Pandemic Support Over Debt Servicing

Chikahisa Sumi is Director of Regional Office for Asia and the Pacific (OAP), International Monetary Fund since 2016. He also headed the Financial Sector Surveillance Group of the Asia and Pacific Department (APD). He led the Future of Asia's Finance project, including the publication of the book 'The Future of Asian Finance' in 2015. He has been the Deputy Vice-Minister of Finance for International Affairs, and Deputy Commissioner of Financial Services Agency in the Japanese Government. This article is based on his views expressed during the 91^st Synergia Virtual Forum where he analysed the World Economic Outlook released by the IMP last month.

As per IMF’s World Economic Outlook released last month, a 4.4 per cent decline in the global economy was envisaged. Recovery was expected not before 2021, but would be nowhere near the pre-pandemic baseline, and would vary from country to country.

The largest variable at present is naturally the pandemic, since there is no end in sight nor its severity clear, given the resurgence in Europe at the moment. Only an effective vaccine holds out hope, albeit with the imposed price of delay.

Besides, the trade tensions between the U.S. and China, and other geopolitical issues, negative shocks could send waves throughout the financial sphere. As the decline in activity is prolonged, there could be more bankruptcies or scarring — a longer-lasting negative impact due to the repeated financial injuries. 

The World Economic Outlook is announced around the time of the annual IMF meeting in mid-October. It does not take into account the second-quarter data that comes right after, since the cut-off date is the end of September. Therefore, any new development since September, including a possible resurgence of the pandemic in Europe, will have a significant impact on the next report update in January. 

POLICY ADVICE

Policy-wise, the IMF’s first suggestion would be to support the health system in each country, rather than unwind monetary support prematurely which should be withdrawn gradually and only after activity picks up. Such a policy would make any new growth sustainable as well and be more inclusive. Next, a plan for medium-term debt sustainability is required to cater for the unprecedented impact on government fiscals by the effects of the pandemic. 

Looking at the industry-wise impact, the service sector has weakened, since tourism falls under this sector. Accommodation and food services have been the mostt hit, followed by arts and entertainment, and then education.

Overall, employment figures across the world have taken a hit, which makes it mandatory for countries to roll out policies to rescue the unemployed millions. On the other side, national conditions have remained accommodative, unlike in the global financial crisis (GFC) of 2007 to 2009, since the Federal Reserve in the U.S. has been very supportive of international liquidity. 

The fiscal responses of advanced economies and emerging economies have been very different, which is one of the reasons why the difference between the pre-pandemic baselines exists among the diverse economies. Some advanced economies have undertaken fiscal support measures amounting to almost 20 per cent of their GDP. However, emerging economies cannot match these figures due to limited budgetary capacity. The situation is even more difficult for low income developing countries.

Private investment has dipped because companies were hit very hard, and profitability has declined. Global liquidity conditions in the pre-pandemic era were comfortable with companies increasing their borrowings. This is no longer feasible, adding to the weakness of the availability of capital with the corporate seIctor. The moratorium on loans to the developing countries would also need to be dealt with in the future.

In April the IMF was optimistic about a recovery in the latter part of 2020. Yet in July, based on the high-frequency data from April to June, it seemed to be much worse. These fluctuations and the unknown effect of the pandemic and timeline for a vaccine have led to a lot of revision of numbers in the IMF.

INFLATION AND FDI

The underlying principle for investments should be “spend all you need to spend, but keep the receipt”. If there is too much emphasis on the effectiveness of easy investments, the delivery can be delayed, which could mean the difference between life and death for a large amount of the population.

As regards the impact of asset price inflation that comes with printing money and spending it, and the competition for FDI on emerging economies, Mr. Sumi said the spillover effect, and the appropriate response would be for countries to look at their respective economic condition when determining monetary policy. It would result in large capital flows into emerging economies which would cause all sorts of problems, including asset price inflation.

A number of new policy sets are available to cope with such a situation. One is the macroprudential policy, which is a more balanced approach to the protection measures for recipients of large capital inflows to counter them. There is also a foreign exchange market intervention. The IMF, on urgings from the ASEAN countries, is studying these policy measures and is considering ways to model an integrated policy framework, which in addition to the traditional macro policy of monetary and fiscal, hopes to come up with sound advice for the recipient countries of policy pressure reactions.

BATTLE SCARS

The most prominent scar on the economy has been bankruptcy. The bankruptcy filing has increased, and the U.S. had adopted the pattern taken during the GFC. However, Germany took a different approach and supported the liquidity of the companies, especially on short and medium terms. So too has the UK. While the economies have been damaged, the government and financial support have kept companies afloat. But this cannot go on forever. Banks could have sizable loan losses in the future. The aftershock to the banking sector globally is projected to touch more than $400 billion.

What is important now is how to get out of the current scenario unscathed, with minimum bruises. The world then has to live with it in the years to come, even after a vaccine has been found. During the GFC, the private sector balance sheet was what suffered, and then gradually, the public sector balance sheet took care of it. This time, the public sector is taking the hit in the first instance in the hope that the private sector balance sheet remains intact, and therefore the scarring to the economy is limited.