The new coronavirus (COVID-19) first appeared (December 31, 2019) in the Chinese city of Wuhan and spread to more than 75 countries by March 2020. At the end of January 2020, the World Health Organization (WHO) declared a state of emergency due to the virus. The virus has already caused over 20,000 deaths this year, consequently in many countries the quarantine has been declared, to stem the spreading of the virus. This was the case in Slovenia as well. Today, it seems that the epidemic is having a profound impact on social and economic activities around the world.
Concerns and unpredictability of the spread of the virus have had an immediate impact on the financial markets, breaking the ten-year bullish trend. Shares have fallen sharply (some stock indices have fallen by more than a third) and we cannot, nor should, ignore this negative effect. The epidemic can have serious long-term consequences for both the stock markets and the entire global economy.
What does this mean for the value of the business?
When evaluating a business, we tend to look at financial information about the business retrospectively. This means that the impact of the epidemic on the value of companies will be reflected in the quarterly, interim and annual reports for 2020. Of course, this does not mean that the immediate negative impact of the epidemic on the operations of certain companies can be neglected today.
An example of a catering company
This can be well illustrated in the case of the catering company (restaurant). Someone who wanted to sell their catering business before the crisis would almost certainly make more money than after the epidemic. The closure of operations for couple of months, will result in significantly lower revenue than expected in 2020. It also raises the issue of restarting the business after the epidemic has ended, as this has to do with the extra costs that the owner may not have enough resources for.
In such a case, the estimators in their forecasts of corporate income, profitability and working capital for 2020 need to be much more cautious and conservative. At the same time, in calculating the required rate of return, we can use an additional mark-up of the discount rate associated with the unpredictability and uncertainty of an epidemic affecting the whole world.
Many Slovenian and global companies are already feeling the effects of the changed and unexpected market situation, as many suppliers are unable to fulfill orders, and in many cases sales have stopped completely. The far-reaching impact of the pandemic on the global and Slovenian economy is difficult to predict, but the overall situation poses additional risk in the forecast of future business operations of companies. Assuming a gradual restriction and containment of the spread of the coronavirus in 2020, UMAR announced a decline in Slovenia’s GDP growth from 3.0 % to 1.5 % in 2020. Amid tight conditions and severely difficult business, UMAR corrected its forecasts and assumed a 6.0-8.0 % GDP decline as a more realistic scenario, as the Slovenian economy shows a strong dependence on exports and imports already existing in certain industries. More and more manufacturing facilities are closing its operations.
The impact will be felt throughout the economy, with a particular impact on businesses in the tourism, hospitality, entertainment and air transport sectors, which are already laying off their employees and facing illiquidity due to a complete loss of revenue. At the same time, consumer habits are changing, with a decline in revenue leading to a decline in purchasing power and a lower demand for services. There is also a high risk of loss of consumer confidence. But it’s not all black. Certain activities such as telecommunications and delivery may even come out of the crisis stronger.
At this very moment, there is no magic bullet to predict when the epidemic will end and the economy reboots and there is no uncertainty and fear among the people. Consumer caution will not go away overnight, and the main question is how coronavirus will affect business, especially tourism in the upcoming years. The economic damage will be dictated by the length of halt in social and economic life in Europe, the longer the halt in life, the greater the harm.