The spread of Ebola has already been deadlier than the widespread SARS (Severe Acute Respiratory Syndrome) epidemic of 2003.
With new cases reported in the United States and Europe, the markets have started to focus on the potential financial effects of this deadly illness. This month analysts cited Ebola concerns to explain stock declines and a senior executive at Barclays has warned that a sustained outbreak of the virus beyond West Africa could create greater turmoil for financial markets than the sharp declines caused by the SARS epidemic a decade ago. Ebola is not yet at the top of the financial markets’ worry list, but there is growing concern.
The direct economic consequences of the Ebola outbreak have been limited so far. This is primarily because the three worst affected counties – Guinea, Liberia and Sierra Leone – together account for less than 1 per cent of the economic output of sub-Saharan Africa.
So, while the human and economic effects in these three countries have been severe, within the wider African economy commodity prices have had a far greater economic impact than the spread of Ebola. African stocks have not been particularly hard hit by recent news concerning Ebola, perhaps reflecting that they tend to attract longer-term investors. Similarly, global financial markets have remained more focused on other concerns, including weak economic growth figures, uncertainty over central bank interest rate policies and increasing geopolitical risk in Asia and the Middle East.
Until now, Ebola’s impact on the financial markets has been mostly sector-specific. Airline stock prices were down sharply earlier this month (even though their financial results have not yet been impacted by the outbreak), while the share prices of some biotech companies have benefitted.
There is, however, growing awareness that there could be severe economic consequences if Ebola spreads further to other continents. According to Marvin Barth, Barclays’ European Head of Foreign Exchange Research, the probability of Ebola becoming a market-relevant event has shifted “from something close to zero to a non-negligible probability.” In response, a number of financial firms have begun trying to quantify this risk.
A key lesson from SARS is that the greatest financial consequence of an epidemic is not the direct costs related to containment, medical treatment and mortality, it is the reduction in economic activity caused by fear. West African countries are already experiencing varying degrees of economic isolation. Kaifala Marah, the finance minister of Sierra Leone, has said that an aversion to working in Western Africa has had the effect of an “economic embargo”. Some international firms have begun to reduce their operations in the region and are considering shutting down temporarily.
In the wider market, the concern is that fear of Ebola may negatively affect consumer behaviour. Despite the low risk of transmission, people may become less willing to travel and to expose themselves to crowds, which could impact the retail and service industries in addition to tourism and hospitality. A general perception of increased risk may also translate into greater overall market volatility, making it more difficult to get new listings away.
The public’s fear of Ebola has centred not just on its high mortality rates, but on their disappointment with various governmental responses to the outbreak. Unlike SARS, the Ebola virus is not airborne and is transmitted via infected bodily fluids, which makes the virus easier to control. Accordingly, experts predict that, with a co-ordinated response by governments, the virus should be mostly contained within its current regions. On the other hand, some experts have shared their worst-case scenarios that envision further spread of the virus aided by a series of governmental mistakes.
In addition to forming policies to help prevent the physical spread of the Ebola virus, governments must tread a difficult path in encouraging public awareness. Public statements about the dangers must be balanced with the need to avoid unnecessary panic, which can be a challenge in the era of 24-hour news. To a large extent Ebola’s effect on the financial markets will come down to the trust people have in their governments’ handling of the crisis. So far, investors are alert, but not alarmed.
Edward Bibko is head of capital markets (EMEA region) at Baker & McKenzie