(Apr 9): Five months into the Covid-19 pandemic and there remains much that we do not know about the virus. Every government is grappling with the unknown, from the most powerful nations in the world, including the US and the UK, to the smaller, emerging countries such as ours. As such, policy U-turns are now commonplace.
The World Health Organization (WHO) and the US Centers for Disease Control and Prevention (CDC) have just reversed their previous stance and are now recommending the wearing of masks in public for all. A study in Singapore shows that people who are not yet symptomatic and those who are asymptomatic can unknowingly transmit the virus. Therefore, wearing masks whether one is sick or not would help limit the spread.
Deciding to put the country into lockdown is a very difficult decision to make.
This is no surprise, considering the high economic and social costs. But decisions on when and how to relax those measures are proving to be equally hard. Case in point: Cinemas and entertainment outlets in China briefly reopened only to be ordered shut again. A county of 640,000 people was ordered back into lockdown after new cases were detected.
As we previously articulated, the world is interconnected and, therefore, interdependent. This makes the coronavirus outbreak a global crisis that requires global cooperation to control. Unfortunately, countries are still not working in sync. That makes a quick end to the crisis difficult.
We should brace for the rising probability that at least some degree of restrictive measures will remain in place for far longer than initial expectations. That means a prolonged period of pain.
Last week, Singapore announced its strictest restrictive movements measures yet, including closing schools and places of worship as well as all but essential businesses. The latest measures are a marked escalation — previously, the focus was on widespread testing, contract tracing and quarantine efforts as well as social distancing — and will last a month, starting from April 7. Despite the country’s relative success in containing the outbreak, the number of new cases had spiked in recent weeks. To soften the impact, an additional S$5.1 billion in aid was announced, boosting the total relief package to S$60 billion.
In the US, House Speaker Nancy Pelosi has called for another bill that could exceed US$1 trillion — including more direct payments to the people and loans to small businesses as well as an extension to existing unemployment insurance. This will be on top of the US$2 trillion package — the largest emergency package in the country’s history — that was passed just the previous week.
American economist Paul Krugman made an interesting argument for massive disaster relief spending funded by borrowings in The New York Times recently — and foresees no debt hangover. How?
The US government can borrow at negative real interest rates, thanks in part to its safe-haven status. When there are heightened uncertainties and investors be-come extremely risk-averse, they flock to US Treasury bonds. As long as future GDP growth is consistently greater than interest rates — not difficult, given that the real interest rate is negative — the debt-to-GDP ratio will decline over time and return to a sustainable level of deficits.
There is no question that massive fiscal spending is required to alleviate hardship during this period of near economic standstill. Healthy and well-run businesses must be protected so that measures such as a restriction on movement do not impair the country’s productive capacity and ability to bounce back once the crisis is over.
Governments must, rightly, step in to bridge any temporary liquidity crunch in times of crisis when banks are less willing or unable to lend. Some companies may not qualify for traditional bank loans, owing to a lack of fixed assets as collateral.
These relief loans will ensure that viable businesses stay afloat, job losses are kept to the minimum and the people’s livelihood is not threatened.
In some countries, such as Germany, the UK, Malaysia and Singapore, the government subsidises part of employees’ wages for a three-to-six-month period. Businesses are incentivised to keep workers, especially those with specialised skills, on their payroll if it does not overly tax their cash flows. Others like the US have unemployment benefit schemes to tide households over, to replace the temporary loss of incomes.
Different industries are affected to varying degrees by the restrictive measures imposed. The worst-affected sectors — such as those in the travel and tourism businesses — will require additional aid. For example, the US aid package has allocated US$29 billion in loans for the airline industry. In addition, the government has offered US$25 billion in grants to airlines specifically to cover payroll — notably, though, the money will be in exchange for warrants and equity stakes.
In other words, crisis relief aid must be extended, but it must not be taken as a blank cheque to backstop losses for the private sector.
Businesses take unlimited upside gains during good times. This is the basic tenet of capitalism that all businesses champion.
Therefore, they do not get to turn around and ask that taxpayers swallow the losses during bad times. The private sector cannot be allowed to shift their debts onto government balance sheets.
Any business person worth his or her salt must know that all businesses come with risks, both foreseeable and unforeseeable. There will always be good times and not-so-good times. It is the owner-management’s responsibility to manage such risks.
Profits and cash flow should be accumulated, as reserves against downturns. Balance sheet matters. Owners who choose to overleverage and overexpand to maximise profits must face the consequences of their decisions when things do not go the way they envisioned.
Critically, governments — except for the US, maybe — do not have unlimited resources. Economics dictate that scarce resources must be allocated to the most productive uses. That said, because time is of the essence — the money must reach busi-nesses and the people as soon as possible — some policy instruments would necessarily be blunt.
This means that, sometimes, blanket measures such as automatic loan moratorium for all would also benefit those who are not in dire need or seem to be less deserving. This raises the perception of unfairness. And, in fact, this may well be so in a percentage of the cases. This as a necessary evil, a trade-off, given the urgency of the situation.
While the US can, and should, borrow as much as possible to finance its fiscal spending — when the world insists on giving you free money, you must take it — the same does not apply to the rest of the world.
In fact, emerging markets are particularly vulnerable to the reverse — capital outflows, which is already evident for some with perceived weaker public finances.
Many emerging countries, including Malaysia, are commodity producers and heavily dependent on exports. The global demand slump will compound the impact from the outbreak on their economies.
Emerging-market currencies have been trading lower as investors pull money out in favour of safe haven assets, such as US Treasury. Should any country be forced to default — those that have borrowed heavily in foreign currencies will come under greater pressure — we would not discount the possibility of a cascading effect on the rest of emerging markets. This would not be unlike what happened during the Asian financial crisis in 1997/98.
Even so, Malaysia has unveiled one of the largest relief packages as a percentage of GDP, at 17.8%, worth RM260.2 billion.
Does it need more? Of course it does. But it must be cognisant of the fact that unlike the US, Malaysia does not have the capacity for unlimited borrowings.
Therefore, it must balance between spending enough to protect the economy but not so much that it causes longer-term structural problems — such as those resulting from a falling ringgit, higher interest rates and current account deficit — that will ultimately impair the country’s competitiveness.
Last, but not least, Krugman pointed out a critical difference between the latest round of fiscal spending and that during the global financial crisis — this is disaster relief, not economic stimulus, even though the spending does have some stimulus effect.
And this is what governments need to keep their focus on — making sure money gets into the hands of viable businesses and individuals to preserve productive capacity, jobs and livelihoods. If the crisis drags on, they may need to raise, extend and/or expand wage subsidies, to prevent mass unemployment.
This also means governments must ensure that their limited resources are not used to bail out companies, particularly those that may not even have viable business models to begin with.
This is a health crisis, not a traditional financial crisis or recession. This economic standstill was engineered so that people would stay at home, not go out and spend.
It is not about building infrastructure and boosting aggregate demand.
Economic stimulus will come later — after the outbreak is under control. This will probably be when governments can enforce widespread testing and isolation, and when the world finds a cure and, the endgame, a vaccine.
When it is time to kick-start the economy, a different set of policies and measures will be needed to aggressively create demand. We are not there yet.
Equity markets remain volatile as investors attempt to put a figure to the fallout from the outbreak. But at this point, much is still unclear. Against this backdrop, the Global Portfolio has seen big swings between gains and losses for the past few weeks.
For the week ended April 8, the Global Portfolio was up 5.6%. All the stocks in our portfolio registered gains last week, save for ServiceNow, which closed 3.9% lower. As with the previous weeks, shares in Lennar, Builders FirstSource and The Boeing Co continue to exhibit a high degree of volatility amid heightened uncertainties.
Total portfolio value now stands at -6.6% since inception. By comparison, the benchmark MSCI World Net Return Index is down 5.9% over the same period.
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