Thursday, April 9, 2020

Some random thoughts Post COVID-19 world + Part 2

The outbreak of COVID-19 pandemic has shaken the collective consciousness of the global community. Since WWII there have been many crises that have impacted more than region of the world. But this novel coronavirus is perhaps the most widespread and deep crisis that the humanity has faced in past 75years. The global financial crisis (GFC) of 2008-09 had impacted most global markets, but the impact on human life was not this serious.
This crisis has occurred at a time when the global order was resetting itself in the aftermath of the GFC. The central bankers were finding the ways to exit the unsustainable monetary policies adopted to mitigate the impact of GFC. The global trade imbalances that have persisted for almost 3 decades were correcting as China, US, EU, Japan, Russia, OPEC etc were actively engaged in aggressive trade (re)negotiations. Old trade and geopolitical blocks were weakening and new blocks were being formed. China had accelerated the drive to assume global leadership through mega initiatives like One Belt One Road (OBOR) and China Pakistan Economic Corridor. UK exiting the common European Market weakened the Europe to some extent. US tightened immigration rules, decided to withdraw from conflict zones like Afghanistan, Iraq, Libya and refused to engage in Syria signaling a paradigm shift in its policy towards globalization and, free trade.
The outbreak of novel coronavirus has however significantly changed the course of reset, in my view. I feel the following are some of the issues that may define the contours of the new order in post COVID-19 world.
1.    The China may be regarded as an irresponsible power, and may not be accepted as a major global leader. In particular, the mistrust between US and China may increase manifolds. We may likely see a Sino-China cold war that may last for many years, or may be decades.
2.    The vulnerabilities of US and Europe have been exposed by the coronavirus.
Post 9/11 incidence, we saw dramatic changes in the concept of internal security in US and many other countries. The suspects were shot dead without much provocation, disregarding all concerns for human rights and liberties. The culprits were chased and killed in foreign jurisdictions often disregarding sovereignty of these foreign lands. The diplomats, politicians and prominent personalities arriving in US and UK were strip searched and denied entry with impunity.
We shall see further rise in xenophobic tendencies of the developed western countries. Another major impact could be concerted effort to reverse the course of demography, especially in European countries that are turning old at an alarming rate. This could be achieved by substantial incentives for procreating aggressively or changes in the immigration policies to encourage let young professionals from developing countries settle there.
3.    I do not believe that post COVID-19 world would be highly localized, nationalist and protectionist. Nonetheless, it is entirely possible that new trade and geopolitical blocks get formed. The new blocks thus formed will define the contours of new world order.
4.    The global supply chain presently relies heavily on China for components as well as manufacturing services. Many developed countries get their fiscal gaps filled by China in lieu of using Chinese manufacturing services and allowing China access to their markets.
The new world order may see a massive shift in this trend. Countries may seek to limit their fiscal deficits and seek diversification of their supply chains. This will present many opportunities & threats to the emerging economies like India.
5.    The dominance of USD as world's only reserve currency will face serious challenges from more neutral digital currencies.
6.    The ideas like free trade, personal liberties, etc face serious challenges from the rising tendencies of government world over to exercise enhanced surveillance and control over personal conduct and data.
7.    The business models, valuation models, risk assessment techniques, commercial contracts etc shall get redefined to build in probability of prolonged shut downs.
8.    The foreign travel protocols may include vaccination as a pre requisite.
9.    The business continuity planning may become a mainstream subject for all businesses, not just the mission critical processes and financial services.
10.  A massive tsunami of debt defaults/waiver may hit the global financial system. Handling of this tsunami and subsequent recapitalization of the lenders will be a key challenge for the governments and central banks.
Inappropriate handling of this challenge may eventually lead to shortage of growth capital and thus rise in cost of capital. A sharp down leg of deflation could lay the foundation of an inflationary world for next decade or so.
Where India stands in this transition and what are the opportunities and threats?
I shall share my thoughts on this next week.

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