Firms need help to survive Covid-19 effects

The economic consequence of Kenya’s announcement Friday that it had detected the first case of Covid-19 are dire, as has been observed elsewhere through plunges in stock markets and financial impacts on sectors such as manufacturing and tourism.

According to the Organisation for Economic Cooperation and Development (OECD), the pandemic will cause adverse supply shocks in the economy owing to factory lockdowns and affect international supply chains. Also, most countries have issued travel restrictions internationally and regionally, resulting in depressed earnings for airlines and the hospitality industry.

On March 11, the European Central Bank President called for dynamic and timely measures to the Covid-19 epidemic by public authorities in a bid to cushion the Euro-area economies against major economic shocks and evade a global financial crisis akin to the one of 2008/2009. On the same day, the President of the United States, Mr Donald Trump, announced a travel ban from the US to all countries in Europe except for the United Kingdom for the next 30 days.

A blog by the International Monetary Fund (IMF) on monetary and financial stability during the virus outbreak indicates that global financial markets will experience capital flight due to a decrease in appetite by investors for riskier investments. Following WHO’s declaration of the disease as a pandemic and a rise in cases, stock markets around the world have endured increased volatility and ensuing economic uncertainty.

In the United States of America, the Dow Jones Industrial Average (DJIA), an index that measures the stock performance of 30 giant companies in the US, fell by 5.9 per cent, signalling a bear market after enjoying an upward market trend for 11 years. Australia’s S&P/ASX 200: XJO index declined by 7.35 per cent on Wednesday and dropped further to 5 per cent on Thursday. As for Italy, the standard stock market index FTSE MIB has dropped by approximately 30 per cent since 2019 following a lockdown of the country.

On March 9, the Nairobi Securities Exchange (NSE) encountered a notable loss, with foreign sales surpassing purchases as foreign portfolio stockholders diversified from the market and opted for fixed income assets such as government bonds. This was driven by fears about the spread of Covid-19 and, as a result, the total net loss in market capitalisation was Sh125 billion.

Looking back at the global financial crisis of 2008, the NSE 20 Share Index slumped by 48 per cent from July 2008. However, according to a report by the World Bank on the impact of the global financial crisis on financial markets, the sharp decline in market stocks was also linked to internal factors such as political instability, oversubscription of Safaricom’s IPO and undersubscription of Co-operative Bank of Kenya shares.

According to the Central Bank of Kenya statistical bulletin, during the first week of January, the NSE market capitalisation was at Sh2.6 trillion. Between February 7 and 13, the market capitalisation was Sh2.4 trillion.

By March 11, market capitalisation closed at Sh2.3 trillion. From the statistics, it is apparent that the stock market has been fluctuating amid widespread concerns by foreign investors who have shed off most of their blue-chip stocks. Although the country has not experienced the adverse effects of the epidemic directly, there could be severe spillover effects from international economies in subsequent days. So, what possible strategies can the State put in place to cushion the economy from financial distress?

The State needs to support firms and companies that will be hit by the financial downturn of the outbreak. This can be realised by providing liquidity support and promoting lending by banks to small and medium-sized companies to avoid cash-flow challenges, bankruptcies and layoffs that would in turn affect economic stability in the country.

Ms Nguyu is an economist. [email protected].