Nathan Kowalski

Bridging the gap and getting back to normal

  • What does the future hold? A deserted Front Street at 8pm on Saturday. No one knows what effect the Covid-19 pandemic will have on the island’s economy, however, it is almost certain to be the most negative shock Bermuda has ever had to deal with, writes Nathan Kowalski. (Photograph by Akil Simmons)

“The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be” — IMF Managing Director Kristalina Georgieva

Let’s first make something clear: Covid-19 is a health crisis, and saving and protecting lives should be our topmost priority. We all need to adhere to health professional guidance, and government-mandated regulations to ensure the safety of our community and help to end the crisis as fast as possible. That being said, it is critical for policymakers to seriously consider the effects of an island-wide quarantine on the economy. The Premier has acknowledged this and mentioned he is aware of the extensive damage happening to our economy. We need to address and fight the war against the virus. Still, we also need to find a way to bridge the gap in the abrupt cessation in business and get back to normal as fast as possible. It is not the best idea to ignore having a conversation about the economy until we have an all-clear. I believe we are capable of having a conversation about health and the economy at the same time.

How will Covid-19 affect Bermuda’s economy?

Nobody knows. This is an honest and unvarnished truth. The critical component of any estimation on the alphabet soup of recovery trajectories, from “V” to “L,” revolves around the length of the virus lockdown and cessation of life as usual.

It is almost certain, however, to be the most negative shock Bermuda has ever had to deal with. This is unprecedented in our modern times. Never have businesses had to close their doors so suddenly. Never has international travel ground to a halt and never has personal interaction been curtailed to this extent. The more extended health restrictions and limitations remain in force, the more severe and more prolonged the permanent damage will likely be, and the less likely we will be able to rebound meaningfully. This is referred to as hysteresis — permanent damage to our economy from which a reduced lower level of economic activity will be able to be generated. Effectively, the damage done to the economy will be to the extent that it will not be able to return to the level it was at for a very long time.

It is important to note for those of us who can work from home that there is a great deal of the service industry that cannot. According to the Bureau of Labour Statistics, only about 29 per cent of Americans can work from home. There is also a great deal of talk surrounding “innovation” and “alternative business” models. I find this disingenuous to some extent. There is still plenty of service jobs that cannot be done virtually. Even the functions that can be done virtually will likely be taken up at a much-reduced rate.

Furthermore, there tends to be a correlation with pay and contact with others. Generally, the lower the pay, the more contact with others. So the people most vulnerable now also have the weakest savings and a lower ability to sustain an abnormal economy. It would be insensitive to think we can just carry on as is and change how we work — we cannot without suffering severe repercussions.

The IMF, for example, released the following on Europe (bold emphasis mine):

“In Europe’s major economies, non-essential services closed by government decree account for about one-third of output. This means that each month these sectors remain closed translates into a 3 per cent drop in annual GDP, and that’s before other disruptions and spillovers to the rest of the economy are taken into account. A deep European recession this year is a foregone conclusion.”

Analysts in the US are scrambling to decide precisely how bad it is. Goldman Sachs recently forecasted a 34 per cent annualised drop in the second quarter US GDP and 15 per cent unemployment.

According to the latest Tourism Satellite Account from the Bermuda Government of Statistics, our tourism industry, directly or indirectly, employs about 3,762 people and equates to roughly 11 per cent of our labour force (working population 35,393). If all these jobs disappeared for some time, we could see a similar unemployment rate of about 16 per cent (5 per cent last reported plus the 11 per cent additional). The direct and indirect, induced government revenue was about $166 million, so close to 15 per cent of government revenues will also be impacted. Tourism itself directly contributed 5.3 per cent to GDP in 2018 — about $653 million in tourism expenditures. According to the Bermuda Tourism Authority, 97 per cent of the country’s hotel inventory is closed, and over 1,900 workers are already out of work. It’s also worth noting that, based on 2019 figures, Q2 accounted for approximately 34 per cent of leisure air arrivals for the entire year.

Although the epicentre of this dislocation is the tourism industry, a wide swath of commerce is also severely affected by social distancing rules. If one adds up a host of service-related jobs that are non-professional and non-white collar from the Bermuda Employment Brief 2018, you come to roughly 35 per cent of the workforce (thank goodness for international business, which provides approximately 12 per cent of the workforce alone and likely can continue to function remotely). Retail and restaurant services employ nearly 5,000 people alone — of which 60 per cent are Bermudians. In a recent webcast hosted by the Bermuda Tourism Authority “Industry Resilience,” a poll of 219 non-hotel businesses found that over 60 per cent of employees have been affected with about 34 per cent of those being laid off and about 28 per cent on reduced hours. These areas are where we will see enormous pressure with the inability to make up for significant amounts of lost revenue no matter how creative they chose to be.

Debts and deficits

From someone who has been a critic and a clarion call on the precarious state of Bermuda’s debt and finances, I can’t believe I’m about to say this. The fiscal situation and deficit is NOT the paramount factor to consider at this stage. We are where we are and can’t go back and rectify. Right now, however, we need to save the economy, and a major focus on deficits and the debt would be counterproductive at this point. You can’t tax zero.

Outside of our control

Another problematic aspect we need to come to grips with, at this point, is that a large part of our future economic trajectory is out of our control. Our most significant source of tourism, the US, is struggling with handling the pandemic, and its path is uncertain at this point.

Ultimately our ability to rebound and get back to normal will depend, to a large extent, upon the US, and specifically the East coast, to get back to some semblance of normal. Seventy-five per cent of air visitors came from the United States last year, and 48.7 per cent came from New York and Boston alone. They will need to get to a place where people want to travel or even can travel. There is, unfortunately, nothing we can do to affect this trajectory except for getting our health crisis contained. Therefore, our current deteriorating state and its recovery may be elusive for some time and is fraught with a very high level of uncertainty.

What should we be doing to bridge the gap and get back to normal?

There are several things policymakers and business leaders should be working on right now. Here is a short but non-exhaustive list:

1, Commit to an extensive and robust PCR and serological (blood-based testing for antibodies to the Sars-CoV2 virus) testing regime to restart the economy and limit fatalities. I think this is the most crucial policy that needs to be started en mass now. It will enable workers that are sidelined due to previous Covid-19 exposure to immediately return to work safely and detect who is not ready.

2, Conduct a multi-scenario economic impact study to assess the potential trajectory of the economy and its pain points. Although this is unlikely to be accurate in terms of precise figures, it will at least provide some form of a framework and fiscal signposts to consider when adjusting policy.

3, Create an economic council of trusted advisers pulled from various stakeholders to advise the government. Covid-19 is not only a health crisis, but it is also a significant financial crisis as well. Health and safety are paramount, but that does not mean we should simply ignore the economy. If we do not deal with and acknowledge the dramatic and devastating effect this will have on our local economy, we may be creating another humanitarian crisis that could cost us immensely in terms of mental health and social unrest.

4, Suspend all private plan pension payments from employers and employees for the year, if agreed by employee and employer.

5, Create a small/medium-sized enterprise (SME) bailout plan that excludes delinquent employers but assists those in compliance with shorter-term liquidity needs for an intermediate period. Banks should look into offering low-interest rate loans (with stipulations) and deferral of some government fees/taxes. The only way we can improve the burden, cost, and increase the chance of coming out on the other side of this without a sizeable fiscal stimulus, is to start up as soon as possible. We need to bridge the gap. The wider this gap gets, the more insurmountable it will become. The government should spend to help SMEs in this period, so there are companies for people to come back to. Unemployment benefits are excellent but not very helpful if you have no job to go back to when the crisis ends.

6, Codify health/safety measures for companies to return to reasonable working arrangements. This should include guidance on screening and sanitising work environments so we can remove shelter in place conditions and the need to lockdown the economy in many instances.

Government fiscal stimulus and concession will help, but they are simply stopgap measures and patches for any dislocation that lasts a short period. If the gap is too large and getting back to normal takes an extended period, major and permanent economic damage will likely result. We need to focus on saving lives, but we also need to mind the gap.

Source:

• “Europe’s COVID-19 Crisis and the Fund’s Response” by Poul Thomsen from IMFBlog. https://tinyurl.com/seyaftt

• “Goldman Sachs Sees 34 per cent Plunge in US GDP and 15 per cent Unemployment” by Alaa Shahine, Bloomberg, March 31. https://tinyurl.com/tjv32oz

• US Bureau of Labour Statistics: Table 1. Workers who could work at home, did work at home, and were paid for work at home, by selected characteristics, averages for the period 2017-2018. https://tinyurl.com/wu8fbl9

• “Tourism Satellite Account Report for the Year Ended 2018”, Bermuda Government of Statistics. https://tinyurl.com/qlueuar

• Bermuda Tourism Authority, “Year-End Visitors Report 2019.” https://tinyurl.com/rbju7ww

Nathan Kowalski CPA, CA, CFA, CIM, FCSI is the Chief Financial Officer of Anchor Investment Management Ltd and can be contacted at nkowalski@anchor.bm Disclaimer: The sole responsibility for the content of this article, lies with the author. It does not necessarily reflect the opinion, policy or position of Anchor Investment Management Ltd. The content of this article is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy or for any other purpose. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable. They are not necessarily all-inclusive, are not guaranteed as to the accuracy and are current only at the time written. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their professional financial advisers prior to any investment decision. The author may own securities discussed in this article. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. The author respects the intellectual property rights of others. Trademark or copyright claims should be directed to the author by e-mail.