Applied Financial Economics

CORPORATE FASTING

We are in Lenten times, which is the period of 40 days after Ash Wednesday and ending on Good Friday, that is on April 10th, 2020.

Fasting: to abstain from some or all kind of food or drink.

As an analogy, let’s consider that food are assets and drinks are liquidity. Now, translating to corporate slang, corporate fasting could be the restraining of asset mobility, amid restriction of liquidity. In plain language, lack of demand and lack of market liquidity.

Due to uncontrollable external events (COVID-19), we have been forced not only to fast, but also to go into quarantine as a prevention to spread the contagious of the deadly virus. So have the Corporations of the world. This has immeasurable consequences in the chain of payments of the corporate universe.

The payment system of the banking sector is not other thing that a mirror image of the corporate payment chain, which as mentioned above, is under tremendous pressure and temporary stagnation. Thus, this corporate fasting, whose consequences have yet to be evaluated, will affect indirectly the banking system.

Some multilateral institution, has a priori, estimated a contraction of the world economy of -5% for 2020. In the case of Ecuador, the pandemic effect is approximately -3% of GNP per month. Are we ad portas of a global recession? Are we ready?

Ready or not the evolution of the corporate fastening will follow its own course and the body (industry) will cleanse itself. In other words, get rid of corporate ballast and become productive with the help of IT. Of course it all depends on how strictly we do our fastening.

Nevertheless, in the case of Ecuador and perhaps a typical emerging country, where we have close to half of the population is unbanked, with unstable, unsecured income and no financial cushion to weather the storm, the hit will be very hard.

Corporate wise, some must consider changing the business model, the strategy, etc. What was, not necessarily will be. A definitive change of paradigm and we must act, not react.