Impact of COVID-19, South African financial markets, IMF International Monetary Fund, lockdown, financial crises, economic recession, equity market, bond market, foreign exchange, commodities market, credit spreads
A new type of corona virus first identified in December 2019 has swept across the globe infecting millions of people. The virus, scientifically known as COVID-19, has caused many governments to declare a national state of disaster and to implement nationwide lockdowns to prevent the spread of the disease. These decisions and the uncertainty surrounding the nature of the virus has had detrimental impacts on the global economy. In June 2020, the International Monetary Fund (IMF) predicted a 4.9 percent contraction in global GDP, marking this time as the worst economic downturn since the Great Depression (IMF, 2020). This worldwide economic distress is different to past financial crises in the sense that it was not caused by something structurally wrong with the economy. The economic recession was brought about by governments' decisions that halted economic activity (Kiersz et al, 2020). This paper will address the impact of COVID-19 on four main financial markets in South Africa, those being the equity, bond, foreign exchange, commodities markets.
[...] However, agriculture has not been fully immune to the impacts of COVID-19. As can be seen from Figure corn and cocoa experienced a decline in value due to the closure of restaurants under strict lockdown protocols. The value of cotton also decreased about 35 percent as the global textile industry contracted. Figure Agriculture Future Price (Nel et al, 2020) Credit spreads A credit spread is the difference in yield between a treasury bond and another debt security of the same maturity but different credit quality. [...]
[...] Ganti Credit Spread. Investopedia. Online at: https://www.investopedia.com/terms/c/creditspread.asp D. Bradlow The IMF's $4bn loan for South Africa: the pros, cons and potential pitfalls. Business Maverick. [...]
[...] The uncertainty of investors during the COVID-19 pandemic has also led investors to dispose of South African bonds which are seen by them as risky assets. The graph below tracks emerging economies bond yields over the past year. All countries show a spike in their bond yields in March 2020 due to the COVID- 19 pandemic, but South Africa's spike is much higher, this difference is mainly due to the recent credit rating downgrade. Each spike corresponds to a national surge in cases of COVID-19. [...]
[...] Chapman and J. Garnett-Bennett Financial Market Impacts of COVID- 19. PwC. Online at: https://www.pwc.co.za/en/assets/pdf/financial-market- impacts-of-covid-19.pdf A. Kiersz and C. Reinicke charts show how the coronavirus has dwarfed the Great Recession in just 2 months. Business Insider. South African Government: Department of Health South Africa Covid- 19 Experiences to Date (25th August 2020). COVID-19 South African Online Portal. Online at: https://sacoronavirus.co.za/2020/08/25/slideshow-south- africa-covid-19-experiences-to-date- 25th-august-2020/ P. Hugo Impact of the Coronavirus pandemic on financial markets and your investment. Prudential Investment Managers South Africa. [...]
[...] According to Pastor and Veronesi's paper about government policy and stock prices, the volatilities and correlations of stock returns are affected by changes in government policy. The introduction of new policies whose impact is uncertain, raise the volatility of the stochastic discount factor which then raises the risk premia making stock returns become more volatile and more highly correlated across firms (Lubos and Veronesi, 2012). Bond market Turning attention to the COVID-19 impact on bond yields we find a similar consequence. [...]
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