Japan is extending its state of emergency. Germany’s constitutional court will again examine bond buying in the Eurozone. Argentina is preparing for the official expiration date of its debt exchange offer. The Polish presidential elections will be postponed. Meanwhile, the Philippines government has stopped all inbound commercial traffic, Italy is easing Europe’s longest-lasting lockdown, Brazil’s parliament is voting on a “war budget,” and South Africa enters its first week under “Level 4” pandemic restrictions.
CHART OF THE WEEK
The Covid-19 crisis is affecting the tourism industry worldwide. Given that border controls will remain in place in many countries this summer, some governments might promote the domestic travel market. This might benefit countries such as Germany and the UK, where outbound tourism expenditure tends to be higher than inbound tourism expenditure – although it is still unclear how quickly lockdowns will be lifted and how consumers will react. In contrast, countries such as Spain, Thailand, and Greece are heavily reliant on foreign visitors. Their populations tend to spend less abroad, meaning that domestic travel will hardly be an economic substitute.
WHAT TO WATCH
Japan
On 4 May, Prime Minister Shinzo Abe announced that he would extend a nationwide state of emergency until 31 May, even as the state of emergency appears to have contained the Covid-19 outbreak. The government is aiming to reduce the number of new cases to below 100 per day before it will consider rolling back its declaration, although it is possible that the state of emergency could be lifted in some prefectures by 14 May. In the meantime, Abe pledged further measures to support individuals and small businesses struggling with the slowdown, and will expand the availability of testing in Tokyo and other large cities, which have been most affected by the pandemic.
Eurozone
Yet another German constitutional court ruling on Eurozone crisis fighting is expected for 5 May. The question of PSPP – the sovereign bond arm of the ECB’s quantitative easing – is the second case the German judges have passed on to the Court of Justice of the European Union for preliminary consideration. This has yielded a positive assessment. But unlike previous programs, PSPP can be triggered without a support program from the ESM rescue fund, thus not requiring Bundestag sign-off. This might matter for the German judges, given the question of the effects of any potential PSPP losses on Berlin’s budget.
Argentina
8 May is the official expiration date for the USD 66bn debt exchange offer unveiled by Finance Minister Martin Guzman on 16 April. The offer as it stands appears highly unlikely to prosper and both sides remain dug in for now. Guzman has suggested that, given the wider interest rate environment, his offer is relatively generous. However, aside from haircut involved, the lack of a macroeconomic plan – and the difficulty in charting a realistic growth strategy amid the current crisis – continues to weigh on bondholders’ risk perception. The next few days therefore represent a crucial opportunity to break the impasse between the sovereign and bondholders, though in practice the 8 May deadline is not fixed. The hard stop deadline comes slightly later – 22 May – which is when the 30-day grace period on a USD 503mn interest payment expires.
Poland
The 10 May presidential election will likely be postponed. Divisions on the topic could weaken the ruling United Right coalition government. On Wednesday, 6 May, the upper house of parliament (Senate) is expected to reject a bill to hold the election by postal vote only. While the ruling coalition could override the Senate’s veto by an absolute majority of votes in the lower house (Sejm), some coalition deputies are opposing the bill. Even if the ruling Law and Justice party manages to push it through, the poll would likely be pushed back to later in May. If the PiS fails to adopt the bill, the presidential poll would likely be postponed beyond May, while risks to the stability of the United Right coalition government would rise.
ON THE HORIZON
ASIA
China
There are signs that Chinese consumers are regaining their appetite to spend, but tourism is lagging other forms of consumption. General Motors said China sales through its joint venture with SAIC Motor rose 13.6% in April from a year earlier. In tourism, around 23.4mn tourists per day were expected to visit tourist spots during China's Labor Day holiday on 1-3 May, up from 19.9mn per day during the Tomb Sweeping Holiday April 4-6 but down from 67.1mn per day during Labor Day 2019, according to the Ministry of Transport. Authorities are requiring tourist destinations to limit visitors to 30% of normal capacity to ensure social distancing.
Philippines
The government stopped all inbound commercial traffic until 9 May because quarantine facilities for returning overseas workers are full. An estimated 20,000 Filipino workers are now in isolation and the numbers are expected to increase as cruise line workers and those from the Middle East arrive, putting further strain not only on quarantine locations but also on unemployment rolls. The Philippines has an estimated 2.3mn workers abroad – likely an undercount – without residency status.
Sri Lanka
After parliamentary elections were postponed from 25 April to 20 June, Prime Minister Mahinda Rajapaksa is holding a meeting with members of the outgoing parliament. The goal is to discuss rules governing campaigning against the backdrop of the ongoing Covid-19 crisis. Sri Lanka has 718 positive cases and has reported 7 deaths.
EUROPE
Germany
Chancellor Angela Merkel and the 16 regional state leaders will convene again on 6 May to decide the next steps towards exiting the lockdown. However, any further easing of restrictive measures will be based on a continuation of social distancing measures. The 6 May meeting might also see a decision about a Germany-wide approach to re-opening all schools, which would be a key precondition if a broader return to work were to be encouraged at some later point. On the other hand, if a negative effect from the first exit steps around 20 April were to show in time for the 6 May meeting, there might hardly be any relaxation of the lockdown.
Italy
The easing of Europe’s longest-lasting lockdown started today, as some 4.5mn people could return to work.The unwinding of the restrictions has been blighted by poor guidelines. The government is expected to unveil a new economic aid package worth around EUR 55bn this week.
Spain
The exit from the lockdown has officially started today, with some islands entering phase 1 of the government’s four-stage plan. However, the PSOE-Podemos coalition is aiming to get the state of alarm extended by parliament on 6 May. The decision seems to be motivated by the government’s ongoing concerns about coordination issues with the regional governments. The opposition People’s Party (PP) has announced that it would not vote in favor of the extension. However, the PP is likely to abstain, since Prime Minister Pedro Sanchez could blame them from the turmoil that would probably follow the failure to extend the state of alarm.
Turkey
The cabinet will meet today to discuss an “exit strategy.” After the recent improvement in the official figures for positive cases and deaths, the government could be tempted to relax some the restrictions earlier than previously indicated (late May). The full lockdowns on weekends are expected to remain until after the end of Ramadan.
UK
PM Boris Johnson will provide a first outline of an exit strategy on 7 May. However, the roadmap will likely only include a very broad timeframe; this will be adjusted depending on how the pandemic situation evolves. In that context, there is some speculation about a first, tentative indication of encouraging some employees to return to work around the end of May. But overall, the UK will likely tread very carefully.
Western Balkans/EU
As one of the key initiatives of Croatia’s EU presidency in the first half of 2020, the EU-Western Balkans video summit will take place on 6 May. The summit will feature the EU’s heads of state or government and Albania, Bosnia and Herzegovina, Serbia, Montenegro, the Republic of North Macedonia and Kosovo. With North Macedonia and Albania having been invited to start EU accession negotiations earlier this year, the summit will focus on deepening economic and political cooperation between the EU and the Western Balkans amid the Covid-19 crisis.
LATIN AMERICA
Brazil
After consecutive delays, the House should finally vote on a Senate-modified constitutional amendment for a “war budget” on 4 May. This would shield Covid-19-related spending from fiscal responsibility limits, expedite procurement, allow the Central Bank to buy corporate bonds, and relax temporary employment and services restrictions. House Speaker Rodrigo Maia has also committed to submitting to a vote on Monday an assistance package to states and municipalities authored by Senate Chairman Davi Alcolumbre, thus making possible a presidential sanction by Tuesday. The week should also see much repercussion about former Justice Minister Sergio Moro’s 8-hour testimony to the Federal Police over the weekend on allegations he made against President Jair Bolsonaro in his departure speech on 24 April. The testimony was ordered by the Supreme Court in the context of an investigation involving both the minister and the president.
MIDDLE EAST AND AFRICA
South Africa
South Africa enters its first week under “Level 4” pandemic restrictions. Economic data due this week is expected to begin to show the extent of the recent lockdown devastation. At Level 4, FNB bank expects economic production to reach about 61% of its full capacity. However, the government’s piecemeal planning around the restart and the continuation of some seemingly irrational restrictions risk a growing backlash against President Cyril Ramaphosa hitherto widely praised pandemic response. Also scrutinized may be IMF financing plans, public enterprises (particularly South African Airways), and remarks that the South African Reserve Bank (SARB) ought to purchase government bonds on the primary market.
