CORONAVIRUS (COVID-19) IMPACT ON DEBT MARKETS

Petros Piki, CA(Z), MSc, RPA

“He who cures a disease may be the skillfullest, but he that prevents it is the safest physician.”

― Thomas Fuller

It has becoming more confusing in the market to deduce what is moving faster than the other Coronavirus or the fear of it. Some people are actually infected before they really are! Covid – 19 (coronavirus) have is wreaking havoc and analysts and companies across industries have been slashing 2020 sales with cruise lines, airlines, banks and businesses that require gathering of people including soccer  taking the biggest hit. What has been the impact on debt, both national and companies’ debt?

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Central Banks are forced by pressure from Covid 19 to repurchase their sovereign debts, Europe’s central bank now owns Euro Zone debt totaling 40% of its economy’s size, and America’s Federal Reserve owns about 30%. Japan Central Bank now owns Japanese debt bigger than its economy!

As we highlighted on our coverage of Stock Markets the Rating Firm Fitch believes that Coronavirus could trigger exodus of International Capital from Africa and other emerging markets given that most African Governments have few tools available to fight external shocks. As of 10 March 2020, foreign investors have sold R20 billion (US$1.2 Billion) of South African debt.

Credit ratings and measures of financial stress and strain in European credit markets leapt to its highest level in four years. Which means investors are bracing for a wave of defaults despite a dizzying decline in government bond yields. Even in the US companies that have weak credit ratings are seeing their debt cost increase by above 380 basis points on average. This will strain their financials as the cost of debt will sky rocket. Most companies are having curtailed operations thus reduced revenue and reduced capacity to service their debts. This could trigger a corporate debt crisis on the international market. Locally the impact of coronavirus to companies may be worse given that most companies were closing or struggling because of viability issues caused by lack of foreign currency and other issues.

According to Foreign Policy (FP) Coronavirus is infecting economies as quickly as it does people. Government debt due to nervous investors has fallen to all-time lows. The vertiginous impact of this disease was witnessed when the Federal Reserve cut interest rates by 50 basis points without consulting other Central Banks as per practice. President Trump still believes further cuts are necessary and other central banks are likely to follow through. When interest rates are cut it impact the bond market, as yields on everything from Treasuries to corporate bonds tend to fall, making them less attractive to new investors. This often leads to stock market rallies as investors pull money out of bonds and put it into stocks. As Coronavirus continue to ravage the 50-basis point cut by the Fed has not resulted in any positive impact on stock exchange.

The outlook is therefore very bleak! But remain positive as always!

When interest rates fall it is normally the best time to refinance debts with cheaper rated instruments but at the moment most investors are adopting a wait and see attitude. Zimbabwean economy at the moment does not have an efficient debt market thus the effects of Covid – 19 on debt is likely to be minimal. In most economies interest rates were already very low, zero or even negative leaving central banks in those countries with no breathing space in monetary policy. In Africa the rates are too high thus Central banks in Africa have room to cut should there be need to stimulate growth.

The effect in the debt market may signal a temporary bear market or a pandemic induced recession... nothing cast stone yet.

We hope the effects are temporary. A world recession will leave economies like Zimbabwe on more precarious position.

Back to basics… always remember good hygiene and be considerate! Wash your hands and teach the young these good hygienic behaviours.

Neverlank is an advisory Firm with advisers that are well informed of developments around them enabling them to provide sound advisory services and strategies.

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