1. Ins t i tute Char tered Ac countant s S r i L ank a At first it seemed that the authorities were exaggerating the dangers of bird flu, though it was confined to south-east Asia at the outset, it is now high on every government’s agenda. The number of fatalities, since the deadly strain was identified in 2003, is still below 100, but this is because it has only affected humans who have been in contact with sick birds. The real danger will come when the disease passes from human to human. A newly emerged group of forecasters point out that the flu is not currently dangerous to humans and there is no evidence that it will mutate into a lethal form of flu in the near future. However they further go on to point out that we should be prepared, but not to panic.
There is also a discussion of the business impact of this flu. We always look at potential pandemics in terms of its medical complications and the stresses it will place on the medical industry to deal with it. Though the rates of illness
preparedand death associated with this flu are not to be taken lightly, they are not the most critically dangerous characteristics. The World Bank has identified bird flu as a “large shadow” that could harm growth in some parts of the world. The global economy could be badly hit if sick employees were forced to stay at home. A number of key industries, such as tourism would be directly affected. The airline sector will also suffer if business and holiday travel fall. Currencies in outbreak economies could be hit and quarantines might disrupt global trade. Widespread industrial closures could have a knock-on effect on oil prices.
Normally, flu would not gain this kind of exposure in the corporate world. However, the avian flu has an extraordinary characteristic in nature and could mutate into a pandemic form of flu. Clearly this was therefore not something to be taken slightly if the entire world’s going to be impacted. Some of the people looking now to book
By
Terence Gunaratne
BSC ( Mgt), ACA, AIPFM, ASCMA, SAT
Contingency Plan for the
Possible Risk of
Global Economic Impairment?
Be
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2. T h e I n s t i t u te o f C h a r te r e d Ac c o 32 untant s of S r i L ank a
their holidays in the affected regions will be thinking twice about going ahead with the plan and further places like Italy, Greece, Spain and the UK will experience significant effects on their tourism if there is a pandemic. If the big economies tend to react in that manner, what would be our position since our economy is highly sensitive to global fluctuations? The mortality rate of this unique flu has been almost alarming. We have been advised to prepare for this deadly flu by everyone from government leaders, international and national health organizations and most recently the financial industry, which has been stepping into the discussions suggesting that the impact on the global economy could be more serious than any other event in the past century.
There had been three flu pandemics in the 20th century. Spanish influenza in 1918’s which killed between 40Mn to 50Mn people worldwide, Asian influenza in 1957 which killed 2Mn and Hong Kong influenza in 1968 which caused 1Mn deaths. Experts therefore believe that another flu epidemic is a question of time. As Bank of America put it, a pandemic is not a low probability event. If 1918 & 1919’s mortality data are extrapolated to the current the US and world population, 1.7 Mn people could die in the US and 300 – 360Mn worldwide, more than five times the cumulative number of documented AID deaths in the world. There are two critical characteristics associated with this potential pandemic. Though the Spanish Flu took approximately 6 months to spread across the world in 1918’s and lasted for almost 2 years, today we are concerned that a real pandemic will spread around the world in 30 to 60 days. Therefore,
SPEED is the first critical characteristic. Recently, SARS spread from China and in a matter of weeks was in 8 countries around the world. Today’s highly mobile society travels more frequently and at greater speed than in 1918’s. So any pandemic will be travelling quite literally at “jet speed”. A virologist recently stated that, if the flu is identified in New York on Monday, it will be in Mumbai, India by Saturday and every city in between. The currently anticipated morbidity and mortality rates will be well beyond anyone’s experience, thus generating fear, panic and potentially chaos throughout our global society. This presents governments, societies and businesses worldwide to realize that it is probable that infected individuals could be travelling and innocently exposing other individuals to this virus. Therefore the strategy of isolation can only be marginally effective.
The business environment of today is the product of decades of forces acting on it and resulting in a natural “inertia”. A pandemic with a time horizon of 18 – 24 months (roughly 500 – 800 days) could disrupt the inertia of the global economy such that restoring it to its pre-pandemic state could be an overwhelming task due to the structure and complexity of the global economy. The business community relies on this in its daily business activities. Without it, there could be no long term planning nor would investors have confidence to invest in the markets that supply the capital to fuel the business machine.
The second critical characteristic is the complexity of the world economy and “economic inertia”. It would be difficult to find a sector that is not in some way touched by or that does not rely on international markets in some manner for its operations. Businesses are either marketing internationally or rely on international sources for their supplies. So, in the unlikely event that the global economy is to slow down or to become stagnant due to a pandemic, it could be an overwhelming challenges to restart it and restore its inertia. Yet this is a very real possibility if avian flu is to become a pandemic. Because of the widespread impact of the illness, both the consumption as well as the supply element of the economy will be simultaneously impaired. This occurs on a global basis and is not confined to any specific area.
Since pandemics by their very nature impact multiple countries and because of the speed with which a pandemic will spread today, disruption occurs everywhere at the same time. Even though the western world had become remarkably complacent assuming that the fears experienced in 1918’s, 1960’s and 1970’s will never again be seen outside the third world owing to hugely improved hygiene, high living standards, scientific breakthroughs and readily available healthcare, they are also now thinking about the devastating effects that can sweep the world instantaneously. We have not experienced such economic disruption since the 1918 influenza (Spanish Flu) or possibly the Great Depression. Even the World Wars I and II had not created economic disruptions of this magnitude, therefore, it has been estimated that “Bird Flu Pandemic May Cost the U.S. Economy $675 Billion
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Since pandemics by their very nature impact multiple countries and because of the speed with which a pandemic will spread today, disruption occurs everywhere at the same time.
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3. Ins t i tute Char tered Ac countant s S r i L ank a including lost work time and disruptions in supply chains. In the United States, revitalising the economy after the Spanish Flu in 1919 and the Great Depression meant getting a “domestic” economy restarted. But today, we no longer have the luxury of restarting just one economy and economic recovery after a pandemic will be an international undertaking. Therefore how about our economy that hugely relies on internalisation. Once again we can not be complacent about anything since corporate philanthropy that we experienced last year during Tsunami may not be seen again due to its less transparency and accountability and hence we need rational thinking to go forward.
A flu pandemic could hit hardly trade, travel, shopping, education and any other activity involving face to face communications. Industries with a greater exposure to open economies that rely on trade or global just in time supply chain networks would suffer adversely. The resulting collapse of the airline, land and water transportation industries, tourism and hospitality sectors, much of retail and wholesale trade along with essential imports and exports would be devastating. This would trigger foreclosures, bankruptcies, credit restrictions and financial panic at least for some period. Online retailers and businesses not involving human contact might survive assuming that the postal services may not implode or that private delivery companies may be able to take up the slack. The world financial markets would be plunged into chaos. Canny investors preparing for a pandemic would be likely to sell shares in retailers, casinos, transport companies, airline and insurance industries in highly volatile and emerging markets like ours. In addition, news of a flu epidemic would also trigger a rapid global sell off of bonds and equities and flight into cash. The result would be a massive spike in the long term interest rates and the cost of borrowing. The financial impact of a flight into cash would be catastrophic. The price of the gold and safe assets would go through the roof. Eventually the long term interest rates should fall back but not before the damage has been done.
Food Retailers
You are a critical part of the society. Even in pandemics, people need to eat. You can’t just sell off your stock and close up. You’ll be hugely short-staffed because of your employee profile (mainly women will be caring for the sick). Key aim is to reduce personal contact- perhaps create standard boxes of basic supplies.
Constructions
You’re going to be seriously understaffed, but might not have less work. You could have more if you’ve already got clients. If contracts include non-performance penalties, think about inserting a pandemic flu exception clause.
Consultancy/Professional Practice
The financial danger is mainly from the death of a key person. Get an insurance cover or if the policies are in the dormant or non - performance category due to default, get them activated.
Online Retailers
When shopping is a health hazard, it is careful to go online. Expect increased demand if you supply essential items. But at the time if your staffing drops, consider restricting orders to existing customers because your supply chain will probably break in the middle.
Night-Clubs/Pubs/Cinemas
People won’t be going out much. You might think about closing for the duration. So make sure that you’ve got cash reserves to survive, and keep paying your staff. If you want them back afterwards.
Public Transport
Demand will fall and with the ill drivers, there might be under-provision of services. Draw up an emergency schedule that you can hopefully stick to. Consider training managers and other interested staff to be emergency drivers even at a cost.
Manufacturing
Your just in time delivery schedule will fall apart. Staff shortages will also create problems, and haulage issues may affect delivery of products. Planning should centre on how to engineer a controlled closure or minimum operations. Safety and maintenance issues will be critical.
Travel/Tourism Industry
Expect cancellations, withdrawals and massive reduction in demand for 18 months or so, the fact is that who will want to fly knowing that the fellow passengers are infectious?
Examples of
how a pandemic might affect
certain sectors
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It has been estimated that the UK’s gross domestic product will fall by 8% and in US it will be around 5%. In Asia, the total GDP will fall by 6.5%. There would be a dramatic effect on world trade, which would shrink by 14%. Further, in the long term, the cost of a pandemic could be even greater by unfairly discrediting capitalism and the international liberal economic order. While the temporary restrictions on trade and travel would be required to contain the pandemic, it would be imperative to ensure that they are lifted as soon as possible when the crises is over so as to allow the global economy to bounce back. But today’s low public level of support for free trade (despite the fact that liberalisation has been an increasing motor of prosperity) suggest that the system may not be able to handle such a shock and world trade organisations and free trade zones may all collapse.
Like after the Great Depression, many may turn back on their capitalism. Even if the market economy would bear no responsibility for bird flu induced economic crisis, a collapse in trade, research and development would be near fatal triggering a slump in productivity and living standards, which in turn may cause conflicts and geographical instability. The great fear nevertheless is that pandemic would trigger a return to intellectually bankrupt ideas of self sufficiency and autarchy.
The chance of flu epidemic is small but its impact could be greater than almost any possible act of terror. It is not in the power of government to avoid a pandemic. But they must do to their best not only to contain it and reduce its human and economic cost but also to preserve the institutions of global capitalism. Of cause, all these forecasts are little better than guess work. More likely than not, bird flu will not turn into a pandemic. But there is a little probability that it does, which means that it is essential for individuals, investors, companies and government to make contingency plans. Many large firms have already begun drawing up contingency plans to deal with a possible outbreak. The global economy would be badly
The chance of flu epidemic is
small but its impact could be greater than almost any possible act of terror. It is not in the power of government to avoid a pandemic.
Surging death rates would lead to house price collapses worldwide and fall in rent pushing millions into negative equity and default on their mortgages. Financial institutions may start to collapse, wiping out mere assets. All of this would lead to further decline in consumer spending, exacerbating the impact on higher bong yields and imposing severe deflationary pressures on the economy. A reduced supply of labour could lead to higher wages as was the case after the Bubonic Plague. Central banks would desperately attempt to reflate the global economy and would probably cut short interest rates to zero and purchase thousands of billions of dollars of government bonds, injecting liquidity into the economy and making sure that long term interest rates are also brought down systematically. The risk however is that this could trigger a surge in inflation but no additional economic output and 1970’s style of stagflation. affected by a pandemic and depending on its strength and severity; its economic impact could not be comparable at least for a short time to the great depression of 1930’s. Other forecasters, however, tend not to be so pessimistic but everybody agrees to a pure fact that a pandemic would trigger at least a serious recessions if not a depression.
Though all types of businesses should be looking at that aspect as an extraordinary matter, international groups can use their global size and modern working and management methods to lessen the impact on their organisations. For instance, some firms have been planning how to change working practices to respond to a possible pandemic and they are preparing their staff to work from home or via video link and teleconference facilities. They also plan to clean offices every hour in an attempt to limit the possibility of infection. SARS had cost China and other East Asian economies billions of dollars as people stayed away from
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5. Ins t i tute Char tered Ac countant s S r i L ank a public places such as shops, restaurants and transport systems. Many fear that a similar scenario will be existent every where if there is flu pandemic. The ADB believes a pandemic could hit the region harder than anything since the 1997 currency crash and it has been already estimated that an outbreak could shave 6.5% of GDP in Asia and this will definitely have a severe impact on our economy. Economically, Hong Kong, Singapore and China are the most vulnerable because they rely on trade and tourism and have large, dense populations. Major cities like Tokyo, which rely on mass transport systems, could also become a sword and most importantly the countries, which interact with those stated above, will also suffer a lot. In that sense also, we need to be rigorously proactive than being reactive and pessimistic. In the second quarter of 2003, the SARS outbreak caused tourist arrivals in Hong Kong to fall dramatically and having learned from that experience, the Hong Kong government has already developed a detailed contingency plan for the newly emerged risk. Therefore are we up to the global standards?
Will the
government
HELP?
The government will have far too much to do to ensure that basic services are maintained so that the problems of businesses could be dealt with instantaneously. It should also encourage businesses to plan for the pandemic and ensure that they do their best to survive. Businesses need to understand how they might be affected and what planning they can do to mitigate the effects. It is also important to remember that pandemic flu losses will not be covered by general business insurance however with the exception of life insurance policies that will pay out for flu deaths, as for most other causes of death.
The role of
financial
EXPERTS
Financial advisers have a role to play in working with managers and clients to help them model potential financial impacts of pandemic flu on their business. Most managers, when the issues are explained, will be able to draw up scenarios on how it might affect their businesses. But they will need support to translate them into financial terms so that they can do cost/benefit analyses with regard to planning
For example, key elements in planning for many businesses will be to train staff in additional skills so that they can do, to some extent, take over the roles of absent colleagues. Clearly there will be costs to such training and only good financial modelling will help assess which roles to justify the provision of such understudies.
Scenario building
Companies should assess what aspects of their operations will need to be prioritised during any pandemic and how that will affect their non core operations. They need to consider what might be the effect of any pandemic on their key operations and core business activities which will, in turn, affect the operational cash flow.
They also need to run what if assessments with regard to illnesses and deaths of key staff. For example, in many organisations, Key IT knowledge (such as where the pass words are kept) exists in the heads of a couple of staff, both of whom could die or at least be sick at the same time. Where functions have been contracted out also presents a risk i.e., if the contracting party cannot perform, this can adversely affect the main operations. Ensure that the in house staff can at least provide a skeleton service for contracted out functions. Do not assume that you will be able to buy resources. They might not be available at any price during a pandemic.
Prudential Planning
The key to be surviving during any pandemic will be to start by reducing any financial liability ahead of time.
For example, if a company has contracts which would be disrupted by a pandemic and hence which might lead to penalties, then one obvious cause of action would be to seek to have a clause inserted waiving penalties caused by pandemic flu.
Another case to consider would be the adversibility of taking on significant commitments, or contracting out key services. For smaller companies and partnerships, the loss of one of the main people can potentially cripple the business. Such business should review all key man power policies.
In the meantime, people and businesses need the best advice about how to stay as safe as possible and how to prepare for illnesses on a massive scale especially if the situation becomes worst. Therefore, the motto for everyone and the best possible advice that could be communicated is that with good preparation, prudential planning and proactive thinking, no one should panic, but in or out of employment, “be prepared”.
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