Nobody ever regrets making fast and decisive adjustments to changing circumstances. In downturns, revenue and cash levels always fall faster than expenses. Moreover, a distinctive feature of enduring companies is the way their leaders and countries leaders react to moments like these. All in all, as with all crises, there are some businesses that stand to benefit. However, many companies in frontline countries are facing challenges as a result of the virus outbreak, including drop-in business activity, supply chain disruptions and curtailment of travel and canceled meetings. The global policy response to challenges:
The WHO and other global health officials have emphasized the significant limitations of closing borders and quarantines as an effective policy response.
The effectiveness in pivoting the healthcare response from quarantines to “maximum containment” and “treatment” is unclear.
Monetary policy has significant limitations to meaningfully mitigate supply chain disruptions.
Financial conditions, which tightened sharply this week, have dislocated from rates markets, and have been largely unresponsive to the 5 declines in global rates to multi-century lows.
Monetary tools tend to be less effective in the presence of elevated uncertainty.
Rate cuts will adversely impact bank sector profitability and households, especially in Europe.
The feedback loops between demand shocks, supply dislocations, and financial risk will require a large and globally coordinated policy response across multiple dimensions. Moreover, that includes liquidity and lending incentives for banks. In addition, supply chain finance, credit support for SMEs and highly impacted industries. Debt moratoriums targeted QE for highly impacted sectors, consumer healthcare relief, and so forth.
With benchmark policy rates so low in developed countries (Fed, ECB, BOJ), and fiscal deficits so high in the US and China, the policy toolkit may be less flexible than in prior recessionary risk periods.
China has started to deploy a targeted fiscal stimulus package. However, with several years of rising fiscal deficits, China’s macro toolkit has become more constrained.
Monetary policy response measures to Coronavirus: 10 bps PBoC rate cut (earlier than expected), RMB 300 bn re-lending facility to encourage bank lending, RMB 200 bn liquidity injection vial MLF, jointly introduced measures from the PBoC, MoF, CBIRC and SAFE to ensure liquidity within system and support medical and pharmaceutical industries, moderate RMB depreciation through 7.0 threshold.
Fiscal stimulus measures thus far have been through targeted programs: RMB80 bn in “Epidemic Prevention Fund”, tariff suspension on materials used directly for epidemic control. Counter-tariff reduction on some US imports to help importers, 50% interest subsidy to firms affected by virus outbreak, 20+ measures to support SMEs. Those include support for factory re-openings, delay utility payments, rent deductions, tax deductions & delays, delays/refunds social security contribution, etc.
Front-loaded local government bond quota, delayed pension, jobless and work-injury insurance payments for companies in Hubei, cut power price by 5% for low energy consuming companies, flexibility for banks to not recognize some new bad loans during the outbreak and ordered not to reduce lending to businesses in impacted provinces.
Fed rate cut to now pricing nearly four cuts by year-end. The market is currently pricing nearly 4 full Fed rate cuts by the end of 2020.