Upended

The global spread of Covid-19 has been both rapid and frightening. The epidemic has upended the global economy, pushing many companies to the brink, curtailing travel and raising the specter of widespread recession.

Last week, stock markets across the globe bled profusely. An estimated $5 trillion in market capital evaporated in a matter of a few trading days.

The market losses approach the scale of the 2008 global financial crisis – and we are not done with the panic yet. Investment giant Goldman Sachs released a forecast last week that said further market meltdown, recession fears and the evident weakness of the US health care system could cost Donald Trump the next elections.

Unless the global markets recover their poise this week, the massive drops in stock prices could create instabilities in many companies. They could lead to painful cost cutting at best to massive bankruptcies at worst.

Even before the epidemic broke out, we expected a much weaker global economy. A number of major economies were expected to move into a recession. Even the most optimistic forecasts saw the pace of global growth declining.

In our own case, the stock market bloodbath last week saw the PSEI falling to the 6,700-point level. Last week, too, Philippine Airlines announced plans to lay off 300 workers to avert further losses. The drop in tourism and the travel bans imposed threaten the company’s bottom line.

Since the outbreak of the epidemic, we have also seen massive disruption in the world’s supply chains. Most of us now realize how large a role China huge manufacturing sector plays in the global supply chains.

When China was forced to shut down many of its factories as part of the effort to contain the epidemic, the rest of the world faced supply disruptions. For instance, Apple downgraded its income forecasts because it cannot produce enough number of phones due to plant closures in China.

The financial and economic disruptions are not about to end anytime soon. Over the weekend, the World Health Organization (WHO) upgraded its epidemic alert to the highest level. The rapidly spreading virus is now on all continents.

Scientists from the US Center for Disease Control are now telling us that a vaccine against this new virus is at best a year away. Meanwhile, all we could do is to attempt containment. This has not produced the best results so far.

WHO has credited Philippine containment efforts. We hope we can hold off infections as effectively as we have seen so far.

Leveraged

Imaginably, there is a lot of fretting among business leaders. We may have succeeded in holding off the contagion, but the serious dislocations will surely affect our businesses.

Last week, there was a bit of an outcry when news broke that Chelsea Logistics and Infrastructure Corporation was seeking government guarantees for a P700-million loan it contracting to buy a new ship. The company built a debt pile of P15.98 billion by the third quarter of 2019.

Chelsea is a subsidiary of Udenna Corporation. Altogether, Udenna and its subsidiaries have P140 in liabilities as of end-2018. Led by young tycoon Dennis Uy, this conglomerate has been rapidly growing the past few years. The growth, however, has been highly leveraged.

A major subsidiary of Udenna, Dito Telecommunity (formerly Mislatel) will likely ramp up more debt in the coming months. Designated the third major player in telecommunications, Dito foresees spending P257 billion in the next few years laying down the infrastructure to enable early operation.

The start of operations has already been move twice, from 2019 to 2020 and then from 2020 to 2021. Now there is speculation that Dito’s strategic joint venture partner ChinaTel could be hobbled by the crisis growing out of the virus epidemic. This includes both the start-up financing it committed and the delivery of the hardware to get the third telco going.

At the onset of operations, Dito aims to serve 37 percent of the population. That will be a challenge. The two existing telcos operate with assets valued at P300 billion built over many years.

Dito was expected to build 2,500 towers to meet its service needs. Now, spokesmen for the company anticipate building only 1,600 towers. Even that will be challenge, considering the shortage of areas for constructing them, the resistance of some local governments to hosting them and both budgetary and time constraints.

There are other costs the company needs to incur before being granted the Certificate of Public Convenience and Necessity.  The agreement with government requires the company to put up a P25 billion performance bond. A spokesman for Dito, in a recent radio interview, complained about the size of this bond.

With all the unforeseen difficulties arising from the Covid-19 epidemic, the betting now is that Dito will likely fail to launch even on its extended 2021 deadline. If they fail to meet the deadline, they will have to pay government huge penalties agreed upon as part of the designation of Dito as the third major telecoms player.

We have not yet seen the bottom of this profound crisis inflicted on the global economy by Covid-19. This crisis will exert much pressure on all enterprises.

It is best for all companies to be as nimble as possible over the next few months. It will be tough for companies laden with huge debt loads to be nimble.

The crisis, of course, was not even on the horizon when Dito embarked on this ambitious venture. Now the difficulties pose existential threats.