SINGAPORE (May 8): The deep economic malaise brought about by the virus will eventually pass, but the world will never be the same again. The disruption to workplace practices will undoubtedly see long-term changes in business and even workplace practices post-crisis. According to Gareth McIlroy, managing director of Korn Ferry, firms must exercise leadership and engage more with employees to adapt to the post-Covid-19 business environment.
McIlroy was speaking at a webinar entitled “The Economic Shock of Covid-19: How can businesses and communities remain resilient?”. It was held on April 27 and organised by the National University of Singapore’s (NUS) Saw Swee Hock School of Public Health. The seminar was moderated by AmCham CEO Dr Lei Hsien-Hsien. Other speakers were Professor Bert Hofman, director of the East Asian Institute, and Dr Taimur Baig, managing director and chief economist of DBS.
Surveying the present state of the world economy, Baig notes that the pandemic was merely the spark that exposed and heightened underlying global economic weakness. Despite high asset values in the lead-up to the pandemic, investor bullishness was not congruent with low growth rates, rising debt levels and growing protectionism exacerbated by US policies under President Donald Trump.
“The shock has hurt emerging markets (EMs) more than the headline-grabbing numbers and narratives that we see in the developed markets. In fact, for most EMs, the financial contagion from the Covid-19 crisis was the first crisis: even before they began reporting pandemic-related issues and statistics, [they] all got slammed by extremely large capital outflow,” says Baig, who predicted the worst-ever year for EM capital flows.
Baig’s grim prognosis of US$400 billion to US$500 billion ($565.4 billion to $706.8 billion) in capital outflows was echoed by Hofman, who notes that the International Monetary Fund (IMF) is predicting a 3% contraction for the world economy in the best-case scenario. This is a massive 6% shock to global GDP worth US$6 trillion visa-vis the mere 1.5% decline during the Global Financial Crisis (GFC) in 2008-2009. The aftershocks could drag on for one to 1½ years until a vaccine is developed.
Hofman notes that policymakers have moved quickly, and dug deeply. Within two weeks after the World Health Organization (WHO) declared a global pandemic, G-20 members pledged US$5 trillion, or 10% of their GDP, to combat the economic shock. This spending has caused fiscal deficit levels around the world, from below 4% last year to 10% this year. In contrast, it took six months for the G-20 to develop a coordinated response to the GFC.
Recovery, however, will be neither quick nor easy. “Businesses and investors should realise that a solution is basically there, but that the path towards that solution may not be smooth. There ... will be some setbacks along the way. Even if you open up the economy, there may be additional measures along the line that may restrict it a little bit. So it won’t be [such that] we will wake up one day and everything will be back to normal,” Hofman warns.
Hanging in there
For Southeast Asia specifically, Baig notes that while there may be some general redirection of trade, investment and capital flows to the region from China, the region’s diversity means that countries will feel the economic impact of the virus differently.
Malaysia is the most vulnerable economy in Southeast Asia as it relies heavily on electronics as well as oil and gas exports, both of which have been significantly affected by the Covid-19 shock, Baig warns. Kuala Lumpur has also passed the most ambitious fiscal stimulus in the region. This could result in greater macro- and micro-risks going forward.
The crisis has significantly pressured Malaysia’s highly leveraged government finances, which stand at 52.5% of GDP as of 2019. Malaysia is still recovering from the negative ramifications of the 1MDB scandal, which saw the country incur RM50.5 billion ($16.4 billion) worth of debt, of which only RM13.9 billion has been paid to date. It has also struggled with capital outflows, especially during periods of financial strain.
EMs will have to weigh the trade-offs between the economy and health security, notes Baig. While developed countries like Singapore have been able to tap their deep reserves to offset the economic slowdown brought on by safe-distancing measures, developing countries like Indonesia and Vietnam are struggling to balance “lives and livelihood” without the luxury of deep pockets.
Achmad Sukarsono, a senior analyst at political risk consultancy Control Risks, agrees that governments around the world need to choose between economic performance and public health. “The ones that choose the latter can flatten the curve, while those that are half-hearted or fearful of economic consequences usually cannot slow the spread,” Sukarsono told Bloomberg.
In contrast, Hofman notes that China appears to be in a stronger position as it emerges from lockdown to restart portions of its economy. Beijing, he added, has been reticent to unleash fiscal stimulus into the domestic economy immediately, leaving it with reserves of dry powder to pursue more aggressive domestic investments in the coming months.
Hofman warns, however, that China’s overseas investments are likely to slow down in the coming years, though they are unlikely to disappear entirely. With money spent on reviving the domestic economy, China, however deep-pocketed it is, may have less to spend on signature programmes like the Belt and Road Initiative, meaning that the early 2020s will likely be years of consolidation rather than expansion for China’s global economic ambitions.
The human cost of contagion
Financial uncertainty aside, governments will also have to grapple with rising unemployment. The US Congressional Budget Office expects unemployment to surge to 16% in 3QFY2020 following a record number of unemployment benefit claims; unemployment in Singapore could double from its usual rate of 2-3% to as high as 4-5% in 2020.
Baig and Hofman say countries that adopt wage subsidy measures, such as Singapore and Denmark, have tended to experience faster recovery than countries that rely on unemployment benefits like the US. This was echoed by Nobel laureate Joseph Stiglitz, who argued at another webinar that such policies were simpler, cheaper and more thorough than the complex and poorly-designed policies that the Trump administration has implemented.
“Many firms did not trust the [US] government’s promise of loan forgiveness. There was a worry that in the end, they would find some pecuniary reason such as a violation of some minor provision so that, in fact, small businesses would not have their loans forgiven,” says Stiglitz, who teaches at Columbia University. He also notes that large firms tended to benefit disproportionately from these measures than more vulnerable small businesses.
Baig of DBS remarks, however, that banks also have a part to play in providing financial relief to clients struggling with obtaining finance. By and large, compared to the 2008-2009 GFC, banks are not part of the problems in this current crisis. Nevertheless, they need to become part of the solution. “[Banks] have built up stronger capital buffers than what they had in 2008-2009 and now they have to deploy that capital. Central banks around the world are using the financial sector very proactively to target the needy and channel the credit to them,” says Baig. Advances in fintech, he says, have helped banks reach people more easily to provide them with the credit necessary to tide over Covid-19.
Enter the ‘New Normal’
Besides lingering economic malaise, Covid-19 has caused significant changes in workplace practices as firms scramble to sustain workplace operations through the implementation of tough safe-distancing measures. McIlory says that firms will have to learn how to manage these changes not only to survive through Covid-19, but also to operate effectively in a future workplace born prematurely from the birth pangs of the pandemic.
“Short-term performance has tended to trump [long-term digital] transformation ... Covid-19 is doing more to drive transformation than all of the [transformation and cultural officer] roles that have been created [to transform business practices] in the recent past,” says McIlroy, who has 23 years of leadership consulting experience. “Transformation has become more than a theoretical idea or a nice-to-have when we are less busy ... Transformation is now a necessity.”
One key change will be the increasing prevalence of work from home (WFH) measures. Though Singapore employers have previously resisted such policies based on the belief that it would tempt employees to slack off, the onset of the pandemic has forced firms to rethink that assumption as the workforce grows used to WFH and its numerous benefits in terms of productivity and work-life balance.
McIlroy highlights, however, that firms will need to show leadership and better communicate with their employees for WFH to succeed. Workers may feel disengaged from their colleagues, and thus have less incentive to stay relevant to their work amid anxiety and stress arising from extended confinement and wider global uncertainty. He recommends that leaders engage employees more actively to keep them motivated.
“Companies need to check in with their employees to investigate what’s working and what’s not,” says the Korn Ferry managing director, who anticipates that WFH arrangements could actually see productivity increase among some workers due to greater work-hour flexibility.
Mcllory also predicts significant changes in real estate. “The CEO of Morgan Stanley has just said he doesn’t need a footprint to run his organisation. I think we will see more and more of [companies shifting] costs from expensive real estate and big cities [to those where] people can work much more remotely ... I do not think we will be back the way we were before on 1 January,” he says.
United we stand
Baig also sees the potential for significant supply chain redirection going forward as countries move to increase supply chain security. He predicts that the warehouse logistics industry, which includes firms like Mapletree Logistics Trust and Cache Logistics Trust, could see a post-Covid-19 boost as governments increasingly consider it prudent to stockpile food for longer periods to ensure food security in case of future disruption.
Baig, citing Nassim Taleb, author of The Black Swan and Anti-Fragile, says that to avoid fragility, one must accept some level of inefficiency. “India has long been criticised for its inefficient practice of maintaining food stocks for long periods of time, but that policy seems to have paid off now while more typical efficiency-driven supply chains were caught out,” he says.
Despite the dark clouds of great power rivalry and growing global insularity post-crisis, Baig is optimistic that the crisis would help the international community better appreciate the importance of global cooperation to coordinate solutions to global problems. The US and China, he said, would both have to recover together for the world economy to recover conclusively. “A crisis like this galvanises us to realise that borders are artificial and arbitrary — viruses don’t know that — and we all have to hold each other’s hands and deal with it as a collective,” he reflects.
McIlroy calls on traditional industry competitors to collaborate on common solutions to their collective business difficulties. Organisations cannot afford to become isolationist and focus purely on their clients and their own bottom lines. “The focus needs to very quickly shift to ‘what is needed for our clients?’, and collectively with our historical competitors to, ‘what do we need to do to look at our business in a different way together so we can serve our clients?’ ” he says.
This is a line Baig concurs with. “If even a single country is left fighting this battle, nobody would have won this battle conclusively,” he says.
