliers, industrialists, tour operators.

Petrides could not be reached for comment in time for the publication of this report.

But it’s understood the measures will include deferred VAT payments for businesses, other tax breaks, and payments covering sick leave or the leave of absence from work of parents who have no support and who have to look after their children now that the schools are closed.

On Friday, the Association of Cyprus Tourist Enterprises (Stek), representing four and five-star hotels, said its members should consider shuttering their establishments until April 30.

The association said that since the government had placed the UK on its category 2 list of countries requiring arrivals to self-isolate for 14 days to wait out any signs of coronavirus, there was no point in them staying open.

Commentators are already predicting doom and gloom, concerned the Cyprus tourism industry – the so-called steam engine of the economy – could come to a grinding halt.

Economist Savvakis Savvides points out that “no one can really predict the precise impact of this pandemic. To a large extent it depends on how long the disease lasts, which is still a big unknown.

“But it would surely have a negative impact on an already ailing and highly indebted real economy in Cyprus. Productivity will suffer and businesses will struggle to make ends meet. If this goes on for too long, it’s going to be hard for many firms to recover from.”

Savvides hastens to add that “throwing money at the problem won’t solve it”. Given the already existing very high levels of private debt (for both households and companies) a recession which was probably coming anyway, should now be almost inevitable.

Despite recognising that the government must intervene somehow, the analyst notes that subsidies and delayed interest payments for businesses are only quick fixes, band aids on a festering wound.

Hotels have already decided to close their doors

What matters is not the availability of funding but the use of it in capital investment projects in new and existing businesses.

The problem however is that the conditions conducive for such investments are scarce in a highly indebted economy where domestic demand is very weak and potential borrowers, because of excessive debt, are no longer considered creditworthy.

“That’s why it’s imperative that an expert and independent development financing institution is in place to identify and evaluate such investment opportunities as well as for structuring off-balance sheet appropriate financing packages to fund these ventures. It will also lead by example for other banks as the Cyprus Development Bank has done in the years after the Turkish invasion.”

Leaving aside the analogy of the self-fulfilling prophesy – governments are the ones restricting movement, leading to disrupted supply chains and suppressed economic activity, which in turn necessitates state intervention, coming full circle – one does have to acknowledge that the state has a responsibility to protect public health.

Yet leaders the world over seem to be going hell for leather in hyping up the situation. This past Wednesday, German Chancellor Angela Merkel warned that up to 70 per cent of the country’s population – some 58 million people – could contract the coronavirus.

Where Merkel got these figures is unclear, but she was most likely citing some disease transmission model that experts came up with. Yet the same sort of experts have got it badly wrong in the past. The 2005 bird flu was not even classed as a pandemic, yet in September 2005 Dr David Nabarro, a United Nations health expert, was telling the BBC that avian influenza could kill “up to 150 million.” The actual death count from bird flu: a few dozen.

The same sort of hyperbole is now leading to a string of draconian measures. Only on Friday, Spain declared a state of emergency for 15 days. Italy is in virtual lockdown, while New York’s governor announced a containment zone around the town of New Rochelle, sending in the National Guard.

In turn, the restrictions generate a chain reaction: thousands of flights have been cancelled worldwide as airlines struggle to cope with a slump in demand. China’s supply chains are severely disrupted, and the OECD is forecasting a global recession for this year.

And coming back to square one, governments gear up for massive spending programmes to offset the economic impact.

Meanwhile the recovery rate in patients who’ve contracted Covid-19 according to data from the Centre for Systems Science and Engineering at Johns Hopkins University, as of Friday March 13 stood at 137,445 total confirmed infections with total deaths of 5,088, or 3.7 per cent of cases. Total recoveries numbered 69,779, or 50 per cent.

By contrast, between 290,000 and 650, 000 deaths annually are associated with respiratory diseases from seasonal influenza, according to 2017 estimates by the United States Centres for Disease Control and Prevention and the World Health Organization.

Some observers suggest governments and central banks may be piggybacking on the coronavirus scare to mask underlying economic weaknesses.

Writing in the Mises Wire (Governments Are Using the Coronavirus to Distract From Their Own Failures, March 4, 2020), Daniel Lacalle comments:

“As in all episodes of panic, one of the greatest risks is governments that feel the need to do something quick and massive, probably contributing to that same panic that they call to mitigate. Taking unnecessary interventionist measures, closing the economy, and disguising the risk with bricks and mortar may be even worse as a solution than the problem itself.”

That segues comfortably to Demetris Georgiades, chairman of the Fiscal Council, who cautions against an over-the-top reaction.

Coronavirus is undoubtedly a concern, he says, but at this stage assessing its economic impact is no better than taking a wild guess.

“Sometimes it’s better to just say ‘I don’t know’ rather than make highfalutin forecasts,” he offers.

Georgiades goes on to stress that not even epidemiologists can tell how long this will last, let alone economists.

Asked if comparisons can be made to other crises, such as the 2013 financial meltdown, the analyst gives a straightforward no.

“In 2013 we could quantify, even if approximately, the damage. You had a €10bn bailout. This time the situation is fluid, you can’t pin it down.”

The power station in Vasilikos was damaged by the Mari explosion, having an impact on electricity supply

Still, in his opinion, events like coronavirus can best be likened to short-term shocks such as that occurring after the July 2011 explosion at the Mari naval base.

“We can associate coronavirus to Mari, in that the latter served merely as a trigger, accelerating an economic slump that was concealed but nonetheless looming.”

Should the disease subside in the summer – as the virus is said not to cope well with higher temperatures – the shock to the global economy should be relatively small and manageable.

“In fact, if it does turn out that way with the virus, Cyprus – with its warm climate and thus a safe destination – may well stand to benefit come summertime. You never know.”

Georgiades thinks the state assistance is mostly for psychological reasons – to reduce the panic in the market and try to stimulate consumption before it goes numb.

The analyst says the government has hundreds of millions of euros in cash balances – so the money to help stimulate the economy is indeed available. But, he stresses, any support measures must be targeted.

“For the time being, the best you can do is micro-manage. Speaking about Cyprus specifically, the government will produce a support package, but we shouldn’t squander our [budget] surpluses which afford a cushion against shocks.”

What worries Georgiades is a blind allocation of government cash to prop up corporations that don’t need it.

For example, major tour operators are insured against cancelled bookings and have the cash reserves to ride out the storm. Government assistance should be directed at smaller businesses struggling to stay afloat.

Also, tax relief – so long as it’s temporary – would help. This could take the form of delaying VAT payments by certain businesses for, say, three months until economic activity picks up again.

“In Cyprus we’ve got a bad habit of running to the government at the first sign of trouble, before we’ve even absorbed the cost of an event. We see that happening right now.

“Whereas government intervention should be the last resort, here it’s become the first resort''.