Ebola adds another wake-up call to businesses

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The price of gold has stuttered this week and the stock price of metal producing companies has been marked down as mines in western and central Africa are closed in response to the growing Ebola epidemic.

In recent decades, West Africa has become home to the production of key commodity resources in modern global trading. The closure of such resource facilities, laying off of employees, and the evacuation of industry personnel and corporate heads from the area in response to the outbreak has already had a significant impact on individual businesses, as well as the national economies of Liberia, Guinea and Sierra Leone.

The World Bank estimates that the ultimate impact on Africa’s fiscal health will be significant [1]. Its recent report on the economic impact of the Ebola outbreak states that Guinea’s estimated annual growth rate has fallen by half. Sierra Leone could see a diminished growth of 8%, down from 11.3%, this year, and zero in 2015. If the outbreak is not contained, Liberia is facing a negative growth rate by 2015. The estimated lost output represents US$359 million for these three hardest-hit countries.

Total sum of global exports revenue from Guinea and Sierra Leone

This, however, is only the beginning. Even though, together, Sierra Leone, Liberia and Guinea account for only 0.02% of the global GDP, the international economies that depend on their exports – iron ore, especially – will also be negatively affected. In other places, it is the fear of infection, rather than the infection itself, that will ultimately wreak the most damage.

The wider disruption caused by epidemics is two-pronged in nature. First, there is the economic cost of treating the outbreak – supplying medical staff and equipment, limiting movement and business hours, etc. Second are the knock-on effects of disease fright – workforce absenteeism, reputation damage, supply chain failure, market panic, etc.

The current Ebola outbreak shares some similarities with the recent SARS epidemic which infected more than 8,000 people and killed 775 between 2002 and 2004. A lack of education about deaths related to SARS amplified the ‘fear multiplier’ and was the main consequence of the outbreak. The economies of the main regions where SARS was prevalent during the few months of the outbreak – China, Hong Kong, Taiwan and Singapore – were badly affected. Hong Kong’s economy shrank more than 10% in the worst quarter. Tourism revenues in Beijing were cut in half during the worst affected period. Personal consumption by the population of Taiwan dropped 8%. Asian currencies sustained significant losses as traders converted into the safe haven of US dollars, and there were increases in these economies’ risk premiums in international capital markets.

An even bigger ‘fear multiplier’ applied when a tourist in Hong Kong carried SARS back to Canada and caused a small outbreak there in March 2003. 44 people in Canada died and 35% of U.S. nationals surveyed at the time felt that it was unsafe to travel across the border. The economic consequences for Canada were severe: hotels lost millions, a third of the Toronto tourism workforce was laid off; and the Bank of Canada estimates that SARS cut Canadian GDP by 0.6% in Q2 of 2003.

This process of fear-propagation is holding true in the United States with regard to Ebola. “The CDC has investigated more than 100 Ebola scares in 33 states in just the first four days of October,” after the first Ebola patient was confirmed this past week in Texas.

In our highly globalised market economy, international businesses ought to have contingency plans to counterbalance the disruption caused by the threat of infectious disease epidemics. The Cambridge Centre for Risk Studies has been studying the threat of emerging infectious diseases and produced a report [http://cambridgeriskframework.com/getdocument/8] on how companies ought to prepare, what kind of risk management processes they should have in place, how severe epidemics and pandemics might play out in terms of the macroeconomic consequences on the global economy and the impacts they can cause on investment portfolios. The report includes a stress test scenario – a hypothetical global pandemic – for businesses to use in contingency risk management planning for disruption from disease outbreaks and insurers to consider how a pandemic could impact multiple lines of underwriting business as well as their asset portfolio in a single event.

This Ebola outbreak will provide further examples of how the fear multiplier can throw ripples through the global economy. Any country that suffers a reference case of the disease will experience an immediate chill on its local economy as the fear factor sets in. Having clear risk management guidelines in place before an event occurs is much preferable to improvising responses when immediate action is required. The threat of new diseases in distant populations may seem of little relevance to a global business in an era of modern medicine, but in an interconnected business world, these outbreaks are a genuine risk to global economic health.

[1] The World Bank, The Economic Impact of the 2014 Ebola Epidemic: Short and Medium Term Estimates for Guinea, Liberia, and Sierra Leone, September 17, 2014; http://documents.worldbank.org/curated/en/2014/09/20214465/economic-impact-2014-ebola-epidemic-short-medium-term-estimates-guinea-liberia-sierra-leone

[2] DiBlasio, Natalie, “Officials: Don’t Shun Suspected Ebola Contacts,” USA Today, October 4, 2014; http://www.usatoday.com/story/news/nation/2014/10/04/texas-ebola-patient-mishandled/16713389/

Tamara Evan

Tamara Evan

Tamara Evan is the head of Geopolitical Research at the Centre for Risk Studies, Cambridge Judge Business School. She supports the Centre’s work on geopolitical and technological risks and heads research into the emerging threat of cyber terrorism to infrastructure.

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