COVID-19 and the economy

By Gene Wong

COVID-19 and the economy

As the Vanuatu Government closes the borders in response to the threat of COVID-19, the country’s Tourism and Hospitality sector has shut down. Air Vanuatu has suspended all flights in and out of the country indefinitely and cruise ship arrivals have completely stopped. The business sector is extremely concerned on the short and long-term effects this will create to Tourism and Hospitality as it contributes over 40% to Vanuatu’s GDP and is a large employer.

In a recent economic update, ANZ has projected an immediate -13.5% drop in GDP. It’s not clear how or when tourism will recover, and Vanuatu faces the prospect of having to restructure its economic base in order to return to prosperity.

The businesses most at risk are those who have borrowed heavily and invested in Tourism Assets. Without tourists, these businesses have lost all sources of revenues. Many have commenced laying off staff and reducing operations to the minimal.

In a letter to suppliers, Iririki Island Resort confirmed that effective Monday 23rd March it would close operations until June 1st 2020. Ramada Resort have also sent letters to local suppliers advising that they will be closing down food and beverage outlets and keeping only one accommodation building on standby. Existing agreements with local contractors have been suspended or cancelled. Other Major Hotels and Resorts have followed similar courses of action.

Departure of Expatriates

A large number of expatriates working in Diplomatic missions, NGOs and in the private sector have left Vanuatu before the suspension of flights. This was prompted by the Australian Government advising all its citizens around the world to return to Australia as it was unable to guarantee consular assistance. The Vanuatu Government has since taken strict measures to minimize any possibility of the virus entering the country as they have recognised that health care and support in Vanuatu is severely under-resourced to cope with a public health emergency like COVID-19. Worse, most medical insurance policies exclude cover for COVID-19.

The departure of expatriate and their families has dried up an already depressed residential property market. Landlords face an uncertain future as leases have been terminated wholesale. Mortgage loans depending on rental incomes to service these loans are now under pressure and defaults are likely without assistance from banks.

The Banking sector

The Banking sector understands its role in the unfolding situation and the Business Review has been informed that options have been considered on how they can assist businesses that have been directly affected. Days ago, the Vanuatu Business Resiliency Council announced that all banks were preparing packages that would defer capital payments for up to six months and a restructuring of borrowing to assist in business cash flows. Additional finance packages to businesses that need to lay off a lot of staff and settle severance pay entitlements. Bank executives have advised that they will be considering each situation on a case by case basis but have reaffirmed they intention to assist.

Job Losses

Hotel and Resort closures will result in massive job losses as staff are laid off or sent on unpaid leave. Some businesses have told VBR that they intend to pay out the severance pay entitlements of staff with the promise of reemployment when the situation returns to normal. This would provide enough cash to those laid off for a few months. Other employers have retained staff on half salary. Many Ni Vanuatu are now facing economic hardship without an income source to cover household expenses. Job losses will impact all sectors of the economy as consumption and expenditure drops off.

Supply Lines and Logistics

Regular sea freight deliveries are uninterrupted so far, and globally, nobody is predicting they will be. Despite a near-global lockdown, cargo ports & shipping are considered essential services, so supply chains are allowed to remain open and active. Container ships provide a supply lifeline to Pacific island nations, so it’s highly unlikely that will change. As China takes control of its pandemic, its factories are restarting and most supply lines out of China are back to normal. Medical and economic experts do not expect a return to normal, and there are fears of a second spike as restrictions on movement are lifted. But the level of economic activity overall is sure to increase, if only in fits and starts.

Shipping lines have been given strict guidelines that they are required to adhere to with regards to vessel and maritime staff health & hygiene. Vanuatu biosecurity staff are well-versed in these processes and will be provided the resources they need. However, concerns have been raised about the suspension of commercial flights for any urgent medical supplies that might need to flown in by air.

France, Australia and New Zealand governments have already begun to mobilise using the FRANZ agreement to expedite flights carrying COVID19 test samples. It’s possible they might be used for patient transfers too. But its doubtful they could provide any significant amount of non-emergency cargo capacity.

There are no supply shortages in supermarkets, and none are foreseen. Au Bon Marche has closed its Central Branch in Port Vila because of the difficulty of maintaining proper distancing and to reduce crowds downtown.

The AID Donor Response

In an article published on 16 March by the Lowy Institute based in Australia, it was suggested that Australia, the major aid donor to the region could do two things: continue to support Pacific countries to prepare for the arrival of the virus by providing technical assistance and equipment for the duration; and provide long-term economic support.

A plan is being formulated by PMO staff in Canberra, and New Zealand has emphasised its perceived responsibility to safeguard Pacific lives. France is already providing testing and other key services.

Last week, the head of the G20 called on the World Bank and other lending institutions to be prepared to write off massive amounts of debt in order to free up money in the developing world for public health response and economic recovery.

But with the entire world grappling with its own domestic responses, problems outside their borders are probably low in priority.

An article in the Griffith Asia Institute’s Pacific Outlook blog argues that assisting the Pacific is a strategic necessity for Australia and others if they intend to protect their borders and their geopolitical position in the regions. Whatever economic assistance could be provided at the start could end up being better than the huge cost of Humanitarian assistance at the height of an outbreak.

The Vanuatu Government have already been in contact with the Aid Donor Community and the VBR is aware that the response to requests have been positive.

The Government response

The Vanuatu Government has responded swiftly to the threat of COVID-19 by closing our borders and implementing strict quarantine controls over returning citizens and residents. All commercial flights are now suspended and cruise ships cancelled. Should these measures succeed in stopping the entry of COVID-19, and there are no cases within the next few weeks, Vanuatu will be better positioned to manage the Health threat.

But the mid- and long-term effect on the economy is the destruction of the tourism sector’s role as an economic driver.

Worldwide, other countries are introducing massive stimulus packages to assist businesses, many of which have simply run out of cash. The USA will launch a two trillion stimulus package to provide relief to businesses by injecting cash and liquidity in to the economy. Other countries are guaranteeing the payment of the salaries of workers who have been laid off by business closures.

Vanuatu faces the same challenges. The closure of major resorts and the downstream effect on other businesses will leave thousands of people without a steady income. The government needs to provide leadership and direction on how it will manage the economic crisis that is unfolding. Government sources have advised that the fiscal position of the country in combination with assistance from banks and the Aid Donor community is sufficient to address what will be a huge challenge in the months ahead even if the COVID19 virus is brought under control.

Spending controls have been robust, and income reached record levels in recent years due to the sale of passports. The government has more cash reserves now than it has ever had in its history.

The basic formula for helping businesses is straightforward. The Vanuatu government needs to provide direct assistance to companies that are unable to earn or borrow because of the pandemic. In exchange, companies need to maintain employment and wage payments. How this can be structured and implemented is the role that the Leadership of the Country will be responsible for.

There is a large degree of uncertainty on how long the COVID-19 crisis will last and when things will return to normal. What is certain is that the current crisis will change the world as we know it forever.