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The geopolitical view on COVID-19

The geopolitical view on COVID-19

The geopolitical view on COVID-19

Sophie Heading | Expert,

In geopolitics, we talk about the ‘known knowns’, the ‘known unknowns’, and the ‘unknown unknowns’. The general rule being that you plan for the risks and scenarios you know might be coming, stress-test your processes and policies against those that you may not foresee, and crisis manage when necessary.

COVID-19 falls somewhere in the latter end of the spectrum – in some respects, the surprise black swan, with a low likelihood but potentially catastrophic consequences. We couldn’t predict when, or where, this type of outbreak would occur, but it is not that unexpected that it did. We couldn’t predict the spread of the disease, nor perhaps the extent of measures that governments have adopted to contain the virus, but we can calmly assess the situation as it develops and adapt as necessary.

Where we are at

We aren’t epidemiologists, and there are others far better placed to take a call on the spread of the disease. But for the purposes of context, at the time of writing, it is present in around 58 countries, most notably China, South Korea, Japan, Iran and Italy. (Uncertain) global estimates suggest that two thirds of the world’s population could contract the disease; preliminary numbers suggest that COVID-19 is less infectious than measles but deadlier than seasonal flu (which, incidentally, is responsible for around 290,000 to 650 000 deaths annually). The goal now arguably is not containment, but rather to slow the spread – to minimize load on health systems, allow for the stockpiling of treatments and development of a vaccine, and make the most of seasonal changes (noting though, it will not necessarily stop in warmer weather, given the outbreaks we have seen in tropical regions).

Governments have adopted a wide range of containment measures, which has resulted in the shutdown of manufacturing, as well as labor disruption through enforced isolation, travel bans and border controls across the world. There is potential for a significant dent to global consumption as well as economic prospects. The containment measures adopted, as well as the disease itself, will result in work lost, and given the way markets work, there is potential to for an impact disproportionate to the cause. So far it has resulted in a slow-to-respond, but now significant market disruption: all major indices fell double digits in the past few days.

Our Alliance partner Eurasia Group, a geopolitical risk consultancy, initially outlined two potential scenarios and the potential impact on the business environment: the first follows the trajectory of SARS, in which case the crisis stabilizes by April. The less optimistic case – ‘the virus digs in’ – involves large-scale outbreaks outside of China, and a containment effort that continues over at least two quarters.

Scenarios for China's novel coronavirus outbreak: Impact and policy response

The basics

Like a lot of macro non-financial shocks, COVID-19 has the ability to hit every component of your business. But when the uncertainty of the situation can feel overwhelming, make sure you have covered the basics:

  1. People and culture: not surprisingly, one of the levers of business it could hit the most. For many, the biggest struggle will be where action is not government-mandated – should your employment base work remotely in the case of a suspected virus case, and if so, for how long? If there is an outbreak, how can you protect employees against scapegoating and vilification? What support will you provide to working parents if schools are closed?  Unfortunately there is no easy answer to this (and it will likely differ on a locational and sectoral basis), but you won’t be prepared unless you ask the question and think through the implications of the response.

    Embrace the power of virtual working for global operations, and if you can’t, as the most basic measure, ensure a reliable, independent and ongoing intelligence source to monitor the spread as well as ongoing travel disruptions. That is, reliable and independent – don’t get caught up in the ‘noise’ of the daily media. Ongoing – given the speed of changes, at a minimum you need to ensure that you will be receiving the ‘need to knows’ within 24 hours. Make sure that any revised travel policies are well known, and that you have a plan in place for if an employee gets caught – or catches the virus on work time.

    Finally, consider the cadence of communications to your broader team – the purpose is to inform, not alarm. We at KPMG – like many organizations – have a crisis management response team, a regular communication with the operations leads in each member firm, our people, as well as an internal resource site for all our member firms to find the latest information and guidance – from international meeting guidelines, to virtual meeting and home working tips and travel guidelines for our people.

  2. Core business processes:
    A crisis management response team must have devolved decision-making responsibility – whilst topics of this nature are sensitive and necessarily require heightened risk management processes, the situation is evolving at a speed far beyond the behemoth bureaucracy of many global organizations.

    Also, this is likely to be a protracted process. The virus will spread widely, but (ideally) slowly, with an approved vaccine several months away, so settle in for several months of uncertainty and ongoing decision-making.

  3. Customers and channels:
    In the short-term, we could continue to see industrial paralysis in areas hit by the virus – China, Japan, South Korea, Italy and Iran being the most important hubs so far, but depending on the pace of spread, this could continue to others. Visibility over your supply chain – and to your suppliers’ suppliers in the case of critical components – will be necessary. The good news is that, in the absence of further information, maritime shipments are unlikely to be suspended.

    In the longer-term, the virus will likely highlight chokepoints in your supply chain; while it may not always be a disease, significant and fast-impacting disruptions to trade can be expected in this G-Zero World (think tariffs, cyber warfare against critical infrastructure, and natural disasters). Learn from this experience to expose and adapt the vulnerabilities in your supply chain.

  4. Financial outcomes:
    In very general terms, a disease is usually a case of short-term (potentially significant, but short-term) economic pain – there is little structural damage being done compared to the impact of a natural disaster on infrastructure and human capital. However, this has hit at a time that the global economy was already vulnerable, so there is the potential that it may throw parts of the developed world into a recession earlier than expected. China’s economy is significantly larger and more integrated than during the SARS epidemic; its share of worldwide trade flow has grown by a factor of 10. It is difficult to anticipate where this will land, so build volatility into your core economic assumptions – and revisit them regularly.

We will be providing more information on ways client communities can respond to potential developments.