The United Nations (UN) reports that according to the World Bank’s Global Economic Prospects released in January 2021, the global economy shrank by 4.3 percent in 2020 due to the Covid-19 pandemic. The Conversation cites data from the International Labour Organization (ILO) that there were 114 million job losses around the world in 2020.
The UN cites the World Bank’s forecast that the global economy will grow by four percent in 2021. The World Economic Forum‘s prediction is 5.6 percent. The Organisation for Economic Co-operation and Development (OECD) expects a 5.8 percent global economic growth. As of March 23, the International Monetary Fund (IMF) projection was at six percent.
Uneven Economic Recovery
The OECD highlights, however, that economic recovery will be uneven across countries. The U.S. and Korea will be reverting to pre-pandemic levels after only about 18 months, Japan in about 21 months, and Germany by the end of 2021. In many areas of Europe, the expectation is almost three years while it will take three to five years in Mexico, Saudi Arabia, and South Africa. In Argentina, it will take six years or more.
According to Nikkei Asia, several waves of Covid-19 infections derailed the economic recovery of Southeast Asia. Vietnam, Singapore, Malaysia, Indonesia, Thailand, and the Philippines all experienced the greatest dip in their gross domestic product (GDP) in the second quarter of 2020 when the pandemic first hit.
In the first quarter of 2021, four of the six countries are still below their pre-pandemic GDPs. The Philippines had the greatest loss at -4.2 percent, followed by Thailand at -2.6 percent, Indonesia at -0.7 percent, and Malaysia at -0.5 percent. On the other hand, Singapore gained 0.2 percent and Vietnam gained 4.5 percent. According to economist Sung Eun Jung of Oxford Economics, Singapore and Vietnam were able to better contain domestic outbreaks of Covid-19. Singapore has tightened restrictions again from May 16 until June 13 because of a Covid-19 cluster in Changi Airport.
Reviving the Market
Markets in developing countries must be able to recover from the pandemic crisis, and financial institutions from developed countries can do much to help. Even as physical stores closed down during the pandemic, small businesses and individuals resorted to putting up online businesses for retail and food. Many more could have joined this online economy if they had the capital to do so. There are, however, limited borrowing opportunities.
According to the Asian Development Bank’s Development Asia, giving people access to credit enables them to invest in a business and this can potentially decrease social inequality by driving economic growth. Commercial banks and other financial institutions, however, usually do not lend money to small businesses, women, and the poor because they have no credit history and formal customer data. These groups are, therefore, excluded from participating in economic activity. Some of them become vulnerable to unscrupulous lenders who exploit them.
Alternative Risk Assessment
Development Asia cites alternative credit scoring as another way for banks and financial institutions, as well as other lenders, to assess credit risk. Even for people who have not used the banking system, this alternative risk assessment is applicable. It uses artificial intelligence (AI) and machine learning to process data from telecommunication companies and digital platforms, such as the person’s identity verification, demographics, mobile and data usage, bills payment history, mobile money usage, social media usage, and geolocation. This combines with other data such as payment of utilities, e-commerce spending, insurance payments, travel pattern, government transactions, and asset holdings. AI can also use the data to map the person’s habits and preferences.
According to Development Asia, insight from alternative risk assessment and automated decisions will decrease processing time by 80 percent and improve credit approval rates in banks and other financial institutions. This will result in a 15 percent increase in sales. Better exposure management will, in turn, decrease bad debt by five percent. Moreover, traditional credit scores use about eight to 10 variables while alternative risk assessment can use over 500 data points, making a more comprehensive evaluation.
Among 4.6 billion people in Asia, only an estimated one billion or less than 25 percent can access formal credit. On the other hand, according to 2019 data from the Pew Research Center, 83 percent of adults in emerging companies own a mobile phone and 45 percent own a smartphone. According to the Digital 2021 report of We Are Social, people in several developing countries spend a great amount of time online. Filipinos spend almost 11 hours per day on average, while South Africans, Colombians, and Brazilians spend over 10 hours per day on average.
All these people who use mobile phones and spend time online can potentially undergo alternative risk assessment and be within reach of financial lending institutions and their services. This can significantly widen the market and increase the revenues of financial institutions in the developing world. It will also provide an impetus to developing economies as more people can set up small and micro-businesses.