Stimulus packages resurface on virus concerns

The impact from the virus outbreak will be quoted as a reason for pre-emptive cuts some time ahead, said Inter-Pacific Securities head of research Pong Teng Siew(inset pic). “These stimulus measures have apparently not reached the limits of what they can do. They will test them until these measures lose their effectiveness.’’

ECONOMIC stimulus is the buzzword now as the impact from the coronavirus epidemic shows no sign of abating but threatens to damage intricate supply chains and possibly cause an economic crisis.

This comes fresh on the heels of a slew of stimulus measures to fight business uncertainty, the contraction in global trade and hit to investment caused by the trade war.

There is no time or space for fatigue but China and the global economy must soldier on, as China, which accounts for a third of the global economy, has become more deeply entrenched in the global economy than it was during the severe acute respiratory syndrome (SARS) 17 years ago.

No doubt there are hopes the worst case scenario will be avoided, and the situation may improve in April to June, but complacency should not set in.

Last Wednesday was the first day that the overall number of new cases in China dropped, but after two days, the number of cases rose again.

More economic stimulus measures should be lined up to fight the coronavirus, but is there a limit to what these can do?

European Central Bank president Christine Lagarde is already warning of few policy options for more monetary stimulus, following a decade of crisis fighting.

The Bank of Thailand cut rates last Wednesday to a new low of 1% from 1.25%; the Philippine central bank cut its policy rate last Thursday by 0.25 percentage point to 3.75%.

The impact from the virus outbreak will be quoted as a reason for pre-emptive cuts some time ahead, said Inter-Pacific Securities head of research Pong Teng Siew.

“These stimulus measures have apparently not reached the limits of what they can do. They will test them until these measures lose their effectiveness.’’

After the interest rate cut, further measures will broaden into fiscal and monetary easing, said Fortress Capital CEO Thomas Yong. “The final outcome will depend on the severity of the epidemic against the speed at which the measures will be introduced, and the size of the stimulus.’’Thailand’s Board of Investment increased corporate tax exemptions for small business and large-scale projects; also granted were tax cuts, easier loan repayment terms and extension of deadline for the filing of personal income tax.

Malaysia is also considering a stimulus package which should be targeted at the hardest hit sectors such as services and tourism-related supporting industries, according to Socio Economic Research Center executive director Lee Heng Guie.

These potentially include, among others, tax relief, relief measures to reduce debts, working funds, cuts in the contribution rates to the Employees Provident Fund and also in levies for foreign workers.

Following an injection of US$174bil into financial markets, China added a further US$21.4bil of funds last Monday to cushion the shock as markets reopened.

After an interest rate cut in the last quarter, the People’s Bank of China (PBoC) lowered rates charged on banks for short-term liquidity.

More cuts are expected on other lending facilities; rates for new loans and medium-term funding will likely be lowered.The PBoC had also cut the amount of cash that banks must hold as reserves, freeing US$115bil in funds to shore up the economy that faces a further slowdown following the earlier impact from the trade war.

Tax breaks are granted to companies involved in containment efforts, while those in affected sectors like transport, restaurants and hotels can carry forward their losses for eight years instead of five.

Among the dire predictions of slowing growth in China, Evercore ISI chairman Ed Hyman sees no economic growth for the first quarter.

China is really slowing and that’s worrying people, Hyman was quoted as saying by CNBC.

Apple, Starbucks, McDonald’s, KFC, Pizza Hut, Ikea, Gap, H&M, Adidas and Uniqlo have temporarily closed stores at select locations.

Luxury brands which derive a third of global spending from China, are badly hit; Burberry and Capri Holdings (the parent company of Michael Kors, Versace and Jimmy Choo) have closed stores.

Car assembly lines in Asia, Europe and the United States could be affected as shortage of components from China together with sagging output, place further pressure on an industry employing eight million people worldwide.

The worry is “not the virus, it’s the trade that matters”, said Hyman, as “people are not going out... not shopping”.

While the US job market and consumer spending remain strong, the US Federal Reserve sees the effects of the epidemic as a current risk.

Downside risks from trade conflicts may have receded; this virus risk, together with “elevated” asset values and high levels of low grade corporate debt, pose a danger to the United States and global economies. Columnist Yap Leng Kuen prays for abatement. The views expressed are the writer’s own.