CONTAGIOUS ECONOMY

The growing number of people diagnosed with the novel Chinese coronavirus also affects the businesses around the world. According to Moody's, the coronavirus pandemic could become a 'black swan', which will hit the world economy much worse than the 2008 financial crisis. "Unlike the 2008 crisis, the authorities are limited in their ability to rectify the situation," John Lonsky, Senior Economist at Moody's said.

Anti-records

Prof. Warwick McKibbin of the Australian National University told to Bloomberg that the damage caused by the coronavirus could reach $160 billion, which is 3-4 times the damage from SARS back in 2003.

Coronavirus has really scared investors. Luxury retailers, the tourism sector and casinos have been hit the hardest. S&P analysts believe that the withdrawal of investors from risky assets can inhibit the inflow of new investments, and the outflow of capital will reduce stock prices and the value of the currency. A similar situation was observed in 2002-2003, when the SARS pandemic broke out in China, but the recession ended as soon as the disease subsided.

According to analysts, the Chinese economy will suffer the most severe blow from the spread of the new coronavirus epidemic. Other countries will also suffer, which makes the economists revise their forecasts for 2020. According to experts, the epidemic may shrink the Chinese economy by 0.5-1%, hence making the global economic growth decline by at least 0.2% to 2.3% maximum at the end of 2020, and not 2.5%, as the IMF predicted. This will be the lowest increase in world GDP since the 2008 crisis.

On January 24, Dow Jones set a record for 2020, falling by more than 1% after the news of the second confirmed case of infection with a new coronavirus in the U.S. The shares of American airlines American and Delta and Las Vegas Sands Corporation (the largest casino owner) have fallen.

World Bank President David Malpass warned of an impending reduction in the forecast for global economic growth "at least in the first part of 2020." He recalled that many Chinese goods are delivered worldwide by passenger aircraft. Now, companies have to quickly adapt their supply chains to new conditions.

Advantages and disadvantages for China

In China, the virus, primarily affected transport, retail, restaurant and hotel businesses. Sharp reduction in world air traffic from China not only reduces the revenues of airlines and airports, losing passengers and traffic, but also creates problems that are more complex for companies operating in various industries.

The industry is also going through hard times - many production facilities are closed, because workers are still on the leave as requested by the authorities, and interruptions in transport make it difficult to ship goods to customers.

The plants of Toyota and Volkswagen, as well as the Airbus plant in China have suspended assembly lines for an indefinite period. World-famous companies such as Tesla, General Motors, Ford Motor, Ikea, Nike, and many others also faced a disruption in the production, supply and sales process due to the epidemic.

McDonald`s announced the closure of restaurants in five cities of China, including Wuhan, where public transport was suspended. Starbucks announced the closure of a number of coffee shops, noting that it has partnered with Chinese health services to protect its employees and customers. Fast Retailing, the owner of the Uniqlo brand, as well as the Swedish chain Hennez & Mauritz, have closed stores in several cities in China.

Facebook, Japan's Shiseido, and a number of other companies have imposed restrictions on employees visiting China unnecessarily; Nissan, Honda and Groupe PSA are evacuating employees from Wuhan.

Apple said that the spread of the virus could adversely affect its supply chain, since the assembly lines of the company are located in China.

However, there are also winners who speculate on the spread of coronavirus. These are the manufacturers of drugs, masks and gloves - stock prices of such companies have increased by an average of 10%, according to Pharmaceutical Technology.

It seems that the unfolding situation has been developed intentionally to weaken the position of China in global economy. Others claim that the novel virus made it possible for the Chinese to buy the shares of their own companies cheaply amidst the falling prices all over the world, and now the bonuses from the shares will remain inside the country. After the localisation of the epidemic, the prices of shares may rise again. There are assumptions that China has already earned $18 billion through the acquired shares. In addition, bonds of developed countries are also rising in price, as investors rushed to buy reliable assets and sell risky ones.

It turns out that the epidemic is controllable. Analysts also support this version and claim that information on the spread of coronavirus can be deliberately distorted as necessary to manage the situation.

Oil prices are down

Nevertheless, today many commodity markets have to respond to the virus. The prices of metals such as copper, nickel and aluminium fell by an average of 7% after the outbreak of the virus. The oil market has been under pressure since the outbreak too: Brent oil fell from almost $70 in early January to below $56- $55 per barrel now.

China has been the world's largest importer of oil since 2016, when it bypassed the United States. Thus, a change in demand in China can have a huge impact on the global market. China consumes about 15% of world oil production. In the past five years, China accounted for an average of 36% increase in global oil demand. Against the background of the spread of coronavirus, which limits both the consumption of electricity and the demand for tourism services and economic activity in general, the demand for oil in China has fallen from 14 million to about 3 million bps, which is about 20% of the consumption. counted Bloomberg.

According to the agency, this is the most serious shock to demand since the 2008 financial crisis and the most unexpected drop since the 9/11 events.

S&P Global Platts admits a drop in global oil demand by "almost catastrophic" 2.6 million bpd in February and 2 million bpd next month in the worst-case scenario.

Meanwhile, OPEC+ has already begun to search for its own 'vaccine' against coronavirus. On February 6, after a three-day extraordinary meeting in Vienna, the OPEC+ Technical Committee recommended that the member states reduce oil production by another 600,000 bpd from the current 1.7 million bpd and extend the restrictions until June 2020 to remove the effects of the Chinese coronavirus. These are just recommendations that the OPEC+ Ministerial Committee (JMMC) can consider for a final decision. The next JMMC meeting is scheduled for March 5-6, 2020.

By the way, the outcome of the Vienna meeting show that not all member states are ready to decrease the oil production, claiming that it takes some time to assess the negative consequences of coronavirus on the oil market.

In particular, the Russian Minister of Energy Alexander Novak noted that the oil market now has "a lot of uncertainty, perhaps due to panic fears". The Minister noted that according to experts, the spread of coronavirus could lead to an average annual decrease in world oil demand by only 150-200,000 bpd in 2020.

Meanwhile, the Azerbaijan Minister of Energy Perviz Shahbazov told reporters that OPEC+ did not plan an urgent meeting of ministers to discuss the coronavirus in February, although there were proposals to bring it forward from March to mid-February. "After reconsidering the situation, it was decided that there would be no advance meeting of the OPEC+ ministers. It will take place in March, as originally planned," P. Shahbazov said.

He added that because of the coronavirus, the decline in oil prices exceeded 10%, but "now the situation is stabilising." According to him, the situation in the oil market is changing towards some recovery in prices.

Azerbaijani economy remains immune

The influence of coronavirus on Azerbaijan's economy can be tangible only if the world oil prices continue to fall, as this will definitely affect the volume of export revenues based on $55 per barrel in the budget for 2020.

Nevertheless, Chairman of the Central Bank, Elman Rustamov, assures that the Azerbaijani government has done serious work to counter external challenges. "Azerbaijan's budget is based on the price of oil at $55 per barrel. This rational approach minimizes external risks and guarantees an annual surplus from price difference. Azerbaijan's foreign exchange reserves exceed $52 billion, and a strong strategic currency base can successfully confront the most serious external challenges," Rustamov said.

Azerbaijani Finance Minister Samir Sharifov does not think the parameters of the state budget for 2020 require changes due to lower world oil prices. "Oil price depends on many factors. I don't think that we should panic, as the oil price is set at a rather cautious level in the budget," Sharifov said. "We draft the state budget based on longer-term forecasts. The budget for 2020 is basically immune from a sharp drop in oil prices because of the transfers to the budget. The transfer amount is expressed in national currency, which means it does not change. If oil prices continue to drop in the longer term, we can make adjustments. But again, there is no need to make hasty decisions. We have large reserves and we will be able to withstand certain shock situations," the minister said.

Azerbaijani Minister of Economy Mikail Jabbarov also believes that there is no reason to worry about the impact of coronavirus on Azerbaijan's economy. "It is too early to make any forecasts, although the crisis has already had a negative impact on the economies of many countries, primarily Asian countries. I believe that we should not rush to conclusions. We must analyse the situation with the relevant government agencies. All scenarios have already been worked out," Jabbarov said.

At the same time, the virus can affect the level of export-import operations between Azerbaijan and China, which is one of the main buyers of Azerbaijani oil. Certain losses are also possible due to a reduction in transit flows from China and a slight decrease in the number of tourists from China to Azerbaijan.

On the other hand, if Russia refuses to import fruit and vegetable products from China, this opens up new opportunities for increasing supplies from Azerbaijan, for example, garlic, tomatoes, or cucumbers, given the great demand for these products on the Russian market.

Either way, any negative phenomenon of a global scale being illness, war, etc. always has a double effect on the economy and may open up additional opportunities for turning the negative effects to positive dividends, no matter how strange this may sound.