This article was first published in the May 2020 China edition of
Accounting and Business magazine.

The crisis sparked by the Covid-19 (coronavirus) pandemic has turned out to be far worse than anyone had anticipated, in several ways.

First, it has spread rapidly to the economic powerhouses of the US and Europe, precipitating extreme measures that could trigger a global recession that might crush export demand in Asia. Some forecasters are talking of economic contractions in the US of up to 30%.

Second, and worse still, this downturn could be aggravated by growing financial stresses, judging by what is going on in, for example, the credit markets.

As I explained in last month’s column, the critical objective for policymakers confronting a shock of this nature is to strengthen the shock absorbers in the system and diminish the shock amplifiers. Typically, there are two main channels by which a shock could be amplified. One is when companies lay off workers, causing unemployment to surge, undermining consumer spending and thereby reinforcing the slowdown. The other is when indebted companies default on their loans or when lenders withdraw credit lines. In both scenarios, the companies most at risk are the small and medium-sized enterprises (SMEs).  

In this regard, it is heartening to see the authorities in Asia putting together support schemes that broadly address these considerations. First, virtually every major Asian central bank has cut policy rates as well as injecting much larger amounts of liquidity into the system. Governments have also ramped up fiscal spending, including direct cash transfers to households.

However, at a time when extreme restrictions on social mingling and lockdowns make it difficult for people to spend, other more unconventional measures are needed. Large-scale redundancies must be averted and one way to do this is through direct wage subsidies. Singapore, for example, is providing wage subsidies ranging from 25% to 75% to save jobs and protect livelihoods, while in Thailand, government agencies provide soft loans to companies that retain their workers.

Tax rebates for SMEs are on offer, while rates on goods and services taxes are to be cut. Policymakers could also organise financial institutions to freeze principal repayments and interest payments for a few months. In addition, governments can work with utility companies to reduce electricity costs for SMEs. In South Korea, the government has pledged 50 trillion won (US$40bn – around 2.5% of GDP) to support SMEs and vulnerable industries. Credit flows to SMEs have to be preserved, too, so governments are introducing or expanding risk-sharing schemes.

The Covid-19 crisis is still in its early stages. Given the panic and market failures that tend to erupt during crises of this magnitude, it is incumbent on policymakers to intervene with measures that are swift and targeted. For now, while Asian policymakers have not got everything right, they seem to be on a positive path. Given the scale of the shock hitting us, recession cannot be avoided – but it can be mitigated.

Manu Bhaskaran is CEO at Centennial Asia Advisors.