Business24 Newspaper 3rd February, 2021 by Business24 Online

WEDNESDAY FEBRUARY 3, 2021

BUSINESS24.COM.GH

WEDNESDAY FEBRUARY 3, 2021

NO. B24 / 154 | NEWS FOR BUSINESS LEADERS

Covid resurgence threatens fiscal stability, BoG warns

Airports Company gets tough with new Covid measures

irlines that board, transport and disembark passengers without the requisite PCR test results or with positive test results into the country will be fined US$3,500 per passenger as part of new measures from the Ghana Airports Company to curtail the importation of the virus into the country. Cont’d on page 3

‘AfCFTA represents path to Africa we want’ By Eugene Davis ugendavis@gmail.com

Ken Ofori-Atta’s plan of achieving fiscal stability hangs in the balance following the new wave

By Nii Annerquaye Abbey annerquaye@gmail.com

he Bank of Ghana (BoG) has said the prospects of government achieving a faster fiscal deficit reduction have been made more difficult following the recent surge in Covid-19 cases, which requires

further unbudgeted expenses. According to the BoG, the fiscal deficit stood at 10.8 percent of GDP as of November 2020—a figure which could rise to about 15 percent if the cost of energy and financial sector reforms is included. Ken Ofori-Atta, the Finance Minister-designate, told

ECONOMIC INDICATORS EXCHANGE RATE (INT. RATE)

POLICY RATE

14.5% 14.77%

OVERALL FISCAL DEFICIT

11.4% OF GDP

AVERAGE PETROL & DIESEL PRICE:

4.2% GHC 5.13

Cont’d on page 2 INTERNATIONAL MARKET

US$1 = GHC 5.7606

GHANA REFERENCE RATE PROJECTED GDP GROWTH RATE

Parliament last November that government intends to mobilise more revenue and rationalise expenditure in an effort to reduce the deficit to 8.3 percent of GDP, instead of the 9.6 percent target he had set in the 2020 mid-year budget.

he immediate past president of the Liberia Chamber of Commerce, Judson Wendell Addy, has urged the continent to work towards establishing an enabling environment that will help foster the objectives of the African Continental Free Trade Area (AfCFTA).

BRENT CRUDE $/BARREL NATURAL GAS $/MILLION BTUS GOLD $/TROY OUNCE

Cont’d on page 3 Follow us online:

$57.79 $2.6801,922.57 $1,836.62

CORN $/BUSHEL

$543.75

COCOA $/METRIC TON

$123.55

COFFEE $/POUND:

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Editorial / News

WEDNESDAY FEBRUARY 3, 2021

Editorial

Protect our front liners, Mr. President

he destruction we are witnessing to the global economy has never before been witnessed since the days of the second world war. Unlike the first and second world wars, there is a common enemy that the entire world is out to fight. So far, the global death toll is in excess of two million people – a figure which seems to be increasing at a rather astonishing rate. When the pandemic broke out, eyebrows were raised regarding why Africa with its fragile health system has been spared by the scourge devouring other wealthy nations. The puzzle left experts confused but it appears the continent had not escaped the pandemic by any divine design. The second wave

of the pandemic is catching up with Africa and Ghana, just like many other countries south of the Sahara is getting overwhelmed with death numbers racking up. Just like we have witnessed in order parts of the world, people most at risk of suffering the devastating consequences of the virus are the health workers – the front liners. It was therefore a great joy when at the onset of the pandemic the government sought to incentivise them in acknowledgment of the role they play. But as the pandemic raged on these front liners, it appears to have been left to their fate. There are several reports of health workers who have contracted the disease and died in the line of duty. This situation is worrying

considering the human resources we are losing to this fight. There is no denying that the country may not have the best of facilities, which in itself is a shame, but to neglect these poor workers without a regular supply of PPEs is troubling. If the government does not take steps to stem the tide or offer better remuneration to these health sector workers, it would be impossible to count on these front liners when the pandemic hits home. Mr. President, much as you have shown leadership in these times, we ask you to keep in mind these front liners and reward their efforts while you ensure they don’t lack PPEs. Our lives depend on them, sir.

Covid resurgence threatens fiscal stability, BoG warns Continued from cover

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Mr. Ofori-Atta believed that achieving the 8.3 percent of GDP fiscal deficit target in 2021 would help government meet the 5 percent of GDP fiscal deficit rule— set by the Fiscal Responsibility Act—by 2024. But the BoG’s Monetary Policy Committee, having met last week to assess the health of the economy, noted that the recent surge in coronavirus cases is likely to derail the plans to reduce the fiscal deficit this year. “The prospects of a sharp fiscal correction in 2021 now look unlikely amidst the second wave of the pandemic, which will be requiring additional spending to provide testing, vaccines, etc. To put debt on a sustainable path and to ensure sustainability in policies, some new revenue measures and expenditure rationalisation efforts will have to be pursued within the context of the medium-term fiscal framework to allow for the generation of primary surpluses,” the BoG stated after its monetary policy meeting. According to the Ghana Health Service, the country is currently recording more than 700 positive coronavirus cases daily, with the

number of active cases above 5,500 as at February 2. Second wave threats According to the central bank, despite the damage caused to the economy by the pandemic, the second half of 2020 pointed to an improved economic performance. Nevertheless, the bank noted that the renewed threat from the second wave of the pandemic has again heightened uncertainty and could hamper the recovery process in the near term. Already, the government has brought back some of the restrictions adopted at the onset of the pandemic in a bid to contain the virus’ transmission— further prompting concerns over a possible lockdown. Commenting on the banking sector’s preparedness for the second wave, the BoG stated that policy and regulatory reliefs granted to the industry will be reviewed alongside close monitoring and prompt supervisory actions to address emerging potential vulnerabilities in the financial sector. “The banking sector is wellpositioned to continue with the core objective of financial

Dr. Ernest Addison, BoG Governor

intermediation and providing support to the growth recovery process. Banks are expected to sustain the strong performance under mild to moderate stress conditions, barring more severe consequences on the real sector from the second wave of the pandemic,” the bank added. Rate stay The committee voted to maintain the policy rate at 14.5 percent—the fifth consecutive time since the virus necessitated a 150-basis-point reduction in March 2020. The bank explained that its decision to keep the rate unchanged reflects the risks to inflation emanating from fiscal expansion as well as rising crude oil prices. Inflation, which peaked at 14 percent in August 2020, closed the year at 10.4 percent, slightly above the 10 percent maximum target set by the bank.

WEDNESDAY FEBRUARY 3, 2021

Airports Company gets tough with new Covid measures Continued from cover Also, for boarding passengers who are either without proof of payment for the Covid-19 test or could not pay for the test in Ghana, the airlines will face a similar fine of US$3,500 per passenger. In addition to the fine, nonGhanaians on such flights may be refused entry and returned to the point of embarkation at a cost to the airline whilst Ghanaians will be allowed entry but subject to a 14-day mandatory quarantine. These are part of a raft of measures introduced by the country’s airports operator in its updated Covid-19 measures at the Kotoka International Airport for all arriving and departing passengers, including those from the ECOWAS region effective February 8, 2021.

“Passengers transiting and transferring through Accra will not be required to take the Covid test in Accra but will be required to adhere to testing requirements for the destination countries,” the statement from the GACL

indicated. Airline crew are exempted from the pre-departure and arrival COVID-19 testing but they must the carrier’s policy for testing, as per the new measures. Other exemptions to the

testing rule are children under age five, who will not be required to undergo testing on arrival and passengers who arrive under emergency circumstances such as diverted flights—as long as they don’t leave the airport or remain in isolation in their hotel. Children between the ages of 5-12 years are however required to pay the revised US$50 for testing. The Kotoka International Airport was reopened to flights in May 2020 after it was shut down in the wake of the pandemic. Initial measures that were introduced and enforced to prioritise the health and safety of passengers and staff included temperature checks, the mandatory wearing of nose masks and social distancing protocols both at the terminal and onboard aircraft. The reopening of the airport was after an extensive disinfection exercise by the government.

‘AfCFTA represents path to Africa we want’ Continued from cover According to him, African leaders will have to demonstrate political will to be able to achieve integration for the economic development and transformation of the continent. He was speaking at a virtual Master Class programme organised by Wealth Masters Group, based in the UK. “AfCFTA is the path to the Africa we want, so we have to put in all the enablers to have it function. We need to encourage our political leaders to give us the reforms that we need,” he said. “We have to address unrest, policies that should be common across the border, currency issues, banking and transactions. There is a whole range of things that have to be addressed to serve the role of trade integration.” Maxwell Amo-Hoyte, of the Association of African Universities, cautioned that the continent needs to build competence in order to fully take advantage of the initiative, else

the Western powers will benefit more. “Inasmuch as we want to have a common market, if we don’t position ourselves well, it is our former masters who are going to benefit more.” The Programmes Manager for the Pan African Chamber of Commerce, Wincate Muthini, stated that stakeholders need to come together by way of synergies, connections and networks that can forge the continent ahead for the next five years. She added that inasmuch as people are excited about the AfCFTA, concrete foundations have to be laid for the future, since all the objectives cannot be attained within one year. Trading under AfCFTA commenced on January 1, and Ghana has already freighted its first cargo under the arrangement. As a continental common market, AfCFTA’s objective is to facilitate the movement of goods, services and persons, and promote industrial development and sustainable and inclusive

socio-economic growth in Africa. It is estimated that the single African market will increase intra-Africa trade by as much as

US$35bn dollars per annum, by harnessing the purchasing power of the continent’s 1.2 billion people.

WEDNESDAY FEBRUARY 3, 2021

News

WEDNESDAY FEBRUARY 3, 2021

Business confidence back to pre-Covid levels – BoG survey By Joshua Worlasi Amlanu macjosh1922@gmail.com

he Bank of Ghana (BoG) says its latest business confidence survey has shown significant improvement in business sentiments, driven by improved prospects and continuous recovery in demand for goods and services. The central bank’s business confidence index conducted December 2020, which gauges the level of optimism among business managers, improved from 94.4 in October to 101.1 in December. In a press statement issued after the MPC meeting, the press on Movernor Ernest Addison noted that confidence has reached pre-lockdown levels, for the first time, as businesses met short-term company targets and expressed positive sentiments about growth prospects. According to the BoG, consumer confidence has also risen above pre-lockdown

levels, supported by rebounding economic activity following the gradual relaxation of Covid-19 restrictions. However, it remains unclear how the confidence of both the business sector and consumers would turn out, in the face of the second wave of the coronavirus pandemic.

Meanwhile, after contracting in March–May, the BoG’s real Composite Index of Economic Activity (CIEA) recorded an annual growth of 11.9 percent in November compared with 3.4 percent a year ago. The central bank noted that the key drivers of economic activity during the period were

construction, port activity, imports, manufacturing, and credit to the private sector. However, Dr. Addison expressed the renewed threat from the second-wave of the pandemic has again heightened uncertainty and could hamper the recovery process in the nearterm.

John Kumah wants law on crowdfunding passed By Eugene Davis ugendavis@gmail.com

he Member of Parliament for Ejisu in the Ashanti Region, John Ampontuah Kumah is urging Parliament to establish a legal framework for crowdfunding in order to support companies seeking capital for expansion. Presenting a statement in Parliament on “Youth Unemployment and Job Creation through the Private Sector,” Mr. Kumah who is the immediate past CEO of the National Entrepreneurship and Innovation Programme (NEIP) maintained that government must endeavour to create more jobs as well as establish the appropriate environment for businesses to flourish. He argued that, to achieve this, the country must chart a new path on job creation in Ghana built on the back of the private sector. One of the means to achieve that is through crowdfunding. In simple terms crowdfunding is when businesses or individuals

raise funds from a large number of people to finance a new business venture or to expand operations. In some instances, individuals get to owe equity in the business they invest in, he noted. Furthermore, he explained that crowdfunding is an advanced form of the very good old “Susu” we know. “As individuals from one community, we sometimes join our resources to start a business. However, this time around thanks to technology,

we benefit from the generosity and goodwill of people we don’t even know”. “I am of the view that we as a country must do more to create an enabling environment for our entrepreneurs to get easy access to funds to fund their businesses. Presently, there is no law in Ghana backing crowdfunding. The absence of this means that the private sector is handicapped when it comes to looking for financial investment,” Mr.

John Kumah wants a law legislating crowdfunding in the country

Kumah added. He called on Parliament to impress upon the Securities and Exchange Commission (SEC), which is working on a framework to regulate crowdfunding in the country, to submit the framework to Parliament. AfCFTA approach Another way to reduce unemployment, he says is to tap into the 1.3 billion consumer market presented by the African Continental Free Trade Area (AfCFTA). “What the AfCFTA does that most small business owners know very little about is it allows them to export their products and services to other parts of the continent where they can generate more revenue which will help in expanding their businesses and subsequently contribute to creating more jobs. With the coming into force of this compact, I entreat small business owners to consider venturing into other parts of the continent. We must seize the numerous benefits of AfCFTA,” he said

WEDNESDAY FEBRUARY 3, 2021

News

WEDNESDAY FEBRUARY 3, 2021

Pfizer expects $15bn sales of Covid-19 vaccine

rugs giant Pfizer has said it expects $15bn (£11bn) of sales this year of the coronavirus vaccine it developed with German firm BioNTech. The vaccine was one of the first to be authorised for use by countries including the UK and the US. The vaccine sales represent a quarter of its expected revenue for this year. Many countries around the world have been scrambling to vaccinate their populations in a bid to save lives and aid economic recovery. Pfizer is trying to deliver two billion doses of the vaccine in 2021 as quickly as possible as countries rush to sign supply deals. In the fourth quarter of last year, the vaccine brought in sales of $154m for Pfizer. Out of the firms rushing to bring vaccines to market, analysts expect at least Pfizer and rival American biotech company Moderna to make billions of dollars this year. There have been concerns that global wrangling over supplies could disrupt delivery schedules. Over the weekend, the

European Union backtracked on a decision to trigger an emergency provision in the Brexit deal that could have prevented shipments entering the UK. The plans had been part of the EU’s new export controls on vaccines to try combat delivery shortfalls. Pfizer has committed to delivering 40 million doses to the UK by the end of the year. On Tuesday, Japan said it would get all of the vaccine doses it had bought from Pfizer and BioNTech after concerns that the EU export controls could have delayed

Japan’s inoculation programme. Japan is trailing most major economies in starting vaccinations, because of its reliance on overseas drugs firms and an insistence that vaccines go through domestic trials. The country plans to start its campaign in mid-February with the Pfizer/BioNTech jab. Pfizer and BioNTech have increased manufacturing capacity to more than two billion doses a year from 1.3 billion to meet demand, BioNTech chief executive Ugur Sahin said on Tuesday.

“Therefore we are confident that we will deliver the doses that we have promised to Japan,” he said. Supply of the vaccine had faced delays in parts of Europe due to changes in manufacturing processes to boost production. But BioNTech said on Monday the firms were back on track to meet their European timeline. To achieve its global goal, Pfizer will have to deliver an average of around 10 million doses per week. BBC

Covid sends US oil giant Exxon into $22bn loss

il giant Exxon Mobil suffered its first annual loss in decades last year as the pandemic prompted energy use to plunge. The firm lost $22.4bn (£16.4bn) as energy prices dropped - at one point falling below zero. The downturn forced the company to make drastic cuts to its workforce and investment plans. Under pressure from activists, Exxon has also said it will expand its focus to more climate-friendly technology. It said it was starting a new business focused on reducing pollution by using carbon emissions capture, a strategy the firm already makes wide use of in its own operations. The firm also said it planned to invest $3bn in “lower emissions solutions” over the next four years. “Last year clearly was an unprecedented event - something that forced dramatic action in the industry and within our company,” Exxon chief executive Darren Woods said. “We changed a lot of things.”

Oil crisis Exxon, which ranked as America’s most valuable public company as recently as 2013, reported a full-year profit of more than $14bn in 2019. But last year’s collapse in energy demand and prices caused by the Covid-19 crisis saw the firm’s revenue drop by more than 30% to $181.5bn. The firm wrote down the value of its shale business by roughly $20bn, took on billions of dollars in debt and slashed spending by roughly $8bn. By 2023, it said additional cuts, including to staff, would reduce costs by an estimated $6bn a year. ‘Poor long-term planning’ Exxon’s financial strains are not unique. Rivals BP and Chevron

also posted annual losses. But Exxon, which has seen its share price slide in recent years, is seen as lagging behind other oil and gas firms in adapting to the pressures caused by climate change. It is the target of environmentalists and activist investors, who have called for an overhaul of its management and changes to strategy. Engine No 1, the activist firm leading the current campaign, said Exxon remained stuck with plans that “position it to succeed only in the absence of a material long-term energy demand shift” and dismissed its focus on carbon capture as “poor long-term planning”. “Today’s patchwork of announcements do not materially

alter ExxonMobil’s long-term trajectory nor do they position it to succeed in a changing world,” the firm said. Exxon leaders defended their plans to analysts on Tuesday, saying they have considered a range of investment strategies depending on whether oil prices now hovering above $50 a barrel - drop back. They also said they saw Exxon’s experience with carbon capture and storage - which reduces greenhouse gases by taking carbon emissions and depositing them underground - as a business opportunity, as governments around the world redouble efforts to fight global warming. “We recognise that carbon capture storage is critical to achieving the ambitions of the Paris Climate Agreement and we’re beginning to see broader recognition of the importance of that,” Mr Woods said. “We felt like... now is the time to bring a more concerted effort in this space.” BBC

WEDNESDAY FEBRUARY 3, 2021

Feature

WEDNESDAY FEBRUARY 3, 2021

The COVID tsunami and Emerging Markets

By Andrés Velasco

tsunami-watcher’s job is thankless. If an earthquake hits Australia, or an underwater volcano erupts near Java, naval stations in Japan, Vietnam, the Philippines, New Zealand, and even far-away Peru and Chile go on alert. Residents of coastal areas are warned that a big wave may be coming. Get it right, and tsunamiwatchers save millions of lives; get it wrong, and they try to ignore the scorn, knowing that next time may be the big one. In 2020, the COVID-19 tsunami was expected to devastate poor and middle-income countries everywhere. The wave did come, and its consequences were painful, but less so than anticipated. Contrary to most forecasts, rich Western Europe and North America have suffered much worse loss of life and economic damage. Former World Bank Chief Economist Pinelopi Koujianou Goldberg and Tristan Reed report a strong positive correlation between income per capita and deaths per million inhabitants. As of late January, deaths per million in the United Kingdom were twice as high as in South Africa, 13 times higher than in India, and approximately 30 times higher than in Bangladesh, Pakistan, Syria and The Gambia. The United States is little different. Countries with more deaths have suffered larger declines in income. The much-feared tradeoff between lives and incomes has failed to materialize; on the contrary, fewer deaths have meant greater economic activity, so per capita incomes dropped by more in richer countries. As a result, the expected tsunami of increased global inequality did not arrive. Within countries, income distribution in all likelihood became more skewed (restaurant workers and taxi drivers lost their jobs, while lawyers and bankers worked from the safety of their homes) but, as the Nobel laureate economist Angus Deaton has shown, the gap between rich and poor countries actually narrowed.

No one is sure why poorer countries have suffered proportionally fewer infections and deaths: weaker health systems, worse nutrition, and larger numbers of people with pre-existing medical conditions suggested the opposite outcome. Some early assessments point to the alleged advantage of warmer weather, but there is little evidence of that. Having younger populations is thought to help, yet that explanation does not explain why health outcomes diverged in countries with similar age distributions (India and Bangladesh, for example, or Nigeria and Zimbabwe). Aging populations may help explain Latin America’s dismal performance. Peru, Mexico, Brazil, Argentina, Panama, and Colombia all have death rates above 1,000 per million inhabitants – among the highest in the world. Snobby Latin Americans who long thought of themselves as misplaced Europeans had their wish fulfilled: the region now resembles Europe not just demographically (particularly in South America), but also in its appalling inability to control the pandemic. So, who are the heroes of this tale? Not the International Monetary Fund and the other multilateral lenders, which once again offered too little, too late. The $250 billion lent by the IMF represents just a quarter of its lending capacity and a pittance compared to what countries needed and to what rich countries spent on pandemic relief for themselves. And former US President Donald Trump’s administration vetoed an expansion of the IMF’s reserve asset, special drawing rights, which would have allowed poorer countries to borrow more. China, the only major economy to record positive growth last year, has propped up demand (and prices) for developing countries’ commodity exports, bolstering these countries’ finances. But China’s role is secondary compared to what the world’s major central banks accomplished.

We knew from the 2007-09 global financial crisis that keeping interest rates low for long is a powerful tool for recovery. Plus, this time around, investors’ search for yield has caused the newly printed money to percolate to remote corners of the world. Markets did experience a tantrum in March and April 2020, withdrawing unprecedented quantities of funds from emerging and frontier economies. But the outflows soon ceased (and sometimes were reversed). Investors had nowhere else to go. This set the stage for the real paladins of this tale: the macroeconomic authorities in many emerging and developing countries. A dozen years ago, few had the monetary and fiscal space to mount a robust response to the crisis. During the COVID-19 episode, by contrast, central banks and finance ministries took advantage of ultra-low world interest rates and created policy space where none was thought to exist. Central bankers in countries like Chile, Colombia, Hungary, India, the Philippines, Poland, and Thailand engaged not just in interest-rate cutting but also in quantitative easing and localcurrency asset purchases – not as large as those carried out by their rich-country counterparts, but large enough to make a difference, reducing funding costs and easing market strains. The prevalence of flexible exchange rates also helped, allowing the local currency to depreciate when adjustment to external shocks required it. The fiscal response has been much more robust as well. The October 2020 IMF Fiscal Monitor reports that in Brazil, Chile, Peru, Poland, South Africa, and Thailand, measures involving additional spending and forgone revenue reached more than 5% of GDP. Other countries mounting a sizeable fiscal effort include Argentina, Bulgaria, Colombia, China, Indonesia, and Romania. The 2020 economic contraction in the non-rich world will end up being much smaller than was once feared. In the January 2021

update to its World Economic Outlook, the IMF estimates that the GDP drop was nearly 5% in advanced economies, and only half of that in emerging and developing economies, where the 2021 recovery will be faster as well. Even in Latin America, where public-health conditions and lockdowns help explain a whopping 7.4% contraction in output, the number is less dismal than the 10% drop expected just a few months ago. How long can this last, and how fragile will the underlying macroeconomic situation turn out to be? Consider Brazil. The good news is that a vigorous fiscal and monetary response has contained the recession and job destruction. The bad news is that public debt will soon reach 100% of GDP. Debt has already hit that level in the US and UK, but the yield curve in those countries is flat, allowing governments to borrow at recordlow rates for long maturities. In Brazil, by contrast, the yield curve is one of the world’s steepest, pushing the government into borrowing at ever-shorter maturities. Granted, Brazil’s debt is mostly in domestic currency. Still, conditions are building toward a run on Brazilian debt. No one can be sure whether such a panic will occur. But more than a few tsunami watchers are again sounding the alarm – and not just in Brazil. About the author

Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities.

WEDNESDAY FEBRUARY 3, 2021

Feature

WEDNESDAY FEBRUARY 3, 2021

Financial perils in check for now, eyes turn to risk of market correction hurt economic activity in many countries. Yet investors appear optimistic about growth prospects in 2021, confident that policymakers will backstop financial markets along the path to recovery.

By Tobias Adrian & Fabio Natalucci

“

The vaccines are here!”—the cry heard and welcomed the world over—has boosted hopes of a global economic recovery in 2021. Yet until vaccines are widely available, the market rally and the economic recovery rest on continued monetary and fiscal policy support. While there is for now no alternative to continued monetary policy support, there are legitimate concerns around excessive risk-taking and market exuberance. Financial stability risks have been in check so far, but we cannot take this for granted. Prices for stocks, corporate bonds, and other risk assets have risen higher on the news of vaccine rollouts. Financial markets have shrugged off rising COVID-19 cases, betting that continued policy support will offset any bad economic news in the short term and provide a bridge to the future. As the apparent disconnect between exuberant financial markets and the still-lagging economic recovery persists, it raises the specter of a possible market correction should investors reassess the economic outlook or the extent and duration of policy backstop. Unwavering faith Reflecting unprecedented policy support, financial conditions have eased significantly last year, reversing the sharp tightening experienced during the March 2020 turmoil in most countries, thus supporting economic growth.

Bifurcated reality

Despite rising COVID-19 cases, the stock prices of firms in sectors like airlines, hotel chains, and consumer services have rebounded as investors continue to move into these previously battered segments in search of good bargains. In advanced economies, credit spreads—the difference between yields on corporate bonds and comparable-maturity Treasury securities—have narrowed sharply both for higher- and lower-rated firms, close to or below levels that prevailed before COVID-19. Interest rates have reached record lows, lowering funding costs for firms, but also incentivizing investors to take on more risk as they search for higher returns on their investments. Emerging-market countries and corporations have also benefited from the buoyant market sentiment, issuing bonds at record-high levels in 2020. Here too the difference between the yields on the sovereign and corporate debt of emergingmarkets and U.S. Treasury securities has contracted sharply. And foreign investment in emergingmarket financial assets (equities and bonds) has rebounded, providing more options for financing large debt-rollover needs in 2021. The surge of COVID-19 infections and the associated public health restrictions imposed by governments since late 2020 may

V a r i o u s analysts and i n v e s t o r s continue to raise concerns that the true value of risk assets like stocks and corporate bonds seems out of line with market value. For example, they point to misalignments between (very high) equity market prices and valuations implied by (still weak) economic fundamentals, especially when considering the sizable economic uncertainties. Other market participants, however, note that current market valuations can be explained after accounting for the “lower-for-longer” interest-rate environment. As justification for the equity market rally, they point to expectations of very low interest rates for the foreseeable future (despite the most recent rise in long-term rates in the United States) and to upward revisions in corporate earnings expectations since the vaccine announcements. They also mention the still relatively high volatility in equity markets as measured by the S&P500 VIX—a barometer of market sentiment— which one could expect to be lower if investors were indeed exuberant. Similar considerations about policy support have been made for credit markets. Policy support remains crucial Policymakers should safeguard the progress made so far and build on the rollout of vaccines to return to sustainable growth by preserving monetary policy accommodation, ensuring liquidity support to households and firms, and keeping financial risks at bay. Reducing or withdrawing support at this stage could jeopardize the global economic recovery. Exuberance and Complacency—

how serious is the risk of a market correction? While there is for now no alternative to continued monetary policy support, there are legitimate concerns around excessive risk-taking and market exuberance. This situation creates a difficult dilemma for policymakers. They need to keep financial conditions easy to provide a bridge to vaccines and to the economic recovery. But they also need to safeguard the financial system against unintended consequences of their policies, while remaining in line with their mandates. With investors betting on persistent policy backstop, a sense of complacency appears to be permeating markets; coupled with apparent uniform investor views, this raises the risk of a market correction or “repricing.” A sharp, sudden asset-price correction—for example, as a result of a persistent increase in interest rates—would cause a tightening of financial conditions. This could interact with existing financial vulnerabilities, creating knock-on effects on confidence and jeopardizing macro-financial stability. Financial stability risks have been in check so far, but action is needed to address vulnerabilities exposed by the pandemic. These include rising corporate debt, fragilities in the nonbank financial institutions sector, increasing sovereign debt, market access concerns for some developing economies, and declining profitability in some banking systems. Policymakers need to use this time to safeguard financial stability by employing macroprudential measures (for example, stricter supervisory and macroprudential oversight, including targeted stress tests at banks and prudential tools for highly levered borrowers) and developing new tools as needed. For example, policymakers are considering whether the macroprudential framework for nonbank financial institutions may need to be strengthened to address weaknesses that became apparent during the March turmoil. Tackling vulnerabilities through these policies is crucial to avoid putting economic growth at risk and to prevent financial instability from disrupting the global economy.

WEDNESDAY FEBRUARY 3, 2021

Markets

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Markets

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WEEKLY MARKET REVIEW FOR WEEK ENDING JANUARY 29, 2021

WEDNESDAY FEBRUARY 3, 2021