In this briefing:
- How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?
- Governments and Policies Adapting to Critical Known Unknown
- Costs of and Response to COVID-19
- Covid-19: RBI Has Gone All-Out-Attack
- The RBI Policy Bazooka: A Comprehensive Policy Move to Fight the COVID-19 Pandemic
The main subject of this report is as follows: “How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?” Certainly, COVID-19 will change the way people behave. The longer that COVID-19 lasts and the longer that millions of people are under lockdown, their behaviors will change further, potentially making them into a habit and this would have a tremendous impact on the global economy.
We are specifically interested in this topic because as millions of people around the world undergo “lockdown” for a period of one to three months, this could have an enormous behavior change once this lockdown period ends.
The change in behavior patterns (especially related to consumer spending) in the post COVID-19 world would also have a big impact on whether the global economy/stock market can turn around quickly (such as after the Great Financial Recession in 2008/2009) or whether the turnaround lasts longer (such as after the Internet tech/crash lasting for nearly 3 years from 2000 to 2002).
We argued in Lack of US market & macro volatility both reassuring and troubling that “the market’s willingness to look through domestic political and geopolitical events suggests that only a significant exogenous or endogenous shock currently beyond markets’ radar screens (an “unknown unknown”) is likely to really move the needle”.
That unknown unknown, a “black swan” event, has turned out to be a global viral pandemic on a scale not seen since the Spanish influenza pandemic of 1918-1919.
The coronavirus outbreak is now three months old but governments, central banks, corporates and households still face a critical known unknown, in our view, namely the total number people who had the coronavirus, acquired immunity and are no longer contagious and who currently carry the coronavirus and are thus potentially infectious.
This includes people who have not been clinically tested – more than 99.9% of the world’s population. We estimate that only 3.3 million people (4 out of every 10,000) have been tested for coronavirus, although testing data are patchy and often released with a lag. The main reason so few people have been tested is the still limited capacity to rapidly and reliably test a very large number of people.
In econometric terms that is a very small sample from which to extrapolate country-wide trends. One implication is that the actual mortality rate may be far smaller than reported.
The high number of tests-per-capita conducted in countries such as South Korea has been posited as an explanation for their relatively low number of coronavirus-related deaths. However, other factors have likely been at play, including the timing of clinical tests, demographics, national health systems’ capacity to treat infected patients and the timing and efficacy of self-isolation and self-distancing policies, including country “lockdowns”.
For now what policy-makers know they don’t know will likely continue to influence country-specific containment plans, as well as domestic measures to support economic growth while ensuring the functioning of financial markets.
As the epicentre of the coronavirus pandemic shifts from Europe to the US and the number of deaths and infection cases reach new highs, the costs of the crisis are beginning to be revealed. In Singapore economic activity contracted in 1Q20 at a faster pace than at the worst point during the GFC while Chinese industrial profits were down 38% in the first two months of the year. Despite this we are cautiously optimistic that Asian economic activity led by China will pick-up in the second half of the year. We are much more worried about advanced economies where policy mis-management threatens to tip the world economy into recession.
The RBI took a gigantic stride to combat the Covid-19 pandemic along with the government, as highlighted by the seventh bi-monthly monetary policy statement 2019-20. The MPC meet outcome had fired from all the possible cylinders, giving a much needed impetus to steady the economy.
After the much needed nation-wide lock-down India announced this Tuesday (Mar 24), and subsequent fiscal stimulus of INR 1,70,000cr for the under-privileged by the Government, today RBI announced a comprehensive monetary and regulatory boost for the economy to help strive through these unprecedented times under the COVID-19 pandemic.
Key Policy Announcements:
- Policy rate (Repo Rate) cut by 75bp to 4.4%
- Reverse Repo Rate cut by 90bp to 4.0% (note that this was cut more than policy rate to discourage excess liquidity being parked with RBI)
- Cash Reserve Ratio (CRR) cut by 100bp to 3.0%
- Mandatory investments of funds raised from RBI’s LTRO (Long-term Repo Operation) auction into corporate bonds to boost liquidity in the bonds market where yields have spiked on the back of panic selling and resultant illiquidity. To allay any mark-to-market concerns, these bond investments will be allowed to be classified as held-to-maturity (HTM).
- Regulatory measures that include three month moratorium on term loans and three month interest deferral on working capital (WC) loans
Overall, the policy package announced by RBI was quite comprehensive and will be positive for the broader Indian economy, thereby helping Indian financials cope through this unprecedented COVID-19 pandemic.