Need for global cooperation to save the day

Lee Heng Guie SERC

TOUGH as it seems, global cooperation in all forms is needed to help us tide through these difficult times of virus attack.

And that is not just on the financial and economic front; it should also be a coordinated approach in upgrading health systems to control the spread of the virus.

Isolationist approaches are out and all tariffs and other barriers should be reviewed to support the falling volume of trade and consumption spending.

Despite these global efforts, it must be realised that aggressive interest rate cuts and flooding of markets with liquidity may not help much against the onslaught of the coronavirus.

Market sentiment is vacillating from optimism to pessimism as more companies especially airlines issue profit warnings, and banks like HSBC in London and UniCredit in Italy send their staff home.

It is now not just supply but demand shocks that are roiling the global economy.

G7’s pledge

Shrinkage in demand causes revenue to drop, and supply constraints caused by disruptions in supply chains and production shutdown, lead to shortages and price increases.

The G7 group of major economies have pledged to use all appropriate tools to achieve strong, sustainable growth.

How much can they do is the question as the Institute of International Finance warned that global growth could be the weakest at 1%, since the financial crisis.

How does one pit against a virus that kills, while fears of contagion lead to declines in consumption and productivity?

The room to cut rates is narrowing; the Federal Reserve’s surprise emergency cut of 50 basis points or 0.5%, leaves US rates in the range of 1.0% to 1.25%.

Bank of Canada also lowered its overnight rate to 1.25% from 1.75%.

“The Fed may be compelled to go into negative short term rates, if monetary power runs dry, ” said Socio Economic Research Centre executive director Lee Heng Guie.

The European Central Bank’s deposit rate at minus 0.5% is at a record low; Bank of Japan has below zero rates.

Negative rates disadvantage savers who pay the banks to deposit their money.

With markets doubting if central banks can save them from the virus, all we can do is try, as without a coordinated approach, things could be worse.

We are even unsure if the severity of the problem is being under-estimated.

While attempting to boost internal consumption, it is hoped that a combination of monetary easing and fiscal stimulus may provide some help.

More than US$54bil in a mix of cash handouts, tax breaks and transfers have been pledged by the United States, Europe and Asian countries to fight the coronavirus.

Targeted aid is also considered.

But the worry is that an increasingly severe lack of demand may hamper efforts to boost consumption.

That demand gap which is opening up, due to, among other factors, people staying at home and not spending outside, may be almost as big as in 2008 when recession had hit.

Thus, the kind of spending that will be required is probably something beyond most governments, as they have no revenues or reserves to cover.

Fiscal spending

Economies with large fiscal space will be able to weather the storm easier; for example, Singapore has ample room to utilize its fiscal surplus which was at an average of 1.5% of gross domestic product (GDP) between 2016 to 2018, said Malaysian Rating Corp associate director, economic research division, Nor Zahidi Alias.Malaysia has some room for fiscal spending, if necessary, he said, as the amount of debt comprising Malaysian Government Securities, Government Investment Issues and Malaysian Islamic Treasury bills stood at 49% of GDP in 2019, well below the self-imposed ceiling of 55% of GDP.

Knowing the risks to short term growth, moving long term reserves into the system may be a good option, said Areca Capital CEO Danny Wong.

Countries bent on advancing their own interests, have to step in with the rest to ’do something.’

A global recession is a time for cooperation, not isolation, wrote Harvard University Professor of Economics and Public Policy Kenneth Rogoff, in a Project Syndicate column.

As an immediate relief, US tariffs on Chinese imports should be rolled back, opined Rogoff, as that would calm markets and put back some money into the pockets of US consumers.

Healthwise, there should be another co-ordinated effort over borders to deal with the rapid spread of the virus.

We need to keep this virus slowed down health systems around the world are just not ready, said World Health Organisation health emergencies programme executive director Dr Mike Ryan.

A reality check is thus required, and there is no room for complacency in markets, economies and health systems.

Columnist Yap Leng Kuen sees the test of endurance ahead. The views expressed here are the writer’s own.