COPING WITH THREE CRISES

Humanity is facing three crises at the same time: a public health crisis, an economic crisis and a financial crisis. Since these three crises are intertwined, to stop any one of them, we must stop the source.

It is clear that the source of all three crises is the Covid-19 global pandemic, in which more than 530,000 people have fallen ill and more than 24,000 people have died.

In order to correctly assess the global economic and investment picture, we have to have a clear picture of the pandemic, and, if possible, correctly project the path of the spread and the containment of the disease.

One way to stop the spread of the virus is to impose strict controls over interactions between people via “social distancing”; this includes banning social gatherings, cancelling all sports and any other events that bring people into contact with each other. This carries a huge economic cost, as it shuts businesses not deemed “essential” and closes borders to travel, in effect shutting down economic activity and putting many workers out of work with no source of income.

As a result, both companies and households are facing a cash crunch. A US Federal Reserve study found that 25% of 2,000 listed American firms will not have enough cash to pay fixed costs if revenue dries up for three months.

Another Fed survey found that one in 10 American adults would be unable to meet an unexpected expense of $400, about two days of average income in the US. People who have cash may start to hang on to it rather than spend.

TARGETED ASSISTANCE

To lessen the hardship on companies and workers, governments must implement targeted interventions in three broad categories: (1) policies to ensure that credit flows smoothly, (2) measures to help companies bear fixed costs, such as rent and tax bills, and (3) measures to protect workers by subsidising wages. The first measure is to prevent a financial crisis, while the latter two are designed to prevent an economic crisis.

Various central banks, especially the Fed, have been supporting liquidity fully. They are reducing interest rates and increasing liquidity through quantitative easing (QE) and intervening in the repurchase market, as well as purchasing commercial paper from the private sector.

The Fed’s latest moves on March 20 and 23, in which it promised to inject liquidity into money-market mutual funds, including short-term municipal debt, as well as provide unlimited liquidity from its bond-buying programme, bolstered investor confidence, at least for the short run.

Many other governments are also helping firms with their costs. Singapore plans corporate-tax breaks and rental and tax rebates for commercial property. South Korea will give cash to small firms struggling to pay wages. Italy will offer tax credits to firms that experience a 25% drop in turnover.

In Thailand, the cabinet on March 24 approved stimulus measures worth at least 117 billion baht. They include cash handouts worth 45 billion baht for 3 million workers outside the social security system, who will also be offered soft loans worth 60 billion baht as well as tax breaks.

Globally, governments plan to inject around $5 trillion in fiscal stimulus, or 5.7% of global GDP. The US and Germany will be the biggest spenders, with more than 10% of GDP of each country.

THREE SCENARIOS

However, as long as Covid-19 continues to spread, it will affect the economy on both the supply and demand sides, as social distancing curtails overall activity. In our base case, the global spread will continue until May, when social distancing coupled with warmer temperatures should help stop the spread.

In this situation, global economic growth would inch up by 1.1% for the year. The economies of Europe and Japan would experience a mild recession from the postponement of the Olympics in Japan and factory closures in Europe.

Thailand’s economic growth would be zero, while China’s economy would grow by 5% assuming no second round of Covid-19. US economic growth would be a low 1.1%.

In the moderate and worst-case scenarios, the virus will spread until July and December, respectively. In the moderate case, the world economy would shrink by 0.2% and the economies of Europe and Japan by even more. Thailand’s economy would contract by 1.2%. China would grow by 4.6%, while the US economy would contract by 0.2%.

In the worst-case scenario governments would be forced to enforce social distancing on an on-and-off basis. The global economy will enter into a recession as severe as was seen in 2008-09. The economies of Japan and Europe could contract by as much as 7-10%.

The Thai economy would contract by 4%, worse than during the global financial crisis but still better than during the Asian financial crisis of 1997-98. US growth would be minus 2%, the same degree as in 2008-09.

Given the grim global economic backdrop, we therefore advise shortterm investors to adopt a wait-and-see approach, postponing investment in risky assets and increasing cash holding. Long-term or value investors who choose to buy the dip can begin to accumulate stocks of companies with good fundamentals that can withstand the tough times ahead.

In addition, we still recommend investing in REITs, infrastructure funds and gold to diversify the risk of low interest rates for longer as well.