In the last few weeks, the outbreak of a new coronavirus – now named COVID-19 by the World Health Organisation (WHO) – has evolved rapidly in China and beyond, with thousands of new cases reported daily and millions of people affected by lockdowns in Chinese cities. For many businesses, the impact has been extensive: in South Korea, Hyundai has suspended operations at the world’s biggest car factory, while businesses from McDonald’s to Burberry have closed stores in mainland China. Experts have predicted the crisis may reduce China’s 2020 GDP growth by as much as 1%.
Beyond these implications, the developing crisis is likely to have a major impact on sectors including tourism, both in the markets most affected by the outbreak and beyond. Singapore, for example, is forecasting a daily loss of up to 20,000 international arrivals this year, while UBS has predicted Australia’s economy will shrink in Q1 due to a slump in visits from Chinese tourists. With organisations increasingly reassessing the risks involved in sending staff overseas, companies including LG, Sony and Amazon pulled out of the Mobile World Congress in Barcelona. The event, which 100,000 people had been expected to attend, was subsequently cancelled.
Impact for treasurers
“With any unexpected occurrence such as the coronavirus outbreak, the first and foremost concern is the affected individuals,” comments Bob Glotfelty, VP of Growth at Taulia. “We should also be aware that the impact on businesses could be far-reaching and felt for some time.”
Indeed, these rapidly unfolding developments will be generating a lot of questions for treasurers. “The key issue for treasurers is to anticipate the possible business impacts, and the treasury effects of those,” says David Stebbings, Director, Head of Treasury Advisory at PwC. “So for instance, coronavirus may cause disruption to supply chains, particularly of goods originating in China. The question for the treasurer is how this might affect cash flows and any hedging programmes in place – particularly if sourcing is either disrupted or carried out in new geographies in the interim.”
In terms of the supply chain considerations, Glotfelty notes that the outbreak underscores the priority businesses must place on risk management – “including taking every precaution to make sure they have enough working capital to pay their suppliers, source alternative suppliers where required and ensure the business can operate as smoothly as possible during uncertain times.”
Cash flows and beyond
More generally, Stebbings says that treasurers need to ask themselves how their business’s cash flows might be affected globally by the new coronavirus. “They will also need to consider how their banks may be affected – and for those with significant businesses in China, the effect may obviously be more pronounced, and may include a treasury workforce aspect,” Stebbings says. “The answers to such questions may have implications on topics like liquidity management, level of borrowings, covenant management and FX hedging, depending on the business and the nature of the impacts.”
While it’s too soon to gauge the full impact of the outbreak, it’s clear that treasurers will have plenty of challenges to face in the coming weeks. As always, treasurers who keep well informed about the developing situation, seek advice from consultants and bank partners, and approach the challenges proactively, will be best placed to navigate these choppy waters.