AIBC Covid-19 Report – Part 2
The outbreak of Coronavirus Disease 2019 (Covid-19) has disrupted society and the financial markets at a magnitude not seen since The Great Depression. With this catastrophic black swan event straining healthcare systems and crippling business activity, governments and corporations worldwide have scrambled to adapt to the crisis and mitigate its damage. At present, this crisis is also the single most significant event driving developments in the financial markets.
AIBC’s two-part Covid-19 report offers a round-up of the crisis. In Part 1, which can be found here, we discussed the crisis’ origins and its impacts on financial markets and on businesses across diverse industries. This article breaks down the present policy response to the crisis and discusses its potential future trajectories.
As the crisis escalated sharply in recent weeks, policymakers across the world have scrambled to alleviate its impacts on the financial system and the broader economy. Core pillars of the crisis response playbook include:
1. Support for Businesses
As previously covered in part 1 of the AIBC Covid-19 report, companies across the board are facing unprecedented disruption in their core business operations, with many suffering significant losses over this stretch. As such, the financial health and near-term survivability of businesses have increasingly come under question, with a wave of corporate rating downgrades taking place right as corporations most need financing to meet their immediate obligations.
With private investors increasingly hesitant to provide financing, central banks have increasingly stepped in. On March 23, the US Federal Reserve surprised markets with the roll-out of two credit facilities in buying up corporate bonds. Further, on April 10, the bond buying was extended to the debt of “Fallen Angels”, companies whose debt were recently downgraded into junk bond status (e.g. Ford, Macy’s – a junk bond is a bond with a rating of below BBB). This provides critical liquidity injections for companies to tide through this period.
Direct lending for small businesses has also been ramped up. The Federal Reserve’s Main Street Lending Program, poised to be unrolled within the coming weeks, offers a credit pipeline for small and medium enterprises who were in good financial health prior to the crisis. In the execution of this program, policymakers have enlisted financial institutions, such as investment and retail banks, for crucial support in areas such as loan applicant screening and loan deployment.
2. Interest Rate Policy
March saw a series of emergency interest rate cuts by the US Federal Reserve – on March 15, the Fed brought benchmark interest rates to 0% with a full 1% rate cut. This decisive action came as the catastrophic near-term damage on employment, consumer confidence, and business operations became increasingly clear, and the longer-term outlook in crisis resolution remains uncertain. Interest rate policy is amongst the traditional countercyclical policy levers employed in stimulating consumption and business lending, yet the swiftness of policy execution was still stunning.
3. Fiscal policy
In addition to the corporate capital injections outlined above, more conventional fiscal policy levers are also at the heart of most governments’ policy responses in controlling the wider economic fallout. Policy levers like household cash hand-outs, tax freezes, and wage subsidies have been employed to provide immediate alleviation to bridge households and businesses through the significant disruption they are experiencing, while longer-term policies like infrastructure projects are likely to follow in a bid to accelerate the economy’s restart. For instance, in the U.S., Congress has acted swiftly in approving a $2.2trn stimulus package in March, with a significant portion going towards direct monetary support for Americans through cash hand-outs and waivers for expenses such as student loan payments.
Beyond the Financial Sector
The market impact and policy response playbook for the present crisis has often been likened to that of the Global Financial Crisis of 2008-09, the most recent crisis of comparable scale. While both catastrophic events with far-reaching impacts on society and the markets, similarities between the causes and resolution of the two crises are limited. As former PIMCO CEO Mohamed El Erian crisply put it, the financial crisis of 2008-09 was like “massive heart attack that happened suddenly to the financial markets”, where the problem stemmed fundamentally from the financial system and could be put out by decisive financial sector policy action. Today, however, the trigger for the crisis came from beyond the financial system. While executing measures from the 2008-09 crisis response playbook can critically alleviate the near-term impact on the economy, financial system, and businesses, a true resolution to the crisis lies beyond the reach of the financial system. The path towards crisis resolution can only be unlocked through combating the root cause of the problem – the Covid-19 pandemic itself.
Trajectories Towards Crisis Resolution
Experts have stated that a full resolution of the Covid-19 crisis is likely to be drawn-out. Inspiring optimism is the fact that several countries have begun taking initial steps towards restarting economic and social activity – in countries like China, which was at the heart of the crisis during its initial onset, lockdown measures have been loosened and work has largely resumed across most industries. In most countries, however, the situation is poised to get worse before it gets better.
Going forward, the containment, suppression, and hopeful elimination of the Covid-19 virus hinges on two points:
1. Medical Cure / Vaccine
The development of a vaccine remains one of the most promising paths towards a complete elimination of the Covid-19 threat and a reversion to “business as usual”. On this front, the World Health Organisation has stated that a vaccine for Covid-19 may only be available 12 to 18 months for now even with the immense amount of resources presently dedicated worldwide to this effort, with 10-15 years’ worth of meticulous testing compressed into a much-accelerated schedule. Yet the coordinated and resounding global effort on this front inspires cautious optimism – to date, more than 70 countries have joined the WHO’s trial to expedite the creation of effective treatments. Initial progress has been reported – the beginning of April saw 2 vaccines possibly entering the human testing stage. In the past week, data from Chinese pharmaceutical giant Sinovac Biotech indicated that a vaccine it has developed has shown promising effects on Monkeys in an animal trial.
In the meantime, effective medical treatment is an essential part in containing the virus’ damage. An anti-flu drug Avigan is currently being distributed for free by Japan to 20 countries widely affected by Covid-19. Developed by Fujifilm Holdings Corp, the drug has been observed to be effective in combating symptoms of Covid-19’s symptoms, which may help lessen the number of critical cases, and consequently the strain on healthcare systems in affected countries.
2. Herd Immunity
Herd Immunity is defined as the depletion of infections in an unimmunised portion of a population due to the fact that most of the population has been immunised. Therefore, a rise in the proportion of the population immune to Covid-19 – attained either through widespread contraction of the disease or through the development of a vaccine – should progressively curb the overall spread of the virus. Experts have estimated that between 40-70% of the world population must be immune for the rapid spread of Covid-19 to be halted.
However, Herd Immunity achieved through prolonged exposure scientifically resembles more of an inevitable equilibrium than a specific strategic plan. Although the mortality rate of the Covid-19 virus is lower than that of diseases at the heart of past epidemics, such as the Severe Acute Respiratory Syndrome, ‘naturally’ achieving herd immunity will still likely result in a crippling death toll. As a result, many initial proponents of this “strategy”, such as the United Kingdom, have now shifted their stance towards employing practical measures, such as physical lockdown, to slow the virus’ spread.
Should vaccine development and social isolation policies show little progress, however, herd immunity may be the natural conclusion to the pandemic months down the road. This has been the case with Sweden, which has claimed to be reaching herd immunity with infection and death rates multiple times that of their Scandinavian neighbours.
The Covid-19 crisis has taken the world by storm with its stunning global escalation, and is likely to dominate developments in society, the corporate world, and the financial markets for the foreseeable future. With no all-encompassing mitigant to this catastrophic “black swan” event, the path to crisis suppression and recovery would necessitate a combination of policy levers form both within and beyond the financial system.
In the months ahead, AIBC 2020’s research team will look to keep you posted on pertinent developments on the Covid-19 situation, as well as other notable trends and developments surrounding the financial world. Do stay tuned!