Finance Projections in the Post-Pandemic WorldBy Cinthya Alaniz Salazar | Wed, 10/27/2021 - 18:24
The global economy came to grinding halt with the COVID-19 pandemic and, as its recovery continues to drag on, economic losses continued to mount furthering extending economic recovery timeline projections. In a distorted post-pandemic global economy, Atradius aims to continue supporting businesses find fair financing solutions in the fifty plus countries where it operates, says Alejandra Correa, General Director, Atradius Informes Mexico.
As the global economy begins to enter a post-pandemic period headed by vaccination campaign efforts in rich and middle-income economies, all countries are grappling with high inflation caused by a myriad of influencing factors. These include supply chain disruptions and increasing input costs, which stand to collectively undermine countries’ economic recovery performance. Supply chain disruptions have affected nearly every economic sector from agriculture to manufacturing. Automotive manufacturing, which represented over 20 percent of Mexico’s GDP in 2019, has been undermined by chip shortages that has forced major companies like Ford, GM and Nissan to downsize and or stop production altogether.
On top of this challenge, companies face increasing input costs, the most pertinent to every sector being rising energy costs. Natural gas and oil production were held up for weeks after the destructive force of Hurricanes Ida and Nicholas battered Louisiana, Texas, and the Guld of Mexico where these natural resources are extracted and exported to all corners of the world. Aware that it would be some time before these resource rich centers would be at full capacity and with the winter months ahead, natural gas and oil prices spiked and have been steadily growing since. In September, China was experiencing rolling blackouts as the government scrambled to import natural gas from anywhere it could. According to estimates from Goldman Sachs, about 44 percent of its industries where affected.
Overall, these two global economic conditions have coincided to exacerbate an already delicate inflation rate that had begun to climb in late January 2021. The global economy, however, is not a monolith for independent state economies, stronger economies are able to endure high inflation rates without having to raise interest rates. On the other hand, middle income economies lack this capacity. Even though this trend is presumably temporary, central banks of emerging economies are concerned about its long-term implications. To mitigate the crisis, many emerging economies have raised interest rates, which will in turn will have varied financing implications on businesses.
In the short-term, financial solutions will depend mainly on a company’s economic performance during the pandemic and federal government subsides. For example, e-commerce companies, which did exceptionally well during the pandemic, may not have to worry about high interest rates but may have to consider debt collection, considerably difficult across international borders. In contrast, businesses in the hospitality industry, which were battered during the pandemic, may have to consider debt refinancing especially in countries were governments did not provide any subsides. In turn, federal governments that provided subsidies may be interested in debt refinancing themselves says Rodolfo Navarrete, Investment Analysist, Vector Casa de Bolsa.
“At the start of the COVID-19 pandemic the question was: Should federal governments provide financial assistance to families and businesses? Now, in 2021, the question has shifted to: How are they going to pay back what they spent?” said Navarrete.
In this case, Mexico which did not provide any substantial financial assistance, is an outliner in the global debt economy. Although it was an unpopular decision domestically, it has generated relative stability and given Mexico the opportunity to enter the debt economy under favorable conditions while other countries struggle. Currently, other federal governments are tasked with drafting fiscal reforms that will cover the debt incurred, implying one of two things: raising taxes, which most understand to be an unpopular decision, or raising the cost to capital access, which is the most politically safe in the short run.
As federal governments begin to scale back subsidy programs, the global economy will be inundated with actors in need of capital, which in turn will result in higher interest rates. This will have salient medium and long-term implications for new and small businesses in need of capital access, especially in emerging economies.
“This will seriously affect [new and small businesses] and put their domestic economies at great risk. As central banks in emerging economies begin to raise interest rates, they risk obstructing their countries economic recovery,” says Navarrete.
In this context, it may be that Banxico’s decision to raise interest rate was premature and unfounded, considering Mexico’s debt has remained stable relative to its GDP. It does, however, threaten to undermine the emergence of new business and investment, potentially delaying the country’s economic recovery that has already showed signs of slowing down.
Into the next year, the global economy can expect inflation to remain outside its desired deviation, which will be difficult to mitigate without raising taxes. If federal legislators find it politically impossible to raise taxes domestically, they can be expected to defer to raising interest rates, potentially handicapping their long-term economic growth—especially in emerging economies. Therefore, in the short-term there will be an elevated demand for financial creditors who will be able to provide reasonable access to capital for governments and businesses alike.