Impact of Coronavirus Pandemic on Financial Market Stability in Africa

Transcription

1. PROBLEMY EKOROZWOJU – PROBLEMS OF SUSTAINABLE DEVELOPMENT 2021, 16(2), 18-25 DOI: 10.35784/pe.2021.2.02 Impact of Coronavirus Pandemic on Financial Market Stability in Africa Wpływ pandemii koronawirusa na stabilność rynków finansowych w Afryce Kalu O. Emenike University of Eswatini, Department of Accounting and Finance, Private Bag No 4, Kwaluseni M201, Kingdom of Eswatini E-mail: kalu@uniswa.sz, ORCID: 0000-0002-3599-0281 Abstract The outbreak of the coronavirus in December 2019, with its accompanying declaration as a pandemic by the World Health Organisation in March 2020, resulted in lockdown of the global financial markets. This paper uses data from pre-coronavirus, coronavirus endemic and coronavirus pandemic periods to evaluate the impact of coronavirus pandemic on stability of Africa stock markets, sovereign bond markets and U.S. dollar exchange rates in Kenya, Morocco, Nigeria and South Africa as well as Africa Sharia equity and Sukuk indices. Findings from study suggest that Africa financial markets became very unstable during the coronavirus pandemic than during the endemic and pre-coronavirus periods. Results from bivariate regression model show evidence of negative impact of coronavirus pandemic on financial market returns. The results further show that Africa financial markets return volatility increases as the number of coronavirus cases increases. Overall, the findings suggest that coronavirus has negative impact on financial markets’ returns and exacerbated financial markets instability thus retarding sustainable economic development in the continent. JEL Classification Numbers: G10, I12, O55 Key words: Coronavirus, COVID-19, stock market, sovereign bond market, exchange rates, volatility, skewness, market stability, Africa Streszczenie Pojawienie się w grudniu 20129 r. koronawirusa, wraz z ogłoszeniem przez Światową Organizację Zdrowia w marcu 2020 r. pandemii, spowodowało zablokowanie światowych rynków finansowych. W niniejszym artykule wykorzystano dane z okresów przed koronawirusem, koronawirusa endemicznego i pandemii koronawirusa do oceny wpływu pandemii koronawirusa na stabilność afrykańskich giełd papierów wartościowych, rynków obligacji skarbowych i kursów dolara amerykańskiego w Kenii, Maroko, Nigerii i RPA, w powiazaniu z zasadami szariatu i indeksu Sukuk. Wyniki badań sugerują, że rynki finansowe w Afryce podczas pandemii koronawirusa stały się bardzo niestabilne, o wiele bardziej niż w okresie endemicznym i przed koronawirusem. Wyniki dwuwymiarowego modelu regresji wskazują na negatywny wpływ pandemii koronawirusa na zwroty z rynków finansowych. Wyniki pokazują ponadto, że zmienność zwrotów na afrykańskich rynkach finansowych rośnie wraz ze wzrostem liczby przypadków koronawirusa. Ogólnie rzecz biorąc, wyniki sugerują, że koronawirus ma negatywny wpływ na zyski na rynkach finansowych i zaostrza niestabilność rynków finansowych, opóźniając tym samym zrównoważony rozwój gospodarczy na kontynencie. Słowa kluczowe: koronawirus, COVID-19, giełda, rynek obligacji skarbowych, kursy walut, zmienność, skośność, stabilność rynku, Afryka
2. 19 Emenike /Problemy Ekorozwoju/Problems of Sustainable Development 2/2021, 18-25 Introduction Financial market stability is indispensable to sustainable economic development, especially in Africa developing economies. Financial market is crucial in promoting economic sustainability, by facilitating the flow of funds from the surplus to the deficit units of an economy. It provides access to a neutral reference price, reduces transaction costs through easy access to buyers and sellers in a centralized market place, and manage transaction risks, thus facilitate conservation of wealth and smooth functioning of economic activities (Stiglitz, 2010; Emenike, 2017; Kremen, Shkolnyk, Semenog & Kremen, 2019). Each of these functions can be inconvenient for certain market participants, without stable financial market. Batuo, Mlambo, and Asongu (2017) conclude amongst others, that economic growth reduces financial instability. Indeed, stable financial markets are not only resilient but also a key factor in producing high economic growth. Financial market instability, on the other hand, retards conservation of financial resources, impedes economic activity and weakens sustainable economic development as prices for key financial assets deviate significantly from their intrinsic values. The financial market in such a situation, is not capable to absorb real economic shocks and to conserve financial resources on long-term scale. The outbreak of coronavirus in December 2019, with its accompanying declaration as a pandemic by the World Health Organisation (WHO) on March 11, 2020 resulted in lockdown1 of the global economy. The lock-down of all businesses and organisations disrupted production, supply chain, and financial market activities. This resulted in huge decline in African governments’ revenues and exacerbated vulnerability to coronavirus crisis. More so, there has been intensive pressure on governments to increase expenditure on palliatives and health equipment in order to mitigate impact of the pandemic (Ito, 2020; Goodell, 2020). The resulting liquidity pressure has become a threat to sustainable economic development and financial stability in the continent, as the fiscal capacity of African countries to respond to such crisis situations was low even before the pandemic. While the number of coronavirus cases and deaths appear comparatively low in Africa than in other world regions2, the economic damage inflicted on the continent is unprecedented. Indeed, the rapid global spread of Covid-19 and the high infection rates raised fears of a global financial market crash in the endemic stage of the virus outbreak. In response to the coronavirus threat, Africa governments unveiled different countermeasures to mitigate its impact on economic sustainability and financial stability in the continent. The Nigeria central bank in March 2020, amongst other measures, place a one-year extension of a moratorium on principal repayments on the bank's intervention facilities, and reduced interest rate on intervention loans from 9% to 5%. Between April and May 2020, South African reserved bank reduced its main lending rate by 50 basis points to 3.75%, and purchased government bonds worth 11.4 billion rand. In the same vein, the central bank of Kenya, amongst other measures, eliminated bank charges for transactions between a bank account and a mobile wallet, and increased the maximum limit for money transfers by mobile phone for small and medium enterprises. The government of Morocco established a pandemic management fund to support the national economy, including the suspension of social charges and repayment of bank loans by companies (MFW4A tracker, 2020). The announcement of these significant policy stimulus package enhanced the upside potential for financial market prices, even though market risks remained elevated (Topcu & Gulal, 2020). The importance of financial markets in mobilising resources, reducing information asymmetry, pricing risk and stimulating sustainable economic development is well established in literature (see for example, Colombage, 2009; Murinde, 2012; Wu, et al., 2020). But COVID-19 pandemic has significantly threatened financial markets stability (Ali, Alam & Rizvi, 2020). African currencies, for example, came under pressure, with sharp exchange rate depreciations in more than half of the countries (Armah, 2020). Borrowers across sectors and scales of businesses have been affected by lock-down, as decline in their income and revenue has negatively impacted their loan obligations. The banking industry in Africa is threatened by the likelihood that there will be a sharp increase in non-performing loans, from the already high levels of 11% in 2019 (Tyson, 2020). Obeid and Ismail (2020) reports that stock markets around the world suffered trillions of US dollars losses in a single week in what was the markets’ worst week since the financial crisis of 2008. Stock markets in the Euro area and the United States lost around 35% of their value between their peak on 19 February and their trough on 23 March (Ampudia, 1 2 While there is enough evidence in history to show that diseases do affect the trajectories of nations, Africa has not witnessed a plague that resulted in simultaneous lockdown of almost all countries in the continent. COVID-19 is unprecedented in scale. The outbreak of Ebola, for example, did not result in shutting down the regional economies. There have been so many other outbreaks, including Asian bird flu, Spanish flu, SARS, HIV-Aids, etc., but none of them resulted in global lockdown. By 31st August 2020, Kenya, morocco, Nigeria, and South Africa, for example, have 34057, 61,399, 53,865, and 625056 total number of COVID-19 cases respectively. It is only South Africa that has comparable figure to high cases countries such as the USA (5,997,163), Brazil (3,862,311), and Russia (990,326) and Peru (647,166) as at the same date.
3. Emenike /Problemy Ekorozwoju/Problems of Sustainable Development 2/2021, 18-25 Baumann & Fornari, 2020). Budget deficits have equally widened across the globe, thus increasing the need for sovereign bond financing. Giving the negative reports across the global financial markets, understanding the impact of coronavirus on Africa financial markets stability is relevant for entrenching and sustaining measures to reduce vulnerability to global shocks, guiding against future health crisis, and building economic sustainability and resilience. The purpose of this paper is to analyse the impact coronavirus on financial markets stability in Africa. The paper provides evidence on the behaviour of African financial markets during the pre-coronavirus era, coronavirus endemic era and coronavirus pandemic era using skewness, minimum and maximum returns as well as volatility of returns analysis. The comparative analysis deepens our understanding on the impact of the pandemic on financial market stability in Africa and provides basis for formulating policies that will minimise vulnerability to the current pandemic shocks as well as guide against future health crisis. The rest of this paper is structured as follows. Section 2 presents literature review. Section 3 focuses on method of analysis and data. Section 4 discusses the results, and Section 5 concludes the paper with few policy implications. Literature review While numerous studies are currently being conducted on the COVID pandemic, the available literature is nascent and growing. A few of the available literature assessed reaction of global financial markets return and volatility to Coronavirus pandemic. Ali, Alam and Rizvi (2020), for example, reported that returns of most of the financial securities are negatively and significantly related to the COVID19 deaths, but the volatility of most of the securities are positively related to the deaths. Similarly, Benzid and Chebbi (2020) reported that an increase of the number of cases and the deaths in the US has a positive impact on the USD/EUR, USD/Yuan and USD/LivreSterling. The findings of these studies suggest that financial assets become more volatile as the number of COVID-19 deaths increases. Ito (2020) showed that, during the pandemic crisis, the stress in the financial system was connected in Germany, France, Italy, Portugal, and Spain. Akhtaruzzaman, Boubaker, and Sensoy (2020) showed that returns of listed financial and non-financial firms across China and G7 countries experience significant increase in conditional correlations during the COVID-19 period, but that the magnitude of increase is considerably higher for financial firms, indicating their importance in volatility transmission. In an emerging stock markets analysis, Topcu and Gulal (2020) reported that the COVID-19 pandemic has a negative impact on emerging stock markets but 20 that the negative impact has gradually fallen and started to narrow by mid-April. The finding of this study brought an element of good news to financial market participants when it evince that the negative impact of the pandemic has started to taper. Several studies have also been conducted to identify safe haven investment in the financial markets during the COVID-19 pandemic. Mirza, Naqvi, Rahat and Rizvi (2020) demonstrated that while most of the investment funds in Europe exhibit stressed performance, social entrepreneurship funds endured resilience during the various stages of evolution of the coronavirus pandemic. Conlon, Corbet and McGee (2020) reported that Bitcoin and Ethereum are not a safe haven for the majority of international equity markets examined, but that Tether acted as a safe haven investment by successfully maintaining its peg to the US dollar during the COVID-19 turmoil. Lahmiri and Bekiros (2020) evinced that cryptocurrencies were unstable and more irregular during the COVID-19 pandemic compared to international stock markets. Similar findings were reported by Conlon and McGee (2020). These analyses suggest that investing in digital assets during COVID-19 pandemic could be riskier than investing in equities. A number of studies have examined the interaction between media reportage and financial markets behaviour, especially during crisis periods. Tetlock (2007), for example, reported, amongst others, that high media pessimism predicts downward pressure on financial market prices followed by a reversion to fundamentals. Engelberg and Parsons (2011) evinced that local media coverage strongly predicts local trading. Similarly, Peress (2014) demonstrated that the media contributes to the efficiency of stock market by improving the dissemination of information among investors and its incorporation into stock prices. These findings on the linkage between media and financial market behaviour have largely shown that prices and market volatility respond to news reportage. Again in the pandemic era, sentiment generated by coronavirus-related news may have contributed to the rapid spread of fears of a global financial market crash, which heightened volatility of financial market prices. This statement is supported in a recent study by Haroon and Rizvi (2020), who found that overwhelming panic generated by the news outlets are associated with increasing volatility in the equity markets. Research methodology To analyse the impact of coronavirus on stability of Africa financial markets, descriptive statistics, EGARCH (1,1) model and bivariate regression model were estimated. Specifically, financial asset return skewness and volatility were adopted as
4. 21 Emenike/Problemy Ekorozwoju/Problems of Sustainable Development 2/2021, 18-25 measures for financial market stability3. The skewness coefficients for the financial markets return series were compared in the three sub-periods of the study – pre-coronavirus, coronavirus endemic and pandemic periods. The exponential GARCH (1,1) model introduced in Nelson (1991), were adopted to estimate volatility of African financial markets return, and bivariate regression model was employed to estimate the impact of total number of coronavirus cases on returns and volatility of African financial markets. The E-GARCH (1,1) model introduced asymmetric parameter, which responds to positive and negative shocks, as a modification to the symmetric GARCH (1,1) model. The EGARCH (1,1) model was estimated using the following equation: