Full Impact Of Ebola Yet To Be Felt

BMI View : Weak state capacity and poor public health infrastructure will hamper efforts to contain the escalating Ebola outbreak in West Africa. Meanwhile, restrictions on the movement of goods, people and money will prove increasingly disruptive to economic activity.

A Grim Picture

Since the first officially reported case in Guinea on March 21, the West Africa Ebola outbreak has spread to four countries (Guinea, Sierra Leone, Liberia and, most recently, Nigeria). At the time of writing it is thought to have infected over 1,600 people and killed more than 900, and we expect these numbers to steadily rise over the coming weeks as governments and foreign aid agencies battle to contain the spread of the virus. With no known vaccine or pharmaceutical in the imminent pipeline that has been proven to control or cure Ebola, the authorities will be forced to rely on traditional public health methods, namely through the isolation of cases ( see 'Ebola Outbreak Raises Development Possibilities', August 6). While it is impossible to predict how much further - and for how much longer - the virus will spread, we believe that efforts to contain the outbreak will be hampered by weak state capacity, lack of public funding and poor health infrastructure. The rising number of cases in Nigeria is a growing concern and underlines the potential for the disease to spread to new countries.

Further To Rise 
West Africa Ebola Outbreak 2014 (LHS) & Ebola Outbreaks 1976-2014 (RHS)

Full Impact Of Ebola Yet To Be Felt

BMI View : Weak state capacity and poor public health infrastructure will hamper efforts to contain the escalating Ebola outbreak in West Africa. Meanwhile, restrictions on the movement of goods, people and money will prove increasingly disruptive to economic activity.

A Grim Picture

Since the first officially reported case in Guinea on March 21, the West Africa Ebola outbreak has spread to four countries (Guinea, Sierra Leone, Liberia and, most recently, Nigeria). At the time of writing it is thought to have infected over 1,600 people and killed more than 900, and we expect these numbers to steadily rise over the coming weeks as governments and foreign aid agencies battle to contain the spread of the virus. With no known vaccine or pharmaceutical in the imminent pipeline that has been proven to control or cure Ebola, the authorities will be forced to rely on traditional public health methods, namely through the isolation of cases ( see 'Ebola Outbreak Raises Development Possibilities', August 6). While it is impossible to predict how much further - and for how much longer - the virus will spread, we believe that efforts to contain the outbreak will be hampered by weak state capacity, lack of public funding and poor health infrastructure. The rising number of cases in Nigeria is a growing concern and underlines the potential for the disease to spread to new countries.

Containment Challenge

Governments in Sierra Leone, Guinea and Liberia have all declared states of emergency in order to restrict people's movements from affected areas and limit new infections. This has included the closing of borders, as well as bans on large gatherings such as markets and schools. Militaries have been heavily deployed to ensure these restrictions are enforced. Meanwhile, the director of the World Health Organization recently announced that the body would be stepping up the international response with a USD100mn regionally coordinated plan. 

Despite this, we believe that all three countries lack the requisite state resources and capacity to adequately manage the outbreak. Institutional weakness, widespread corruption and weak government finances will limit the ability of governments and foreign aid agencies to respond effectively to a fast-moving situation. A weak rule of law and limited government capacity to assert control in rural areas, where the majority of cases originate, will also impede efforts to implement these measures.

Further To Rise 
West Africa Ebola Outbreak 2014 (LHS) & Ebola Outbreaks 1976-2014 (RHS)

Other factors undermining containment efforts across all three countries include weak health infrastructure and poor accompanying levels of public health awareness on the part of the local population. Per capita health care spending in 2013 was just USD33.4 in Guinea, USD78.6 in Liberia and USD106.5 in Sierra Leone, compared with the global average of USD179. The three states ranked 139 th, 144 th and 147 th (out of 148 countries) respectively for 'health and primary education' in the World Economic Forum's 2013-2014 Global Competitiveness Report. Lack of education on the problem and the widespread belief in the efficacy of witchcraft in some areas has also exacerbated the issue. 

Rising Risks To Regional Growth Outlook
Real GDP Growth, % y-o-y

Economic Arteries Blocked

It is difficult to accurately assess the economic impact of the Ebola outbreak at this early juncture; we believe, however, that the restricted movement of goods, people and money - the lifeblood of a functioning market economy - will inevitably disrupt economic activity within the three countries in question and drag on real GDP growth over the coming quarters. Although we expect the economic impact to be most keenly felt in the above-mentioned three economies, the effects are also likely to be felt across the wider region. We are currently forecasting real GDP growth in West Africa of 6.2% in 2014 and 6.2% in 2015, but downside risks to these projections will mount the longer the crisis goes on.

While the absence of high-frequency economic indicators prevent an accurate assessment, we believe that trade and commerce within these countries has slowed markedly in recent months. The closure of borders (Côte d'Ivoire recently shut its border with Liberia) is disrupting supply chains by removing key production inputs as well as weighing on export-derived revenue streams and, by extension, hitting already fast-deteriorating government finances.

In addition to restricted land crossings, a number of major airlines have recently suspended flights to the affected countries - most recently Emirates and British Airways - and we believe other airlines could soon follow suit. These measures are likely to further inhibit business travel to the affected countries and deter all but the hardiest tourists. On a smaller scale, but arguably of greater significance to the wider population, has been the cancellation of weekly markets (notably in Guinea) on which the local and informal economy heavily depend.

Prices And Tensions To Rise

The increased scarcity of essential goods will exert growing pressure on prices and erode purchasing power. Disruptions to the food supply are hard to quantify but pose a growing risk to local communities. Anecdotal evidence suggests that agricultural activity has been significantly impacted as farm workers in affected areas have left their land. The longer the crisis continues (and spreads), the greater threat this poses to food security and inflation in the affected countries. Such a situation would likely see an increased risk of social unrest. A combination of weak governments, deep ethnic divisions and histories of political violence make all three countries particularly susceptible to political and social instability.

Investor Confidence Eroding
London Mining & African Minerals, Share Price Performance (Rebased Jan 2014)

Sentiment Hit, But Mining Ore Right For Now

Guinea, Sierra Leone and Liberia are on the radar of many investors given that they are on the cusp of a potentially economically transformative iron-ore boom. One silver lining for these economies thus far has been that mining activity - a key pillar within all three economies - has up to now been largely unaffected.

In Sierra Leone, production at the Marampa iron ore mine (one of the largest in the country), owned by UK-based London Minerals, has continued, with the company recently revising its full-year production target from 4.9mn tonnes to 5.4mn tonnes. The operations of African Minerals (the other main player within the sector) have also been unaffected, according to recent statements. Both companies have been upping measures to deal with the crisis, introducing staff screening and restrictions on non-essential travel.

Despite this, investor sentiment towards the two companies has steadily eroded in recent months. This has played out in the share price performance of the two AIM-listed firms, which have lost more than 60% of their value since the start of the year. Given their prominence within the country, we believe that these two stocks can be seen as a bellwether for investor sentiment and business confidence towards Sierra Leone as a whole. While mining output has so far been relatively unscathed, we believe that investment into new projects, both in mining as well as other sectors, is likely to be put on hold until further notice.

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