According to the EBRD, the Covid-19 pandemic is expected to result in a substantial output contraction of the regional economies. The measures taken by the governments in order to limit the spread of the virus „have severely affect domestic demand and domestic supply likely resulting in the greatest disruption to global economic activity since the Second World War.”

However, the latest report issued by the EBRD – Regional Economic Prospects in the EBRD Regions – reveals that in the longer term, „the Covid-19 crisis may also lead to reassessment of concentration risks in global manufacturing, perhaps leading to a new emphasis on diversification and reshoring. This could open new business opportunities for companies in the EBRD regions.”

The bank says vulnerabilities are greater in countries where private sector debt is high. According to the chart below, Romania’s corporate domestic debt is low, if compared to other countries in the region. But its public sector debt is high, which gives the Romanian government little room for manoeuvre under the circumstances.

Corporate domestic debt as a share of GDP, 2019 (per cent)

Government deficits are also already large in most EBRD economies. Romania is one of such examples, see below:

As the EBRD report informs, the pandemic brought the complexity of global supply chains into the spotlight. China’s province of Hubei, the origin of the epidemic, is a high-tech manufacturing hub, home to local and foreign firms highly integrated in global supply chains in the automotive, electronics and pharmaceuticals industries (300 of the world’s top 500 companies have facilities in Wuhan). Several car plants around the world, including in Romania and Serbia, had to halt production early due to missing parts.

Economies in the EBRD regions are among the most integrated in global value chains. In Central Europe, around 45 per cent of exports by value added are first imported in the form of inputs and components.

„In the short term, the region’s deep integration in supply chains is a source of vulnerability in the face of wide-spread disruptions to supply chains. Knock-on effects may be large as companies often do not know the details of the suppliers of their suppliers,” the report reads.

However, in the longer term, the Covid-19 crisis will likely lead to greater scrutiny of supply chains, with greater focus on diversification and resilience.

„The EBRD regions’ integration in supply chains may offer opportunities to scale up exports of certain products as companies worldwide reassess the risks of high concentration in supply chains,” it says.

In many sectors, China is a dominant supplier globally – in some of these sectors EBRD regions’ economies already have a comparative advantage and high export volumes, with a potential to scale up their exports. According to the EBRD, these sectors include textiles, metals, chemicals and pharmaceuticals, agriculture and machinery. In particular, car exporting economies in central and south-eastern Europe and textile producers in the southern and eastern Mediterranean could benefit.

Foto credit: Markus Winkler on Unsplash