The Coronavirus is potentially a life-changing event in every sense (economic, social and political) and many businesses and policymakers will be asking the same question “how do we best manage, if not survive this?”. Here are some thoughts on the possible scenarios, including countries embracing higher taxation and nationalisation as quick fixes for the deep economic recession (perhaps even depression) that is expected to follow.
Stark policy choices
There is no doubt that governments will face difficult policy decisions in the aftermath of the Coronavirus. Given the astronomical cost to the public purse, the policy choices facing governments would ordinarily be austerity (cuts in public services/expenditure) and increased taxation, or both. Naturally, the first would spell political suicide. Electorates will not be in the mood for austerity after months of lockdown nor is it likely that any political party seeking re-election would advocate public cuts in health or education, not least as these are the two public sectors most affected by this crisis. In fact, the health service has now become untouchable and if anything will require increased investment and funding (in some cases after years of neglect). But all this has to be paid for amid declining public revenues and record increases in public debt.
I, therefore, see governments around the world instead turn towards taxation as the perceived quick fix for the economic malaise that has afflicted their economies. This leaves large businesses and private wealth as the most vulnerable to fiscal measures, which at first will be labeled as ‘temporary‘. Of course, temporary measures are unlikely to fill the huge economic void that the Coronavirus will leave in its wake. Like a tsunami, the aftermath of lockdown will be devastating to local economies. And unfortunately, if the past is anything to go by, societies tend to seek scapegoats in times of crisis, and aided by social (and even parts of the mainstream) media I see a relentless attack on private wealth and large businesses, including any celebrities who in future choose to display their wealth as a demonstration of social status (how times change!). Within the European Union (excluding the UK), we might even see a common corporate tax regime as another means for paying for this.
The Spectre of Nationalisation
Nationalisation may also be back on the political agenda as governments first turn towards companies in need of public funding but may then be tempted to nationalise otherwise profitable businesses and industries to support the high levels of public expenditure. Where large parts of the electorate feel vulnerable to the economic downturn, such actions will find widespread public support. Of course, instead of the path to economic recovery, this will spell long-term economic disaster, and if the economic consequences spiral out of control, the measures introduced in some countries (especially in less advanced economies) will be virtually indistinguishable from the policies of the old communist bloc.
And even if not full nationalisation, is it beyond the realms of possibility that some countries might expropriate a minority interest in businesses as a means of funding the economic recovery? I see this not only as within the realms of possibility but plausible.
The New World Order
Unfortunately, I am not sure human rights or constitutional arguments will hold sway in the short to medium term but disputes will certainly be played out through the legal system and at first without much success.
Of course, not all countries will go in the same political and economic direction. I cannot see the US, Germany or Switzerland abandon their economic model. Their economies will suffer for sure but their economic and political foundations are strong enough to withstand this earthquake. The UK, however, may be more exposed if the political pendulum swings too much to the old ideological left. Nordic countries will navigate these troubled waters better than most (through a mixture of socialist and capitalist policies), whilst the economies of Southern Europe will struggle. But even the US I think will, in future, champion socialist-style policies across a range of domestic measures, including health care, manufacturing and welfare benefits. China and Russia might see this as an opportunity for major private ownership changes and its political establishment will come out of this stronger than before. In developing countries, the global economic crisis will become fertile ground for domestic ideological conflict or worse.
Is there a Plan B?
So given these potential scenarios, the question is, how are businesses and investors likely to respond?
An option for some wealthy individuals might be to move to another jurisdiction ‘lock stock and barrel’. There is no shortage of available destinations around the world. Whilst businesses comprised of physical assets located in one country cannot move, it might be possible to undertake a reorganisation of asset holdings, for example, through a share for share exchange between two holding companies so that the ultimate ownership sits outside the country. This is not going to stop nationalisation of local businesses nor would there be a tax benefit, but foreign ownership could bring to bear the political voice of a foreign government, especially when it came to the vexing question of compensation. Cash investments can easily move when individuals move abroad and we are therefore likely to see a huge flow of money into jurisdictions perceived to be ‘safe’ (not ‘tax’) havens. This will also be an opportune time to review the governance of ownership structures and ensure they are as robust as possible (in my capacity as a professional non-executive director especially, I have seen the real value of this on many occasions throughout my career).
I can also see large investors look at strategic partnerships as a means of diversifying/mitigating risk and even as protection. This could be as simple as cross shareholdings between businesses in different countries or even businesses seeking to invest in other businesses that they perceive will offer investments more protection, such as insurance companies for example. This is because insurers hold huge investments and assets on their balance sheets in order to pay local policyholder claims; as a strategic partner, insurers may be perceived to offer a higher level of protection than a direct investment would, since hurting policyholders would have political consequences for local governments. We might even see a return of captive insurers with an investment strategy not dissimilar to Warren Buffett, namely invest and buy majority stakes or even the whole ownership of companies.
In an uncertain world, the best strategy might well be to ‘keep it local’, in other words, to minimise dealings outside the jurisdiction of the ownership structure, manage its affairs in the home jurisdiction and use independent local professionals well versed with corporate governance. If ever it was time to invest in professional infrastructure and intellectual capital (instead of the ostentatious display of wealth) it may be now.
There may be one exception in the future – once the preserve of the rich and famous and a wealth symbol in itself, private jets that avoid passenger terminals will likely become the preferred means of air travel on health grounds for anyone willing to pay for it, including world leaders and business executives.
Small is beautiful
With private wealth and large corporates under the spotlight, smaller jurisdictions that offer political stability and policy continuity/certainty should continue to attract inward investment. For example, and whilst certainly not unique in terms of size or business infrastructure, Gibraltar has solid economic and political foundations, a high level of brand recognition with U.K. consumers (for example, 1 in 4 U.K. motor insurance policies are underwritten by Gibraltar insurers) and the jurisdiction is subject to high standards of financial regulation and transparency. But perhaps even more importantly, it has also proved to have an influential voice with successive governments in the U.K. (which could be an important investor consideration) and none of the trappings of luxury of other small territories (which could become an unwelcome signpost in the post-Coronavirus world order). Buying a super-yacht and luxury house with a private berth in Monaco, which has so often been associated with the lifestyle of the super-rich, may no longer sound like such a good idea.
As I finalise this article during lockdown and contemplating the views across the Strait of Gibraltar (Morocco) and Algeciras (Spain), I cannot help thinking that with the lowest levels of Coronavirus infection anywhere in the world, living in the Southern tip of Europe (whilst maintaining direct air links with the U.K.) has an attraction in itself. Long may that continue.
(If you are not part of my existing network please connect and send me your comments. I would love to hear from you).
Nigel Feetham QC
14 April 2020