As scientists race to find a vaccine against coronavirus, governments in the Balkans and elsewhere trust massive stimulus packages will stop their economies from falling sick as well.
By Aleksandar Janev
At the beginning of February, in an interview with the Minister of Finance, Nina Angelovska, North Macedonia’s economic projections for 2020 were discussed. One of the main criticisms was that all macroeconomic indicators suggested that the country was expecting a repeat of the previous year – without any increased growth that would make significant difference to living standards.
The coronavirus, then barely heard of in the news, was localized only in China at the time. It seemed as distant as the country itself. The issue was not even discussed as a potential risk to the economy.
Nobody suspected the cataclysmic scenarios depicted in science fiction thrillers, in which a deadly virus literally engulfs the whole world, could transfer from the screen to real life; nor that epidemiologists, not macroeconomists, would make the most relevant forecasts for the world economy.
Within two weeks, the world began to go into lockdown.
International financial institutions fear that the biggest collateral damage from the entire pandemic may be the economy.
It has become clear that the coronavirus has pushed the world economy into recession. The initially planned growth rate of the North Macedonian economy, put at 3.8 per cent, has declined by 7.3 percentage points to minus 3.5 per cent – according to the most optimistic scenario. In absolute terms, the estimated damage to gross domestic product, GDP, is 890 million euros.
“The crisis sparked by the spread of the novel coronavirus is the worst since the Great Depression,” the IMF’s Managing Director, Kristalina Georgieva, said in March, comparing it to world crisis of the 1930s that still serves as a prime example of international economic disaster.
As pharmacists race to find a vaccine that may save lives, to prevent even worse economic damage authorities have applied a tried and tested way of economic immunization, based on previous crises, injecting as much money into economies as possible.
However, experience has shown that no matter how large the dose is, there is still no guarantee that a crisis of this intensity can be prevented without major consequences.
Big bang followed by aftershocks
Despite the strong stimulus measures taken by the authorities to soften the blow, it is obvious that a shock to the economy is inevitable. Statistics show that the enforced closure of societies with the introduction of curfews has had a devastating effect on business.
From the introduction of the first curfew in North Macedonia on March 22, until June 7, when it was abolished, citizens were banned from moving for as long as 826 hours, about half of the entire period. In some towns and cities, such as Skopje, Kumanovo and Debar, curfews lasted even longer.
Although special permits allowed some movement from home to work, many companies were forced to close their facilities, mainly due to the cancellation of production orders.
Malls, cafés, restaurants, gyms, casinos and betting shops and other service activities that were most affected by the restrictive government measures suffered even more. They had to temporary close their businesses.
“Even after the reopening, the situation has not improved significantly. The daily turnover is half compared with previously – and that would be an optimistic estimate,” Kostadin Kangov, owner of a private dental practice in the southern town of Gevgelija said.
He said the “new normality” had increased his costs and made operations more difficult. “The time needed to treat a patient has doubled, for example,” he explained, “because you have to completely disinfect the whole room following the prescribed protocols. The cost of protective equipment has also increased dramatically as a result,” Kangov added.
The reduction in the number of patients at his Korona Dental practice is also related to new complications at the nearby Greek-North Macedonia border. Kangov said that although Greeks could now reenter the country, few now come to Gevgelija, and that was hurting all local businesses.
While some of the largest companies in the world have closed, the corona crisis in North Macedonia has been fatal so far only to 22 companies – that being the number of companies that opened bankruptcy procedures from January to June, based on Central Registry data.
However, this low number may not reflect reality, because the government issued a decree banning the opening of any bankruptcy proceedings during the state of emergency.
Economic indicators show that the crisis has in fact hit several sectors hard.
The most dramatic drop was recorded in April, when the curfew was longest, when industrial production in North Macedonia fell by 33.5 per cent. In May, the trend slightly eased with a fall of 27 per cent, and by 15.1 per cent in June compared to the same period last year.
Cumulative statistics for the first half of the year showed an overall drop in production in industry of 14.6 per cent.
In terms of individual sectors, the volume of work fell most in the production of machines and devices – by 41.6 per cent – followed by the production of electrical equipment – by 31.8 per cent; in motor vehicles, trailers and semi-trailers – by 21.1 per cent.
Textile plants for the production of clothing, where the coronavirus spread most among the workers, saw production fall by 17.9 per cent. In the metal industry production fell by 9.4 per cent.
The introduction of restrictive measures over almost the whole world, especially in European countries, which are North Macedonia’s largest trade partners, as expected, reduced the volume of foreign trade.
Statistics showed that in April, North Macedonian exports fell by as much as 60.3 per cent on an annual level. In the next two months the decline eased to 29.2 per cent in May, and to a fall of 7.3 per cent in sales in foreign markets in June compared to the same period last year.
Data for the first half of the year show that the value of North Macedonian exports fell by 22.3 per cent compared to the same period last year. In real terms, exports by June of this year amounted to 2.45 billion euros, lower by 707 million euros.
The reduced workload of domestic factories and lower consumption also resulted in a decline in imports, of 18.1 per cent.
Although the state anti-crisis measures were largely aimed at preserving jobs and preventing layoffs, data from the Employment Agency showed that the labour market was not immune to the crisis.
As of July, the pandemic had left 20,002 people jobless. In March, when the state temporarily closed companies in catering, transport, tourism and more services, the number of unemployed increased by 1,564 people. In April, the number increased by 6,737, in May, 5,560 more unemployed were registered. In June, an additional 3,656 people were jobless and in July, 2,503.
Korona Dental owner Kangov said he had noticed the influx of unemployed people on to the labour market when he announced a job vacancy two months ago.
“I was surprised at how many people applied, including people that I know working in other surgeries who had lost their jobs due to the crisis,” he said.
“Fortunately, we have kept all our employees, used some of the state aid measures and did not reduce salaries – but unfortunately we paused all other plans to construct a new facility and open new jobs,” Kangov added.
State Statistical Office data show that the average salary has not changed drastically. The average salary saw only a small variation in April, when monthly pay fell by 2.4 per cent.
However, in May, average pay increased again and reached 26,390 denars, which means an annual growth of 4.4 per cent.
The general picture of the economy in the second quarter, seen through the prism of GDP, will be statistically known only in September, but a decline of 15 per cent, the largest in history, can be estimated even now. Some of the world’s largest economies, such as the United States and Germany, have already reported the largest quarterly declines since World War II.
Three doses of vaccine
North Macedonian authorities have adopted three packages of anti-crisis measures since the beginning of March.
The first measures for the economy were adopted in mid-March along with the health measures. They targeted the three worst affected sectors, tourism, hospitality and transport, and all others that had stopped economic activity due to the government measures forcibly closing most businesses.
Ten days after the declaration of the state of emergency a second package of measures was adopted, by which the government expanded their scope to cover the payment of a minimum wage for workers employed in companies that had seen a revenue reduction of over 30 per cent, regardless of their sector.
The third package of measures, adopted in May, mainly focused on supporting the most vulnerable categories of citizens, with direct financial payments to people on incomes lower than the minimum wage.
“All the proposed measures were tailored to achieve the goals appropriate to the imposed needs, and achieve maximum effects given the limited opportunities,” Finance Minister Nina Angelovska said.
According to the Ministry of Finance, the measures have so far cost about 165 million euros, of which about 40 million euros was paid in support of citizens and about 125 million euros to companies.
Of this, the most money was allocated to provide financial support the amount of the minimum wage of 235 euro a month for about 130,000 employees in 19,500 companies. A total of 83.3 million euros of budget money was spent so far on that.
Analysis by the Institute for Economic Research showed that this measure helped to prevent mass layoffs, when as many as 75,000 jobs were at risk due to the reduced workload of companies.
It showed that about 32,000 jobs in the most affected sectors and about 43,000 jobs in the highly affected sectors would have been lost without this measure, which is 9.2 per cent of the total number of employed people in the country. In other words, without this assistance, the unemployment rate would have reached 23.9 per cent.
Managers of some of the most affected companies confirmed that these measures saved them from doom, but were worried about the future.
“Four months closed and zero income. However, we managed to keep all 220 employees and survive this difficult period,” said Daniela Ademoska, executive director of the Hilton and Stonebridge hotels in Skopje.
“But what is next? The measures were valid until June and we have an obligation to keep the employees until the end of September.”
Her companies are also on the list of those that used interest-free loans from the Development Bank, which provided support amounting to 12.7 million euros to 1,331 companies with over 16,600 employees. Another 25.6 million euros should be added to this amount, which was recently paid to 105 companies at a low interest rate of 1.6 per cent because the rest was subsidized by the state.
Through the third set of measures, which included direct cash subsidies and vouchers for the purchase of products and services, over 28 million euros went on the domestic payment card. This was provided to 325,000 low-income citizens, high school students and students aged 16 to 29 as well as health professionals who directly contributed to the fight against COVID-19.
Additionally, through tourism vouchers, another 12 million euros were paid to about 117,000 citizens, and there was also financial aid for athletes and independent artists.
According to the simulations of the Ministry of Finance, the anti-crisis measures have mitigated the decline in economic activity. Not taking into account the effects of the measures, the government estimated that economic activity this year would slow down by 3.4 per cent.
“However, assuming that the money from the third package of measures is fully used, the decline in economic activity in 2020 will be 3.1 per cent, or 0.3 percentage points less than the baseline scenario,” Minister Angelovska commented.
The Governor of the National Bank, Anita Angelovska Bezoska, said that as the country was still dealing with the effects of the pandemic on the economy, it was difficult to assessment the success of the measures.
“The nature of the measures taken by policy makers in our country is similar to the measures taken in other economies, and is in line with the recommendations of major international financial institutions,” Bezoska said.
“Like other countries, the focus of the measures was initially placed on subsidies in order to preserve jobs and prevent a larger decline in wages. In addition, some of the measures provided support to increase the consumption power of citizens with lower income,” she added.
Otherwise, all measures were estimated to be worth about 500 million euros, which is 5 per cent of GDP; data show that so far only a third of the planned money has been realized.
“These are projected funds, and their realization depends on the number of registered companies and whether they meet the requirements. Part of the measures, from the third package for revitalization of the economy, are planned to be implemented in the autumn,” explained Angelovska.
In addition to the fiscal measures of the government, the National Bank has adopted measures aimed at easing monetary policy – reducing the basic interest rate on three occasions and releasing additional liquidity to the banking system that can be directed to lending to the private sector.
Melancholy economic autumn looms
The attributes of autumn, such as gloomy weather and falling leaves, may be synonymous with melancholy but usually have no effect on business. But this year it seems that autumnal melancholy will be an appropriate metaphor for the business environment.
It was expected that the last quarter would improve the image for the whole of 2020, but pessimism is now intensifying, as the authorities fear a bigger wave of the virus, and even another lockdown.
Managers are pessimistic about the coming period. In the Business Trends Survey conducted in June by the State Statistical Office, they expected production to drop further in the next three months, citing insufficient demand from abroad as the biggest factor.
The confidence indicator in the processing industry, which summarizes production orders, workload and inventory, was 12.2 in June and decreased by as much as 9.1 percentage points compared to the same period last year.
The National Bank in April came up with a scenario according to which, if the pandemic persists, the negative economic consequences would have a prolonged effect. Now it seems that this scenario, which predicted GDP going further down by 2.3 percentage points, i.e. from minus 3.5 per cent to minus 5.8 per cent, is becoming more realistic.
Minister of Finance Angelovska said uncertainty remained the main feature of this crisis. “We are prepared for the worst but still hope that will not happen. We are monitoring the situation closely and will react accordingly if necessary,” she said.
“The Ministry of Finance monitors the implementation of the measures and is working on finding new measures, following the experiences of other countries, but we also see how they can be applied in our country,” she added.
Angelovska dismissed speculation that the country only had money in the budget until September. “There is money in the budget so that all receivables, including those from the measures, can be serviced regularly,” she said.
International financial institutions have also become more pessimistic about the economic outlook for the end of the year.
The IMF changed its mind for the second time, and from an initial forecast of world recession of 3 per cent, now estimates a bigger decline of 4.9 per cent this year. However, it predicts a recovery of 5.4 per cent for next year.
For now, the projections for the North Macedonian economy range from a decline in GDP of 3.2 per cent, according to the World Bank, 3.5 per cent, according to the EBRD, 3.9 per cent, as projected by the European Commission, or 4 per cent, according to the IMF.
The IMF’s chief economist, Gita Gopinath, said the global damage was now estimated at $12.5 trillion. “There is a great deal of uncertainty surrounding this forecast. Good news about vaccines and treatments and additional policy support can lead to a faster recovery. On the downside, further waves of infection can reduce increased mobility and spending, and quickly tighten financial conditions, causing debt problems,” Gopinath said.
In Europe, downward projections are also being made. The European Central Bank forecasts that the economy of the continent will fall by as much as 8.7 cent this year.
“The Eurozone economy is experiencing an unprecedented contraction. The significant loss of jobs and income and the extremely growing uncertainty about the economic outlook have led to a significant drop in consumption and investment,” said Christine Lagarde, chair of the European Central Bank, expressing hope about the EU-funded recovery from COVID-19 worth 750 billion euros.
However, when and how this economic crisis ends may not depend so much on the financial injection, but on the discovery of a medical vaccine that will guarantee humans immunity from this dangerous virus. Only then will the economy have full immunity as well.