THE EQUILIBRIUM A
W H O L E
N E W
W O R L D
THE FUTURE OF BANKING AND CAPITAL MARKETS BEYOND CORONAVIRUS
TABLE OF CONTENTS WH AT YOU WI LL F I ND I NS I DE
PAGE 1
A Message from Our Advisor
PAGE 2
A Message from Our President
PAGE 3 PAGE 4
A Message from the Vice President, Research & Editorial Messages from the Research & Editorial Team
Events Review
PAGE 54
Meet Our Team
PAGE 58
Who Are We?
PAGE 59
Bibliography
PAGE 60
ISSUES
FEATURES THE FUTURE OF BANKING AND CAPITAL MARKETS
PAGE 8
Cent ral B an ks Nav igat ing th e Uncharte d Wat ers of CO VID -19
PAGE 12
Re defining Ce ntra l B anks
PAGE 16
Banking : P ast and Prese nt
PAGE 22
E quity Marke ts: How is R isk Prospe ring a midst Uncerta i nt y Past, Prese nt and Fu ture o f Bo nd Ma rk et s
PAGE 28
BEYOND CORONAVIRUS: THE PATH TO A NEW NORMAL
A Crisis L ike No Oth e r, An Un ce rt ain Re cove ry
PAGE 36
O ve rv iew a nd Ke y I n sigh t s of Sh ock s a nd Un em pl oym ent on S in g a po re ' s E conomy
PAGE 40
T he Service In dustry durin g C OVID-19
PAGE 46
How t h e Ma nufacturin g Ind u stry h andle d COV I D-1 9
PAGE 50
A MESSAGE FROM OUR ADVISOR DR TAN KHAY BOON
Dear readers, It is my pleasure to introduce to you the Newsletter by SIM Economic Society, a society managed by a group of students with strong interest in Economics. The value of Economics lies with it enable us to understand how economic environment operates and how events occur around the world affect us. The most impactful event that occur in the world at the moment is the Coronavirus or Covid-19 and this year Newsletter analyses the effects of Covid-19 in two dimensions. In the first dimension, the students discuss the effects of Covid-19 on the real sector. The analysis begins with the impact on the global economy and then move on to analyse the impact on the Singapore economy, focusing on the manufacturing sector, the service sector, the unemployment and the policy options. In the second dimension, the students explore the effect in the financial sector by analysing the banking market, the bond market, the equity market and the role of Central Bank in handling the Covid-19 crisis and also preparing for the future challenges, including digital currency and environmental protection. Through these analysis, we can derive a better understanding of the real and financial impacts of the Covid-19 and also make us better prepared for the aftermath of this crisis. Hope that you enjoy reading the articles. Your support is the best encouragement to these students. Thank you for your support. Tan Khay Boon Advisor SIM Economic Society
As Michelle Obama points out, it is important to shine in the face of adversity and refuse to allow it to limit our achievements and instead inspire us to continue to break boundaries and embrace change. It is evident that the pandemic will leave us forever altered, but it is the way in which we choose to deal with, and address adversity is what will create resilience. In this publication of “The Equilibrium”, we introduce to you “A Whole New World”, which hopes to provide readers with an analysis of the repercussions of the pandemic on the global economy and the financial sector as a whole. The publication even goes further to predict the revolutionary changes that many institutions will need to adapt to in order to ensure their future survival. The economic impact of the 2020 pandemic has been largely disruptive on the Singaporean economy. The first half of the newsletter dives into the impact on a global level followed by an indepth analysis of the core sectors that support the Singaporean economy. In the second half of the newsletter, an analysis of the financial sector has been conducted to understand the aftermath of the crisis as well as the future landscape that the institutions will have to withstand. The pandemic has displayed the ability of the finance sector to adapt to an online communication but also depicts the need for the transformation of the functions within this sector. Furthermore, our title “A whole new world” for the annual summit has been chosen to emulate the impact of the pandemic on our society. The title symbolizes both the change brought on by the pandemic wherein banks, businesses and even SIMES have had to quickly adapt to an online platform but also illustrates the long-lasting impact on the current generation and further generations to come. Also, this year, marks our 13 successful years of SIMES and the first one to be completely conducted on an online platform. The summit has invited 8 distinguished panelists with an aim to provide our student body with diverse perspectives to ensure a deeper understanding of our topics. We are proud to have panelists from renowned companies such as Ministry of Affairs, CFA Institute of Singapore and Deloitte.
A MESSAGE FROM OUR PRESIDENT
The only limit to the height of your achievements is the reach of your dreams and your willingness to work hard for them.” Michelle Obama
Moreover, the production of the newsletter would not have been possible without the constant support and enthusiasm of the entire SIM development department and specifically Mr. Kenneth Chan and Ms. Patricia Lee. We would also like to give our heartfelt thanks to Dr. Tan Khay Boon, our academic advisor, for his continuous support and dedication to our newsletter and guiding us along the way. Their nurturing has continued to inspire us to increase opportunities for growth within SIMES. More importantly, the newsletter is the culmination of the joint effort from the Research and Editorial and the Marketing department. Through countless, days, nights and hours they have poured their heart and soul into producing thoroughly researched articles and as well as ensuring the overall design of the newsletter. This endeavor would not have been possible without their commitment and passion to educating the student body about the economic challenges. "Coming together is a beginning. Keeping together is progress. Working together is success." Henry Ford The production of this newsletter, the upcoming summit and our overall planning would not have been possible without the dedication, hard-work and enthusiasm from all of the executive and the subcommittee members of SIMES. Our team has shown their resilience in a time of uncertainty by continuing to successfully hold events and bonding sessions on an online platform. I would like to personally thank my amazing team for continuing to dedicate their time to SIMES. Finally, we hope that you enjoy reading our newsletter and are inspired to overcome adversity and embrace change this coming year.
TANVI GABRIEL
A MESSAGE FROM THE VICE PRESIDENT OF R&E DIVYA TYAGI
Dear Reader, It is with utmost delight I present to you this year’s issue of the Equilibrium. The Research and Editorial team at SIMES is excited to share with you insights and breadth of perspectives on how Economies and Financial Markets are embracing the new normal. We have strived to spell out what uncertainty in the present pandemic times means for the Global Financial Markets and Singapore’s Economy. The Covid-19 crisis has been a real-time test of the resilience of the financial industry to absorb shocks and still support the real economy. Making use of the right policies has been essential to ensure that the crisis does not lead to more permanent damage to economies and the financial system, rather fosters recovery. The world is still grappling to find a cure for a virus which has disrupted every facet of human life; we, at a minimum, endeavour to bring to you the ‘cure’ economies and financial markets have adopted to drive faster through the road to recovery. To do so, we have taken the liberty to print the mention of this global crisis as ‘Covid-19’ crisis throughout this publication. We have deliberately avoided printing the same in capitals to mitigate the impact that the mentioned crisis presents. Thank you, readers, for the trust you have entrusted in us over the years. We are humbled at SIMES to continue our partnership and engage with you over Economics discourse. We hope to pass over our zeal and passion for exploring Economics via our articles and analysis. This production is, after all, a by-product of our writers’ passion to make Economics accessible for you. Cheers! Divya Tyagi
MESSAGES FROM THE RESEARCH AND EDITORIAL TEAM HOO CHI YANG, RESEARCH DIRECTOR
The 2019 novel coronavirus has caused a tremendous impact on the world economy and has continued to adversely affect the livelihood of countless people around the world. Unlike other economic shocks, a pandemic shock has the effects of demand, supply, and financial shocks combined. With Covid-19 being a complex subject that may be difficult to understand, what this newsletter aimed to do is to bring an economic understanding of its effects on the global economy that is easily digestible for the audience. This would not have been possible without the help of my fellow peers from the SIM Economics Society working alongside me. Thank you to SIMES members for these gruelling 3-months in making this newsletter possible and you for reading our newsletter.
EARTH CHADHA, DEPUTY DIRECTOR OF RESEARCH
The equilibrium has always represented the combined effort, teamwork and dedication of the Research and Editorial department at SIMES. This year the department is proud to present a newsletter on the topics Beyond Coronavirus: The Path to The New Normal and the Future of the Banking and Capital Markets. We hope it enlightens you better about the current and upcoming condition of the global economy and the financial industry. Lastly, I would like to thank all the SIMES members who have helped with smooth rollout of the newsletter.
SHANNEN DAVELYN KOSASIH, DEPUTY DIRECTOR OF RESEARCH
Karl Marx once said 'History repeats itself, first as tragedy, second as farce.' 2020 has been a roller-coaster ride for the lives of many and with it, comes the beginning of a New Era. In every crisis, there lies a golden opportunity. With the world at a standstill comes the test of resilience for the global economy as change is no longer dispensable. The Equilibrium aims to discuss about Covid-19 impact on the present and future global economy and a deeper dive into banking and capital markets. Working as part of the R&E team with the help of other departments within SIMES has been a meaningful journey and I hope that you get to gain an insightful perspective on the economic roadmap to recovery.
PRIYAN PUROHIT, DEPUTY DIRECTOR OF RESEARCH AND SECRETARY
This unprecedented pandemic quickly fostered into a health, as well as financial crisis. Hence, governments and central banks had to respond in a unique manner, tremors of which were felt across all financial markets. This newsletter explores both the economic and financial aspects of this crisis; the long-lasting impact of policy decisions on the economies of various countries, the concepts behind the steps taken by central banks and the reaction of capital markets. It also highlights the increasing contrast between the trends observed in economies when compared with financial markets during such a crisis. We hope that we’re able to guide you through the timeline of events which took place since the beginning of 2020, and explain as to why they have now taken their respective different trajectories in these past few months.
PAU KHUA MUNG, SENIOR SUBCOMMITTEE, RESEARCH AND EDIOTRIAL
The Research and Editorial department from SIMES is once again proud to announce our annual newsletter that comes in two-folds. Beyond Coronavirus: The Path to the New Normal and the Future of Banking and Capital Market. This newsletter serves as an emblem of SIMES, made possible through the dedication, hard work and teamwork of the R&E department. We hope our readers will find the newsletter informative and spark their curiosity beyond the topics discussed in the newsletter. Lastly, a big Thank You to the R&E team, the SIMES committee, staffs of SIM, Alumni and readers that have supported us throughout the years.
JANE CLARISSA ARYANTO, CHIEF EDITOR
The SIM Economics Society has always been a platform for like-minded peers to learn and experience further insights into the world of economics. Hence, the Research and Editorial team is proud to present our annual newsletter, covering two crucial themes that will have a massive impact towards the future of economics. With topics that cover the infamous Covid-19 and its effects from this moment forth, and the future of Banking and Finance, we sincerely hope that our analysis may be beneficial and knowledgeable for our readers. We thank you for your continuous encouragement and support towards the SIM Economics Society.
EVANGELINE ZHANG JIELIN, DEPUTY CHIEF EDITOR
2020 has been a rough year with the widespread of the Covid-19 pandemic that has caused massive disruptions to economic activities worldwide. This year, the Research and Editorial team would be delving into two themes - Beyond Coronavirus: The Path to a New Normal as well as the Future of Banking and Capital Markets. Our annual newsletter is a culmination of the efforts of our Research and Editorial members who spent months researching and analysing economic concepts tirelessly. We hope that our findings would give you a better understanding of the carefully selected topics and a deeper appreciation of economics. We would also like to express our sincere thanks to all readers for your continuous support.
THE FUTURE OF BANKING AND CAPITAL MARKETS
WHERE ARE WE HEADED?
FOREWORD The Covid-19 crisis has given birth to some atypical economic challenges: The Global Recession The normal yield curves are upward sloping since short-term debt instruments have a lower yield than long-term debt instruments of the same credit quality. However, there are instances when we witness an inverted yield curve – when short-term interest rates exceed long-term rates. The yield curve inversion is seen as a sign of a looming recession. The Covid-19 pandemic which plunged the global economy into a severe recession was preceded by the U.S. yield curve inversion in February. Now, we are witnessing the deepest recession since the Second World War. Moreover, the largest fraction of economies is experiencing per capital output declines in 150 years. The World Bank’ June 2020 Global Economic Prospects predicts that the global economy will shrink by at least 5.2% this year. Unsurprisingly, the global unemployment rate is expected to reach its highest level since 1965. .The Stock Market Crash The yield curve inversion in the U.S. Treasury market is a major indicator of falling stocks as well. Since more money is invested into safe haven Treasuries during uncertainty, the inflow of money into safer treasuries drives the yields lower. This year we have seen enormous stock market volatility as there were global fears about the spread of Covid-19, plummeting oil prices, a lingering recession along with the shutting down of economies. The Oil Market Crash The ongoing oil price wars accompanied by the Covid-19 outbreak led to an oil glut and an eventual oil market crash in the first half of 2020. The Covid-19 pandemic ushered countries into lockdowns and put travel industries to a halt. This triggered an historic oil market collapse which saw the sharpest plunge in global oil demand on record. The extent of the crisis was so acute that oil – the largest commodity market in the world – was trading at negative prices; this implied buyers were being paid to buy oil. Amidst the backdrop of these exceptional events, the stability of the global financial system has been challenged. Through our articles on Banking and Capital Markets, we wish to unfold the global impact of the Covid-19 pandemic on the financial markets and present to you what lies ahead. We will cover the blow borne by the Banking industry and the role Central Banks – the guardians of financial stability – are now undertaking. From the side of Capital Markets, we present to you an analysis on how these markets have coped and what market trends you can expect to witness in the near future. Allow us, dear reader, to walk you through the untrodden road global financial markets have been treading on. Divya Tyagi, Vice President at SIMES
THE EQUILIBRIUM NOV 2020| 8
THE EQUILIBRIUM NOV 2020| 9
Central Banks Navigating the Uncharted Waters of Covid-19 Written By: Divya Tyagi
Introduction
Quantitative Easing
Since the onset of 2020, policymakers have been designing policies to curb the spread of Covid-19. This
Normally, Central Banks lower their short term interest rates to regulate an economy; however, when
caused a decline in economic activities and called for the use of expansionary policies to boost the global
interest rates are already near zero or negative, Central Banks resort to using Quantitative Easing (QE) in
economy. Economists generally agree on using fiscal stimulus as a first measure to revive a struggling
flexible exchange rate regimes. Quantitative easing - which has been heavily relied on by Central Banks
economy. However, there was limited fiscal space in advanced and emerging markets even before the
during the Covid-19 outbreak - is considered to be an unconventional monetary policy used to flood the
pandemic was declared due to their existing huge budget deficit and high levels of debt to GDP ratios
market with extra liquidity. During QE, Central Banks print more money to purchase long-term securities
(Figure 1). Hence, Central Banks could provide only limited fiscal stimulus and had to implement
through open market operations with the aim of increasing the money supply in an economy. This
expansionary
such
intervention, in turn, lowers the interest rate or yield, while causing an increase in the price of fixed-
unconventional monetary policies which are being implemented to ease the downward pressure on
income securities. Central Banks aim to encourage spending by making borrowing cheaper and increasing
economies – Quantitative Easing and Helicopter Money.
consumer demand.
monetary
policies
in
conjunction,
to
fight
the
pandemic.
Here
we
discuss
two
Quantitatively Speaking‌
GDP = P * Y = price level multiplied by real output as per the Quantity Equation. To understand quantitative easing quantitatively, we can study the relationship between GDP, money supply and the velocity of money. GDP equals money supply in an economy (M) times the velocity of money (V); this can be expressed as
GDP = M * V Here, velocity is the speed at which money passes through the economy. During times of business cycle downturn, consumers are reluctant to spend, and businesses are conservative in investing. This plummets Figure 1: General government net lending/borrowing % of GDP Source: International Monetary Fund
the velocity of money in the economy. Therefore, Central Banks - through Quantitative Easing - inject more money into the economy, causing the money supply to increase, thereby restoring the GDP.
THE EQUILIBRIUM NOV 2020| 8
THE EQUILIBRIUM NOV 2020| 9
Central Banks Navigating the Uncharted Waters of Covid-19 Written By: Divya Tyagi
Introduction
Quantitative Easing
Since the onset of 2020, policymakers have been designing policies to curb the spread of Covid-19. This
Normally, Central Banks lower their short term interest rates to regulate an economy; however, when
caused a decline in economic activities and called for the use of expansionary policies to boost the global
interest rates are already near zero or negative, Central Banks resort to using Quantitative Easing (QE) in
economy. Economists generally agree on using fiscal stimulus as a first measure to revive a struggling
flexible exchange rate regimes. Quantitative easing - which has been heavily relied on by Central Banks
economy. However, there was limited fiscal space in advanced and emerging markets even before the
during the Covid-19 outbreak - is considered to be an unconventional monetary policy used to flood the
pandemic was declared due to their existing huge budget deficit and high levels of debt to GDP ratios
market with extra liquidity. During QE, Central Banks print more money to purchase long-term securities
(Figure 1). Hence, Central Banks could provide only limited fiscal stimulus and had to implement
through open market operations with the aim of increasing the money supply in an economy. This
expansionary
such
intervention, in turn, lowers the interest rate or yield, while causing an increase in the price of fixed-
unconventional monetary policies which are being implemented to ease the downward pressure on
income securities. Central Banks aim to encourage spending by making borrowing cheaper and increasing
economies – Quantitative Easing and Helicopter Money.
consumer demand.
monetary
policies
in
conjunction,
to
fight
the
pandemic.
Here
we
discuss
two
Quantitatively Speaking‌
GDP = P * Y = price level multiplied by real output as per the Quantity Equation. To understand quantitative easing quantitatively, we can study the relationship between GDP, money supply and the velocity of money. GDP equals money supply in an economy (M) times the velocity of money (V); this can be expressed as
GDP = M * V Here, velocity is the speed at which money passes through the economy. During times of business cycle downturn, consumers are reluctant to spend, and businesses are conservative in investing. This plummets Figure 1: General government net lending/borrowing % of GDP Source: International Monetary Fund
the velocity of money in the economy. Therefore, Central Banks - through Quantitative Easing - inject more money into the economy, causing the money supply to increase, thereby restoring the GDP.
THE EQUILIBRIUM NOV 2020| 10
THE EQUILIBRIUM NOV 2020| 11
Long-term Impact of Quantitative Easing
Economies euro
have
and
pledged
yen
in
trillions
of
dollars,
Quantitative
Easing
programmes around the globe. In fact, just the Federal Reserve, European Central Bank, Bank of Japan and Bank of England have announced investing approximately $22 trillion of liquidity into the financial system by June 2020 -
the
amount matches the size of annual U.S. output. Should we be worried? An economist certainly would be. The Quantitative Easing policy is expected to work in the short term to provide monetary
Modern Monetary Theory
one-off cash pay-out announced in April as part
stimulus; however, in the long run, this policy can create monetary instability. The short term
Money
can
impact may cause an increase in price level and
issuing
debt.
real output but the long term impact only causes
population will only work to redistribute income
an
QE,
at best; hence, issuance of debt is more widely
Central Banks create digital money, which is
relied upon. However, Modern Monetary Theory
intrinsically inflationary and hence, is a quick
(MMT) argues that the government can always
fix
also
create new money from Central Banks, instead of
helps to protect the economy against deflation,
raising taxes or increasing borrowing. MMT is a
but only in the short run. It is worth noting that
heterodox macroeconomic theory which suggests
the rapid growth in the money supply will feed
that
into long-term inflation, this along with high
government spending can be paid for by creating
debt levels, will slow down economic growth.
money till the point inflation is stable; otherwise,
As a result, economies can face stagflation: a
taxes are raised.
increase
to
in
price
stimulate
a
level.
weak
As
part
economy.
of
This
in
be
raised
by
Imposing
countries
with
increasing
higher
fiat
taxes
taxes
on
currency
or the
system,
challenging economic situation in which high inflation
is
coupled
with
low
growth
in
a
An application of MMT is Helicopter Money. Helicopter
vicious cycle.
money
is
a
last
resort
monetary
stimulus in which large sums of money is issued
Helicopter Money Milton
Friedman
‘helicopter
in
money’.
and
1969 He
coined
the
proposed
a
phrase thought
digitally
distributed
to
people’s
bank
accounts to encourage them to spend more and thus,
boost
the
economy.
During
economic
experiment – ‘Let us suppose now that one day
downturns, businesses are reluctant to spend. By
a helicopter flies over this community and drops
injecting newly created cash directly in people’s
an additional $1,000 in bills from the sky, which
bank
is, of course, hastily collected by members of
aggregate
the
people to cover living expenses during times of
community.
Let
us
suppose
further
that
accounts, demand
in
an
economy
during the Pandemic. The government of Hong
repeated’.
Friedman’s
been
allow
which
be
has
and
the
stress.
never
money
increase
everyone is convinced that this is a unique event will
Helicopter
governments
given
out
a
Kong transferred HKD 10,000 in February 2020
theoretical concept, the outbreak of Covid-19
to all residents financially affected by the virus as
has popularized the idea and implementation of
part of its overall policy response (Nee lee, 2020).
helicopter money.
Similarly, Singaporeans adults were given S$600
parable
of
a
helicopter
drop
is
no
longer
of the Solidarity Budget (Sin, 2020).
In Concise
No Free Money However, Helicopter Money is not free. The
Central Banks have been at the helm of affairs in
opportunity cost to Helicopter Money is lost
their response to pull the global economy out of
seigniorage. Seigniorage is the profits Central
the Covid-19 induced economic slowdown. In
Banks
particular,
make
by
Implementing compared bond
to
the
issue
Helicopter buying
a
of
base
Money
zero-coupon
money. can
be
perpetual
that does not promise future payments.
Central
Banks
adopted
some
unconventional policy actions from their toolkit, namely
the
use
of
Quantitative
Easing
programmes and issuance of Helicopter Money,
Instead, a Central Bank could have issued the
to
same
to
exacerbating. These policies invite their own set
purchase a conventional bond which promised
of challenges for the long-run but for now, they
future payments. These forgone payments mean
are healing a struggling global economy. Since
forgone seigniorage profits for Central banks.
public
sector
Additionally,
shape
before
amount
of
additional
Helicopter
base
Money
is
money
not
zero-
prevent
the
present
balance the
economic
sheets
pandemic,
crisis
weren’t the
need
in to
from
great rely
interest funding. When a Central Bank directly
unconventionally more on monetary policies has
funds a deficit, additional cash is transferred to
distinguished the present crisis from any before.
the public. Once the rounds of fiscal stimulus
This
are done, the excess cash is deposited with the
hegemony of Central Banks.
banks. Since there is no additional demand for s loans, this cash flows back to the Central Bank in the form of reserves. Since the Central
Bank
pays
interest
on
these
reserves, it is a hidden tax on banks and a
form
of
financial repression.
pandemic
has
helped
reinstate
the
THE EQUILIBRIUM NOV 2020| 10
THE EQUILIBRIUM NOV 2020| 11
Long-term Impact of Quantitative Easing
Economies euro
have
and
pledged
yen
in
trillions
of
dollars,
Quantitative
Easing
programmes around the globe. In fact, just the Federal Reserve, European Central Bank, Bank of Japan and Bank of England have announced investing approximately $22 trillion of liquidity into the financial system by June 2020 -
the
amount matches the size of annual U.S. output. Should we be worried? An economist certainly would be. The Quantitative Easing policy is expected to work in the short term to provide monetary
Modern Monetary Theory
one-off cash pay-out announced in April as part
stimulus; however, in the long run, this policy can create monetary instability. The short term
Money
can
impact may cause an increase in price level and
issuing
debt.
real output but the long term impact only causes
population will only work to redistribute income
an
QE,
at best; hence, issuance of debt is more widely
Central Banks create digital money, which is
relied upon. However, Modern Monetary Theory
intrinsically inflationary and hence, is a quick
(MMT) argues that the government can always
fix
also
create new money from Central Banks, instead of
helps to protect the economy against deflation,
raising taxes or increasing borrowing. MMT is a
but only in the short run. It is worth noting that
heterodox macroeconomic theory which suggests
the rapid growth in the money supply will feed
that
into long-term inflation, this along with high
government spending can be paid for by creating
debt levels, will slow down economic growth.
money till the point inflation is stable; otherwise,
As a result, economies can face stagflation: a
taxes are raised.
increase
to
in
price
stimulate
a
level.
weak
As
part
economy.
of
This
in
be
raised
by
Imposing
countries
with
increasing
higher
fiat
taxes
taxes
on
currency
or the
system,
challenging economic situation in which high inflation
is
coupled
with
low
growth
in
a
An application of MMT is Helicopter Money. Helicopter
vicious cycle.
money
is
a
last
resort
monetary
stimulus in which large sums of money is issued
Helicopter Money Milton
Friedman
‘helicopter
in
money’.
and
1969 He
coined
the
proposed
a
phrase thought
digitally
distributed
to
people’s
bank
accounts to encourage them to spend more and thus,
boost
the
economy.
During
economic
experiment – ‘Let us suppose now that one day
downturns, businesses are reluctant to spend. By
a helicopter flies over this community and drops
injecting newly created cash directly in people’s
an additional $1,000 in bills from the sky, which
bank
is, of course, hastily collected by members of
aggregate
the
people to cover living expenses during times of
community.
Let
us
suppose
further
that
accounts, demand
in
an
economy
during the Pandemic. The government of Hong
repeated’.
Friedman’s
been
allow
which
be
has
and
the
stress.
never
money
increase
everyone is convinced that this is a unique event will
Helicopter
governments
given
out
a
Kong transferred HKD 10,000 in February 2020
theoretical concept, the outbreak of Covid-19
to all residents financially affected by the virus as
has popularized the idea and implementation of
part of its overall policy response (Nee lee, 2020).
helicopter money.
Similarly, Singaporeans adults were given S$600
parable
of
a
helicopter
drop
is
no
longer
of the Solidarity Budget (Sin, 2020).
In Concise
No Free Money However, Helicopter Money is not free. The
Central Banks have been at the helm of affairs in
opportunity cost to Helicopter Money is lost
their response to pull the global economy out of
seigniorage. Seigniorage is the profits Central
the Covid-19 induced economic slowdown. In
Banks
particular,
make
by
Implementing compared bond
to
the
issue
Helicopter buying
a
of
base
Money
zero-coupon
money. can
be
perpetual
that does not promise future payments.
Central
Banks
adopted
some
unconventional policy actions from their toolkit, namely
the
use
of
Quantitative
Easing
programmes and issuance of Helicopter Money,
Instead, a Central Bank could have issued the
to
same
to
exacerbating. These policies invite their own set
purchase a conventional bond which promised
of challenges for the long-run but for now, they
future payments. These forgone payments mean
are healing a struggling global economy. Since
forgone seigniorage profits for Central banks.
public
sector
Additionally,
shape
before
amount
of
additional
Helicopter
base
Money
is
money
not
zero-
prevent
the
present
balance the
economic
sheets
pandemic,
crisis
weren’t the
need
in to
from
great rely
interest funding. When a Central Bank directly
unconventionally more on monetary policies has
funds a deficit, additional cash is transferred to
distinguished the present crisis from any before.
the public. Once the rounds of fiscal stimulus
This
are done, the excess cash is deposited with the
hegemony of Central Banks.
banks. Since there is no additional demand for s loans, this cash flows back to the Central Bank in the form of reserves. Since the Central
Bank
pays
interest
on
these
reserves, it is a hidden tax on banks and a
form
of
financial repression.
pandemic
has
helped
reinstate
the
THE EQUILIBRIUM NOV 2020| 12
THE EQUILIBRIUM NOV 2020| 13
Redefining Central Banks Written By: Divya Tyagi
CBDC, once introduced, will serve as a digital representation of a sovereign currency. This new form of
Introduction
Central Bank money will be determined by monetary policy and will act as a liability to the Central Banks’ balance sheets. It would provide the public with direct access to Central Bank money – which is
Central Banks are universally entrusted to maintain the monetary and financial stability of an economy. An integral part of their functions is to maintain the trust and safety of their payment system. The present pandemic has only underlined the pivotal role of Central Banks in payments further. Along with this, Central Banks have lately realised an additional responsibility they should hold, i.e. to contribute towards fighting climate change. Countries worldwide have been looking for ways to mitigate climate change by
deemed to be a safe, reliable and universally accessible settlement instrument. Moreover, it should be seamlessly converted against commercial bank money and cash. There are two types of CBDC that are being considered to be deployed: Wholesale and retail CBDC. Wholesale CBDC will be used by financial institutions to buy and sell financial assets, while retail CBDC will be used by citizens for making transactions and to receive government grants. Currency Delivery
making it a priority in public policy. Ignoring the impact of climate change now poses the risk of inviting a
Issuing
‘Green Swan’ event - an extremely disruptive financial event that could trigger the next systemic financial
CBDC
Banks
crisis. We will delve into both these responsibilities of Central Banks and how these can be implemented.
to
will
pursue
aid
Central
several
policy
objectives
at
issuing
CBDC
will
once.
public Firstly,
allow
more
financial inclusion in the economy while ensuring Central Banks stay relevant
Central Bank
in
financial
monitoring.
Following the Covid-19 pandemic, the
Digital Currency
need
stimulus
to
be
able
payments
to
in
deliver seconds
during times of crisis has become
There have been several attempts at introducing private digital means of payments globally. Fintech and Big tech companies have been instrumental in offering automated financial services like introducing
more apparent than ever. CBDCs are being considered to make the payment systems more resilient against
mobile payments. Cryptocurrencies, notably Bitcoin, too have attempted to revolutionize the payment
shocks. Additionally, it can improve the effectiveness of targeted monetary policy in times of economic
space
distress.
and
bypass
Central
Banks.
A
Cryptocurrency
is
a
digital
currency
immune
to
government
interference and secured by encryption techniques. However, it was Facebook’s proposal to develop Libra – a private global stablecoin – which threatened to undermine the role of Central Banks in controlling monetary systems and propelled Central Banks to hasten the ideation of developing Central Bank Digital Currency (CBDC). Cryptocurrencies and private sector stablecoin proposals have been perceived as a threat to the jurisdiction’s monetary sovereignty and a risk too big to undertake.
Furthermore, CBDC will reduce costs associated with issuing and managing physical cash,
which will improve financial inclusion and distribution of fiscal stimulus for unbanked citizens.
THE EQUILIBRIUM NOV 2020| 12
THE EQUILIBRIUM NOV 2020| 13
Redefining Central Banks Written By: Divya Tyagi
CBDC, once introduced, will serve as a digital representation of a sovereign currency. This new form of
Introduction
Central Bank money will be determined by monetary policy and will act as a liability to the Central Banks’ balance sheets. It would provide the public with direct access to Central Bank money – which is
Central Banks are universally entrusted to maintain the monetary and financial stability of an economy. An integral part of their functions is to maintain the trust and safety of their payment system. The present pandemic has only underlined the pivotal role of Central Banks in payments further. Along with this, Central Banks have lately realised an additional responsibility they should hold, i.e. to contribute towards fighting climate change. Countries worldwide have been looking for ways to mitigate climate change by
deemed to be a safe, reliable and universally accessible settlement instrument. Moreover, it should be seamlessly converted against commercial bank money and cash. There are two types of CBDC that are being considered to be deployed: Wholesale and retail CBDC. Wholesale CBDC will be used by financial institutions to buy and sell financial assets, while retail CBDC will be used by citizens for making transactions and to receive government grants. Currency Delivery
making it a priority in public policy. Ignoring the impact of climate change now poses the risk of inviting a
Issuing
‘Green Swan’ event - an extremely disruptive financial event that could trigger the next systemic financial
CBDC
Banks
crisis. We will delve into both these responsibilities of Central Banks and how these can be implemented.
to
will
pursue
aid
Central
several
policy
objectives
at
issuing
CBDC
will
once.
public Firstly,
allow
more
financial inclusion in the economy while ensuring Central Banks stay relevant
Central Bank
in
financial
monitoring.
Following the Covid-19 pandemic, the
Digital Currency
need
stimulus
to
be
able
payments
to
in
deliver seconds
during times of crisis has become
There have been several attempts at introducing private digital means of payments globally. Fintech and Big tech companies have been instrumental in offering automated financial services like introducing
more apparent than ever. CBDCs are being considered to make the payment systems more resilient against
mobile payments. Cryptocurrencies, notably Bitcoin, too have attempted to revolutionize the payment
shocks. Additionally, it can improve the effectiveness of targeted monetary policy in times of economic
space
distress.
and
bypass
Central
Banks.
A
Cryptocurrency
is
a
digital
currency
immune
to
government
interference and secured by encryption techniques. However, it was Facebook’s proposal to develop Libra – a private global stablecoin – which threatened to undermine the role of Central Banks in controlling monetary systems and propelled Central Banks to hasten the ideation of developing Central Bank Digital Currency (CBDC). Cryptocurrencies and private sector stablecoin proposals have been perceived as a threat to the jurisdiction’s monetary sovereignty and a risk too big to undertake.
Furthermore, CBDC will reduce costs associated with issuing and managing physical cash,
which will improve financial inclusion and distribution of fiscal stimulus for unbanked citizens.
THE EQUILIBRIUM NOV 2020| 14
THE EQUILIBRIUM NOV 2020| 15
Projects Underway As
per
the
Fiscal
Bank
for
conducting
some
work
on
work.
banks China
developed advanced since
are
engaging
arguably
experiment economy.
2014
on
the
has
of
It
with
effective in mitigating climate change: it allows
CBDC
has
been
‘Digital
for the implementation of long-term structural
CBDC
the
and
most in
an
working
Currency
The Covid-19 pandemic is predicted to cause
challenges and practicalities of a potential
Climate Change
digital issuance. In a different approach, in
the total carbon dioxide emissions to reduce by 4-7% in 2020 (Figure 3). There has not been
Singapore, ‘Project Ubin’ was being carried
impact
the
financial
system in the coming years. The results from ‘Project Ubin’ will likely be crucial if MAS ever
launches
CBDC
for
wholesale
applications.
If
greenhouse
curbed
gas
climate
impact related
emissions
change
economic events
can
not
negatively
growth. can
are
Climate-
reduce
the
such
a
dramatic
emissions
in
the
impact past
120
on
global
years
CO2
(Schnabel,
2020). Yet, this would not be sufficient to limit the
global
temperature
increase
to
the
1.5°
profitability of firms if the transition to a
above
low
the
under the 2015 Paris Agreement. We presently
coming decades. For instance, consumer
require all available means to curb the global
spending will decrease as uncertainty in
CO2 emissions and Central Banks are ready to
the
contribute.
carbon
On
economy
future
detrimental top
about
is
slow
increases, to
of
firms’
that
future
which
financial
adverse
profitability
in
is
health.
expectations will
pre-industrial
We
levels,
cover
two
which
was
policies
set
which
governments and Central Banks are relying on lately.
it
by
publicly
widely
imposing
Arthur
Cecil
Pigou,
help
to
a
carbon
tax
will
agents
to
create lower
incentives emissions
for by
that
financial Banks
will
jeopardize
stability. are
now
the
Therefore, being
climate change.
capital.
Further,
Central
Banks
can
ensure financial stability and a transition towards a low-carbon economy by scrutinising financial market imperfections. Monetary
Policy
Response
-
Green Quantitative Easing In the past decades, Central Banks have focused on their first role – maintaining price stability. The
Great
Financial
Crisis
prompted
Central
Banks to also consider a second role in ensuring stability.
Central
Banks
are
now
is
one
such
policy
which
can
be
Central Banks buy bonds which are meant to fund
to
mixes to play their part in combatting
greener
implemented in this pursuit. Green QE is when
Central
implement monetary and fiscal policy
carbon-intensive assets of financial institutions to
easing
global
called
correct the climate externality and reallocate the
of mitigating climate change. Green quantitative
debts. This can lead to systematic bank losses
This implies that a carbon tax can be used to
considering to embrace a third responsibility i.e.
which can reduce their ability to repay
Source: BIS, The Block
economist
financial
compel
firms to postpone their investment plans
Figure 1: % of Total Central Banks engaged with CBDC work
with
economists
switching to more efficient production processes.
suggests it is only exploring the benefits,
will
dealing
economic
banks to initiate public research on CBDCs,
project
suggest
case,
Bank of England, one of the first central
the
externality,
Climate
as an incentive to lower an externality. In this
broader Belt and Road strategy. Whereas,
how
an
Since
taxation. Theoretically, a price is required to act
global reserve currency. This is part of their
technology (DLT) and blockchain to define
is
policies.
internalise climate externalities by the means of
to compete with the dollar’s dominance as a
financial system by using distributed ledger
Change
the
Electronic Payment’ (DCEP) project in order
This included experiments to transform the
redistributive
Pigouvian carbon taxes. These taxes named after
and
out by the Monetary Authority of Singapore.
-
Fiscal policy response is deemed to be the most
CBDC.
Figures 2 represents the rapid pace at which Central
Response
Pigouvian Carbon Taxes
International
Settlements, more than 80% of central banks are
Policy
Figure 2: Global annual CO2 emissions (in million tonnes) Source: European Central Bank
environmentally
friendly
projects.
This
causes the interest rate on these green bonds to reduce
relative
to
other
bonds,
which
makes
firms more willing to invest in green projects. Additionally, the lowered cost of borrowing on the bond market incentivizes firms to issue bonds instead
of
taking
governments emissions.
and
a
bank firms
loan. to
This
induces
reduce
carbon
THE EQUILIBRIUM NOV 2020| 14
THE EQUILIBRIUM NOV 2020| 15
Projects Underway As
per
the
Fiscal
Bank
for
conducting
some
work
on
work.
banks China
developed advanced since
are
engaging
arguably
experiment economy.
2014
on
the
has
of
It
with
effective in mitigating climate change: it allows
CBDC
has
been
‘Digital
for the implementation of long-term structural
CBDC
the
and
most in
an
working
Currency
The Covid-19 pandemic is predicted to cause
challenges and practicalities of a potential
Climate Change
digital issuance. In a different approach, in
the total carbon dioxide emissions to reduce by 4-7% in 2020 (Figure 3). There has not been
Singapore, ‘Project Ubin’ was being carried
impact
the
financial
system in the coming years. The results from ‘Project Ubin’ will likely be crucial if MAS ever
launches
CBDC
for
wholesale
applications.
If
greenhouse
curbed
gas
climate
impact related
emissions
change
economic events
can
not
negatively
growth. can
are
Climate-
reduce
the
such
a
dramatic
emissions
in
the
impact past
120
on
global
years
CO2
(Schnabel,
2020). Yet, this would not be sufficient to limit the
global
temperature
increase
to
the
1.5°
profitability of firms if the transition to a
above
low
the
under the 2015 Paris Agreement. We presently
coming decades. For instance, consumer
require all available means to curb the global
spending will decrease as uncertainty in
CO2 emissions and Central Banks are ready to
the
contribute.
carbon
On
economy
future
detrimental top
about
is
slow
increases, to
of
firms’
that
future
which
financial
adverse
profitability
in
is
health.
expectations will
pre-industrial
We
levels,
cover
two
which
was
policies
set
which
governments and Central Banks are relying on lately.
it
by
publicly
widely
imposing
Arthur
Cecil
Pigou,
help
to
a
carbon
tax
will
agents
to
create lower
incentives emissions
for by
that
financial Banks
will
jeopardize
stability. are
now
the
Therefore, being
climate change.
capital.
Further,
Central
Banks
can
ensure financial stability and a transition towards a low-carbon economy by scrutinising financial market imperfections. Monetary
Policy
Response
-
Green Quantitative Easing In the past decades, Central Banks have focused on their first role – maintaining price stability. The
Great
Financial
Crisis
prompted
Central
Banks to also consider a second role in ensuring stability.
Central
Banks
are
now
is
one
such
policy
which
can
be
Central Banks buy bonds which are meant to fund
to
mixes to play their part in combatting
greener
implemented in this pursuit. Green QE is when
Central
implement monetary and fiscal policy
carbon-intensive assets of financial institutions to
easing
global
called
correct the climate externality and reallocate the
of mitigating climate change. Green quantitative
debts. This can lead to systematic bank losses
This implies that a carbon tax can be used to
considering to embrace a third responsibility i.e.
which can reduce their ability to repay
Source: BIS, The Block
economist
financial
compel
firms to postpone their investment plans
Figure 1: % of Total Central Banks engaged with CBDC work
with
economists
switching to more efficient production processes.
suggests it is only exploring the benefits,
will
dealing
economic
banks to initiate public research on CBDCs,
project
suggest
case,
Bank of England, one of the first central
the
externality,
Climate
as an incentive to lower an externality. In this
broader Belt and Road strategy. Whereas,
how
an
Since
taxation. Theoretically, a price is required to act
global reserve currency. This is part of their
technology (DLT) and blockchain to define
is
policies.
internalise climate externalities by the means of
to compete with the dollar’s dominance as a
financial system by using distributed ledger
Change
the
Electronic Payment’ (DCEP) project in order
This included experiments to transform the
redistributive
Pigouvian carbon taxes. These taxes named after
and
out by the Monetary Authority of Singapore.
-
Fiscal policy response is deemed to be the most
CBDC.
Figures 2 represents the rapid pace at which Central
Response
Pigouvian Carbon Taxes
International
Settlements, more than 80% of central banks are
Policy
Figure 2: Global annual CO2 emissions (in million tonnes) Source: European Central Bank
environmentally
friendly
projects.
This
causes the interest rate on these green bonds to reduce
relative
to
other
bonds,
which
makes
firms more willing to invest in green projects. Additionally, the lowered cost of borrowing on the bond market incentivizes firms to issue bonds instead
of
taking
governments emissions.
and
a
bank firms
loan. to
This
induces
reduce
carbon
THE EQUILIBRIUM NOV 2020| 16
THE EQUILIBRIUM NOV 2020| 17
Banking: Past and Present Written By: Pau Khua Mung
Overview
Since the 2007-09 financial crisis exposed the risk-taking nature of the banking industry with regards to its insufficient capital and liquidity position, banks have undergone a major transformation to bolster their financial position in hope of averting another financial crisis. Moreover, reforms such as Basel III that sets a new capital and liquidity requirement have been introduced to better position banks absorb losses.
12 years on, the Covid-19 crisis has disrupted global economic activity and tremendously impacted the financial industry - particularly the banking sector as we see lesser borrowing, increase in default rates of loans and disruption of banking activity due to restrictions on visitors to banks.
For those of us who have taken Econs 101, we would be familiar with the term fiscal and monetary policies and its importance in playing a vital role to help businesses thrive due to the demand- and supply-side shock of the
Figure 1: Some of the many measures that Central Banks across different regions have taken to ease financial stress on businesses. Figures and policies are subjected to change as Covid-19 unfolds. Source: Brookings, Deloitte & European Central Bank
economy caused by Covid-19. As such, governments and Central Banks across the world have been doing their due diligence to calm
markets
through
implementing
various
policies
(Figure 1).
Throughout
the
course
of
this
newsletter,
we
will
be
discussing how banking has evolved throughout the years and to a large extent, the impact that Covid-19 has on the banking system across these 3 regions: Europe, US and AsiaPacific.
Pre-Covid-19 Crisis In the last decade, the global banking system has grown bigger and more profitable. The banking industry is also safer as policymakers and regulators around the world have taken measures to solidify banking against future shocks. After the financial crisis, an emphasis has been placed on stronger capitalisation as being a vital determinant of banks’ ability to withstand adverse shocks. Therefore, banks’ common equity capital ratio (CET1) have generally risen significantly over the past decade (Figure 2). Common Equity Tier 1 (CET1) is a component of Tier 1 capital that is common stock mostly held by a bank or other financial institution. It is a capital measure introduced in 2014 as a precautionary means to protect the economy from a financial crisis. Examples of CET1 assets are cash, stock, etc.
THE EQUILIBRIUM NOV 2020| 16
THE EQUILIBRIUM NOV 2020| 17
Banking: Past and Present Written By: Pau Khua Mung
Overview
Since the 2007-09 financial crisis exposed the risk-taking nature of the banking industry with regards to its insufficient capital and liquidity position, banks have undergone a major transformation to bolster their financial position in hope of averting another financial crisis. Moreover, reforms such as Basel III that sets a new capital and liquidity requirement have been introduced to better position banks absorb losses.
12 years on, the Covid-19 crisis has disrupted global economic activity and tremendously impacted the financial industry - particularly the banking sector as we see lesser borrowing, increase in default rates of loans and disruption of banking activity due to restrictions on visitors to banks.
For those of us who have taken Econs 101, we would be familiar with the term fiscal and monetary policies and its importance in playing a vital role to help businesses thrive due to the demand- and supply-side shock of the
Figure 1: Some of the many measures that Central Banks across different regions have taken to ease financial stress on businesses. Figures and policies are subjected to change as Covid-19 unfolds. Source: Brookings, Deloitte & European Central Bank
economy caused by Covid-19. As such, governments and Central Banks across the world have been doing their due diligence to calm
markets
through
implementing
various
policies
(Figure 1).
Throughout
the
course
of
this
newsletter,
we
will
be
discussing how banking has evolved throughout the years and to a large extent, the impact that Covid-19 has on the banking system across these 3 regions: Europe, US and AsiaPacific.
Pre-Covid-19 Crisis In the last decade, the global banking system has grown bigger and more profitable. The banking industry is also safer as policymakers and regulators around the world have taken measures to solidify banking against future shocks. After the financial crisis, an emphasis has been placed on stronger capitalisation as being a vital determinant of banks’ ability to withstand adverse shocks. Therefore, banks’ common equity capital ratio (CET1) have generally risen significantly over the past decade (Figure 2). Common Equity Tier 1 (CET1) is a component of Tier 1 capital that is common stock mostly held by a bank or other financial institution. It is a capital measure introduced in 2014 as a precautionary means to protect the economy from a financial crisis. Examples of CET1 assets are cash, stock, etc.
THE EQUILIBRIUM NOV 2020| 18
THE EQUILIBRIUM NOV 2020| 19
Global Outlook of Banks
of
banks
unfolds.
as
the
situation
However,
certainty
is
that
the
banks
one
would
need to prepare themselves to Figure 2: Growth of Top
experience earnings lower than
1000 Banks in terms of
previous years as they adapt to
Assets, RoA and Tier 1 Capital in the Last Decade. Source: Danielle Myles, “Top 1000 World Banks 2018”
the new normal. In Europe, it is estimated
that
revenues
could
the
banking
fall
roughly
40% and ROE could drop by 11%
next
recovery
year
in
scenario.
a
muted
A
muted
recovery scenario is whereby if Despite a positive outlook for
the
banks
world,
including social distancing and
the
financial
lockdown measures, is initially
been
uniform
successful but fails to prevent a
around
recovery crisis
since
has
across
the
not
all
banking
regions
industry
with in
public
resurgence
the
world
Europe
“muted”
Profitability
(Figure 4).
remained
a
in
the
will
facing its own set of challenges. has
health
response,
virus,
Source: MGI, McKinsey PFIC - Global Banking Pools, Central Banks, Annual Report
the
experience
economic
Figure 4: Banking Revenue of European Banks After Risk
a
recovery
constant challenge for European US
banks as compared to the US and
Asia-Pacific
banks.
Since
US bank profits fell by 69.6% to Figure 3
the financial crisis of 2007-08,
$18.5 billion in the first quarter
Source: European Banking Federation & Statista
the profit of top five European banks
has
dropped
from
$60
of 2020 from the year prior as Across
the
billion in 2007 to $17.5 billion
through
in 2017. According to Deloitte,
intervention
this
regulations
challenge
could
be
Atlantic,
its
banks felt the economic impact
policy
profitability of 15.3% ROE in
of
strict
2017. However, due to the slow
pandemic.
economic
Federal
the
assertive and has
US
Chinese banks boasted healthy
successfully
growth
and
rising
the
novel
Followed
Reserve
by
the
interest
rate
nursed its banks to a healthier
trade-tension
structural
deficiencies,
financial position since the 2007-
investors
overcapacity, low interest rates,
08 financial crisis. Total assets in
Chinese authorities could desert
Interest Margins (NIM) - which measures between
and
the
absence
of
a
pan-
grew
the
skeptical
US,
cuts,
that
experiencing
banks
the United States banks reached
plans to deleverage, leading to
regulatory
a peak of $17.5 trillion in 2018
an
agency. (Srinivas, et al., 2019)
with ROE experiencing a post-
Japanese
The
crisis
hand, have been plagued with
the
slow
generating
European
banking
good
news
is
that
the
Return on equity (ROE), which measures
how
well
assets to create profits, has been
2007-08
recovering Financial
since Crisis
the as
ROE on European banks went from 5.8% in
2017 up to 6.1%
in 2018 (Figure 3).
of
11.96%
in
2018
(Figure 3).
banks
effectively manage a company’s
slowly
high
increase
banks,
economic
low/negative Over in the Asia Pacific, Chinese banks
have
taken
the
the
world’s
top
bad on
the
growth
interest
debts. other
and rates
(Srinivas, et al., 2019).
four
largest banks in 2018 were from China (Srinivas, et al., 2019).
How
has
the
Covid-19
crisis
assess
how
Covid-19
has impacted the performance o
in
Net
difference
received,
paid
and
adjusted
for
amount
of
assets
held
interestby
the
bank (Figure 5).
Insurance
NIM For the time being, it is difficult fully
the
total
been
decline
interest
interest
banks
impacted banks?
to
have
Figure 6
According to the Federal Deposit
global
banking industry by storm. By 2018,
in
a
in of
quarter
Corp.
(FDIC),
aggregate 3.28%
of
Source: S&P Global Ratings
coronavirus
attributed to factors such as the
with
Figure 5: Net Interest Income, Taxes, and Earnings
in
2019,
US
reported the down
a
fourth from
3.48% a year earlier (Figure 6).
Source: FDIC
Moreover, with the Federal Reserve cutting rates to a target range of 0% to 0.25%, it is estimated that bank earnings would fall 23% due to further NIM pressure expected beyond 2020 (Steve, 2020).
THE EQUILIBRIUM NOV 2020| 18
THE EQUILIBRIUM NOV 2020| 19
Global Outlook of Banks
of
banks
unfolds.
as
the
situation
However,
certainty
is
that
the
banks
one
would
need to prepare themselves to Figure 2: Growth of Top
experience earnings lower than
1000 Banks in terms of
previous years as they adapt to
Assets, RoA and Tier 1 Capital in the Last Decade. Source: Danielle Myles, “Top 1000 World Banks 2018”
the new normal. In Europe, it is estimated
that
revenues
could
the
banking
fall
roughly
40% and ROE could drop by 11%
next
recovery
year
in
scenario.
a
muted
A
muted
recovery scenario is whereby if Despite a positive outlook for
the
banks
world,
including social distancing and
the
financial
lockdown measures, is initially
been
uniform
successful but fails to prevent a
around
recovery crisis
since
has
across
the
not
all
banking
regions
industry
with in
public
resurgence
the
world
Europe
“muted”
Profitability
(Figure 4).
remained
a
in
the
will
facing its own set of challenges. has
health
response,
virus,
Source: MGI, McKinsey PFIC - Global Banking Pools, Central Banks, Annual Report
the
experience
economic
Figure 4: Banking Revenue of European Banks After Risk
a
recovery
constant challenge for European US
banks as compared to the US and
Asia-Pacific
banks.
Since
US bank profits fell by 69.6% to Figure 3
the financial crisis of 2007-08,
$18.5 billion in the first quarter
Source: European Banking Federation & Statista
the profit of top five European banks
has
dropped
from
$60
of 2020 from the year prior as Across
the
billion in 2007 to $17.5 billion
through
in 2017. According to Deloitte,
intervention
this
regulations
challenge
could
be
Atlantic,
its
banks felt the economic impact
policy
profitability of 15.3% ROE in
of
strict
2017. However, due to the slow
pandemic.
economic
Federal
the
assertive and has
US
Chinese banks boasted healthy
successfully
growth
and
rising
the
novel
Followed
Reserve
by
the
interest
rate
nursed its banks to a healthier
trade-tension
structural
deficiencies,
financial position since the 2007-
investors
overcapacity, low interest rates,
08 financial crisis. Total assets in
Chinese authorities could desert
Interest Margins (NIM) - which measures between
and
the
absence
of
a
pan-
grew
the
skeptical
US,
cuts,
that
experiencing
banks
the United States banks reached
plans to deleverage, leading to
regulatory
a peak of $17.5 trillion in 2018
an
agency. (Srinivas, et al., 2019)
with ROE experiencing a post-
Japanese
The
crisis
hand, have been plagued with
the
slow
generating
European
banking
good
news
is
that
the
Return on equity (ROE), which measures
how
well
assets to create profits, has been
2007-08
recovering Financial
since Crisis
the as
ROE on European banks went from 5.8% in
2017 up to 6.1%
in 2018 (Figure 3).
of
11.96%
in
2018
(Figure 3).
banks
effectively manage a company’s
slowly
high
increase
banks,
economic
low/negative Over in the Asia Pacific, Chinese banks
have
taken
the
the
world’s
top
bad on
the
growth
interest
debts. other
and rates
(Srinivas, et al., 2019).
four
largest banks in 2018 were from China (Srinivas, et al., 2019).
How
has
the
Covid-19
crisis
assess
how
Covid-19
has impacted the performance o
in
Net
difference
received,
paid
and
adjusted
for
amount
of
assets
held
interestby
the
bank (Figure 5).
Insurance
NIM For the time being, it is difficult fully
the
total
been
decline
interest
interest
banks
impacted banks?
to
have
Figure 6
According to the Federal Deposit
global
banking industry by storm. By 2018,
in
a
in of
quarter
Corp.
(FDIC),
aggregate 3.28%
of
Source: S&P Global Ratings
coronavirus
attributed to factors such as the
with
Figure 5: Net Interest Income, Taxes, and Earnings
in
2019,
US
reported the down
a
fourth from
3.48% a year earlier (Figure 6).
Source: FDIC
Moreover, with the Federal Reserve cutting rates to a target range of 0% to 0.25%, it is estimated that bank earnings would fall 23% due to further NIM pressure expected beyond 2020 (Steve, 2020).
THE EQUILIBRIUM NOV 2020| 20
THE EQUILIBRIUM NOV 2020| 21
A return on average assets measures (ROAA) as mentioned above is
Asia-Pacific financial-
an indicator used to assess the profitability of a firm’s assets. It is
services sector in Asia had lost
largely used by financial institutions to gauge financial performance
over
of firms (Kenton, 2019).
By
May
2020,
$920
the
billion
in
market
value, and this largely stemmed from
investors'
concern
Japanification
about
the increasingly high levels of non-performing assets in bank
As the name suggests to us, the term Japanification is derived from
portfolios
the fact that Japan in the past 10 years has been facing low and
due
to
Covid-19
negative inflation and growth in Japan. Japanification is the idea that
(Gunning, et al., 2020).
an According
to
an
S&P
Global
Ratings report, the majority of banks would depict an increase in
credit
losses
and
weaker
earnings in the next one to two years.
Moreover,
systematic
risks are on the rise in the AsiaPacific
region
unemployment (Jain,
et
al.,
business sentiment
as
in
expansion
could
endure
accompanied
Therefore,
interest
by
rates
a
prolonged
low
tend
levels
to
stay
period
of
of
inflation
low
growth
(Figure
low/near-zero
or
10).
become
negative. (Srinivas, et al., 2019). This is becoming a problem for Europe, which consists of many developed economies. Battling its current low GDP growth rate of 1.52%, Europe faces the risk of Japanification. If Japanification is to take effect in Europe, it could
Lastly, Japan also faces human-capital issues, including low female labour-force participation and levels
have a major adverse effect on the growth and profitability in the
of immigration that are likely insufficient to meet the demand for workers as Japan’s population ages
banking industry globally.
(Scaggs, 2020).
In a similar way, the same threat looms in the US with the Feds
As such, the idea that the Eurozone and the US entering Japanification could still be far-fetched and given
already targeting interest rates at 0 to 0.25% with the region currently
ample time for a post-Covid-19 economic recovery, there are still plentiful opportunities for the two
facing a recession (Steve, 2020). Moreover, interest rates across the 3
regions to get back on track.
accompanied 2020)
and in
rise
economy
the
by
poor
consumer midst
of
the
Covid-19 outbreak are likely to cause an increase in credit losses
regions have been sluggish the past 5 years with an inconsistent growth of the economy.
in most Asia-Pacific Countries (Figure 7).
Figure 7 Source: Standard & Poor’s Financial Service LLC.
Figure 9: GDP Growth Rate of the US, European Union and Asia-Pacific Source: Trading Economics
A steep increase in credit losses and a sizable drop in net interest margins (NIM) and fee income are likely to suppress earnings in 2021 (Figure 8).
Despite the comparable patterns of Japanification visible in these regions, a quantitative comparison across the regions appears too simple
as
it
ignores
other
fundamental
problems
Japan
is
Figure 10: Inflation Rate Across Euro Area, US and Japan Source: Trading Economics
experiencing, Firstly, Japan has a number of structural issues holding back its economy and the government has seemingly lacked either the In conclusion, there could be an adverse impact on the future of the banking industry amidst the backdrop
political capital or willingness to take them on.
of the Covid-19 pandemic. Factors such as technological disruption, changes to the working environment, that
demographics changes and a possible Japanification are considerable weightages that need to be taken into
large
account. However, therein lies the opportunity for growth with banks tested on their banking resilience and
conglomerates also own equity stakes in one another—a web of what
as such it would be vital for banks to continue upgrading themselves whether it be improving their
is known as cross-shareholding—which discourages competition.
customer relations, their financial standpoint or adopting new technology to better serve their stakeholder.
Secondly, discourages Figure 8 Source: S&P Global Ratings
Japan
suffers
companies
from from
a
restrictive
hiring
new
labour workers.
code Its
THE EQUILIBRIUM NOV 2020| 20
THE EQUILIBRIUM NOV 2020| 21
A return on average assets measures (ROAA) as mentioned above is
Asia-Pacific financial-
an indicator used to assess the profitability of a firm’s assets. It is
services sector in Asia had lost
largely used by financial institutions to gauge financial performance
over
of firms (Kenton, 2019).
By
May
2020,
$920
the
billion
in
market
value, and this largely stemmed from
investors'
concern
Japanification
about
the increasingly high levels of non-performing assets in bank
As the name suggests to us, the term Japanification is derived from
portfolios
the fact that Japan in the past 10 years has been facing low and
due
to
Covid-19
negative inflation and growth in Japan. Japanification is the idea that
(Gunning, et al., 2020).
an According
to
an
S&P
Global
Ratings report, the majority of banks would depict an increase in
credit
losses
and
weaker
earnings in the next one to two years.
Moreover,
systematic
risks are on the rise in the AsiaPacific
region
unemployment (Jain,
et
al.,
business sentiment
as
in
expansion
could
endure
accompanied
Therefore,
interest
by
rates
a
prolonged
low
tend
levels
to
stay
period
of
of
inflation
low
growth
(Figure
low/near-zero
or
10).
become
negative. (Srinivas, et al., 2019). This is becoming a problem for Europe, which consists of many developed economies. Battling its current low GDP growth rate of 1.52%, Europe faces the risk of Japanification. If Japanification is to take effect in Europe, it could
Lastly, Japan also faces human-capital issues, including low female labour-force participation and levels
have a major adverse effect on the growth and profitability in the
of immigration that are likely insufficient to meet the demand for workers as Japan’s population ages
banking industry globally.
(Scaggs, 2020).
In a similar way, the same threat looms in the US with the Feds
As such, the idea that the Eurozone and the US entering Japanification could still be far-fetched and given
already targeting interest rates at 0 to 0.25% with the region currently
ample time for a post-Covid-19 economic recovery, there are still plentiful opportunities for the two
facing a recession (Steve, 2020). Moreover, interest rates across the 3
regions to get back on track.
accompanied 2020)
and in
rise
economy
the
by
poor
consumer midst
of
the
Covid-19 outbreak are likely to cause an increase in credit losses
regions have been sluggish the past 5 years with an inconsistent growth of the economy.
in most Asia-Pacific Countries (Figure 7).
Figure 7 Source: Standard & Poor’s Financial Service LLC.
Figure 9: GDP Growth Rate of the US, European Union and Asia-Pacific Source: Trading Economics
A steep increase in credit losses and a sizable drop in net interest margins (NIM) and fee income are likely to suppress earnings in 2021 (Figure 8).
Despite the comparable patterns of Japanification visible in these regions, a quantitative comparison across the regions appears too simple
as
it
ignores
other
fundamental
problems
Japan
is
Figure 10: Inflation Rate Across Euro Area, US and Japan Source: Trading Economics
experiencing, Firstly, Japan has a number of structural issues holding back its economy and the government has seemingly lacked either the In conclusion, there could be an adverse impact on the future of the banking industry amidst the backdrop
political capital or willingness to take them on.
of the Covid-19 pandemic. Factors such as technological disruption, changes to the working environment, that
demographics changes and a possible Japanification are considerable weightages that need to be taken into
large
account. However, therein lies the opportunity for growth with banks tested on their banking resilience and
conglomerates also own equity stakes in one another—a web of what
as such it would be vital for banks to continue upgrading themselves whether it be improving their
is known as cross-shareholding—which discourages competition.
customer relations, their financial standpoint or adopting new technology to better serve their stakeholder.
Secondly, discourages Figure 8 Source: S&P Global Ratings
Japan
suffers
companies
from from
a
restrictive
hiring
new
labour workers.
code Its
THE EQUILIBRIUM NOV 2020| 22
THE EQUILIBRIUM NOV 2020| 23
Equity Markets: How is Risk Prospering amidst Uncertainty Written By: Priyan Purohit
USA
Introduction
The crash is not to be taken lightly. In order to
The safeguard paused trading for 15 minutes in
understand
hopes
the
scale
of
the
event
we
are
that
the
market
will
calm.
The
U.S.
In the following segment, we shall take a look at how the Covid-19 pandemic has affected equity markets
referring to, here is some context. U.S. equity
Securities
around the world. Having a reputation of being more volatile as compared to various other financial
markets represent 41% of the $75 trillion in
mandated
markets, one might expect a more severe downturn here. While this might have been the case in the initial
global equity market cap; this is almost 4 times
breakers to prevent a repeat of the October 19,
months, the recovery has also been surprisingly quick. This makes us question as to what extent can the
more than the next largest equity market, which
1987 market crash. Since then, they have only
state of equity markets in a country be compared proportionally to its economy? At the same time, what
is the European market (excluding the UK). The
been triggered five times, four of which have
future trends will be observed here? Let’s find out.
market’s reaction to the unpredictability came
been in March 2020 alone (Funakoshi, 2020).
and the
Exchange creation
of
Commission market-wide
(SEC) circuit-
with large drops in share prices, which triggered a
market
March.
wide
circuit
breaker
four
times
in
When
compared
with
the
previous
crises, here is how the uncertainty in the stock markets caused by the pandemic stands:
Stock Market Crash and Its Implications
Stock markets around the world crashed in February 2020 and continued to underperform for a major portion of March 2020 as well. The growing uncertainty caused by the coronavirus pandemic resulted in a rapid price correction across capital markets as investors rushed to safe haven assets such as gold. In times of uncertainty, people want accessible credit lines, liquid assets and safe investments so that they can be prepared for any circumstances. Stocks do not exactly serve that purpose and hence, the markets faced a brutal blow in the beginning. On 9th March, the global markets reported the most severe drop since the 2008 financial crisis due to the added pressure of the oil price war, leading to the day being remembered as ‘Black Monday’. This had already happened even before the WHO declared Covid-19 as a pandemic officially.
financial
Figure 1: Levels of USA’s Stock Market Volatility Throughout Various Financial Crises Source: Kellogg Insight
THE EQUILIBRIUM NOV 2020| 22
THE EQUILIBRIUM NOV 2020| 23
Equity Markets: How is Risk Prospering amidst Uncertainty Written By: Priyan Purohit
USA
Introduction
The crash is not to be taken lightly. In order to
The safeguard paused trading for 15 minutes in
understand
hopes
the
scale
of
the
event
we
are
that
the
market
will
calm.
The
U.S.
In the following segment, we shall take a look at how the Covid-19 pandemic has affected equity markets
referring to, here is some context. U.S. equity
Securities
around the world. Having a reputation of being more volatile as compared to various other financial
markets represent 41% of the $75 trillion in
mandated
markets, one might expect a more severe downturn here. While this might have been the case in the initial
global equity market cap; this is almost 4 times
breakers to prevent a repeat of the October 19,
months, the recovery has also been surprisingly quick. This makes us question as to what extent can the
more than the next largest equity market, which
1987 market crash. Since then, they have only
state of equity markets in a country be compared proportionally to its economy? At the same time, what
is the European market (excluding the UK). The
been triggered five times, four of which have
future trends will be observed here? Let’s find out.
market’s reaction to the unpredictability came
been in March 2020 alone (Funakoshi, 2020).
and the
Exchange creation
of
Commission market-wide
(SEC) circuit-
with large drops in share prices, which triggered a
market
March.
wide
circuit
breaker
four
times
in
When
compared
with
the
previous
crises, here is how the uncertainty in the stock markets caused by the pandemic stands:
Stock Market Crash and Its Implications
Stock markets around the world crashed in February 2020 and continued to underperform for a major portion of March 2020 as well. The growing uncertainty caused by the coronavirus pandemic resulted in a rapid price correction across capital markets as investors rushed to safe haven assets such as gold. In times of uncertainty, people want accessible credit lines, liquid assets and safe investments so that they can be prepared for any circumstances. Stocks do not exactly serve that purpose and hence, the markets faced a brutal blow in the beginning. On 9th March, the global markets reported the most severe drop since the 2008 financial crisis due to the added pressure of the oil price war, leading to the day being remembered as ‘Black Monday’. This had already happened even before the WHO declared Covid-19 as a pandemic officially.
financial
Figure 1: Levels of USA’s Stock Market Volatility Throughout Various Financial Crises Source: Kellogg Insight
THE EQUILIBRIUM NOV 2020| 24
THE EQUILIBRIUM NOV 2020| 25
Europe Initial
Public
Offerings
(IPO)
is
a
Market Recovery
process
through which a private company puts its shares on the public market for the first time to raise funds while trading it for a stake in their firm. The IPO market in Europe has been virtually
Equity markets around the world started showing signs of recovery from the month of May itself. As of 5th June 2020, the S&P 500 was up by 30%
inactive since early March.
and
NASDAQ
was
up
by
40%.
This,
combined with the data collected on stock market trends post a financial crisis, tell us that these are
Only
7
IPOs
on
European
between
were
launched
This brings me to the second reason. Why would
and those with large physical assets during the
people want to invest their money into something
meltdown between Feb 21 and March 18, 2020,
as high-risk as equity markets in the time of such
when the S&P 500 bottomed. Companies tend
uncertainty? Come to think of it, the answer to
to fund large physical infrastructure with debt.
this question boils down to a very simple concept
During the meltdown, the market feared whether
about equity markets, the fact that they absorb
such
extrapolated future events.
companies,
like
airlines,
would
have
sufficient staying power to service their debt burden if their revenues remained at zero for an extended period of time.
their respective regions.
exchanges
early
mid-April,
in stark contrast to the economic conditions in
The market punished companies with large debt
March
and
accumulating
S&P 500
a
NASDAQ 40%
30%
total of €26.2mn in proceeds Let
compared with €6.4bn issued
us
take
a
look
at
the
recovery
post
the
Financial crisis of 2008. During that time, the
in the same period of 2019.
market rewarded the hardest-hit companies the most. If a stock went from 100 to 20 and another
The noticeable implication though, has been the different use of these offerings by companies. Close
inspection
of
companies’
offering
documentation reveals that about €2.5bn of the €5.6bn
capital
raised
between
March-April
2020 was explicitly attributed to Covid-19 use. Firms needed to raise cash in the current market environment for debt repayment, for working capital
or
to
explore
potential
opportunistic
went from 100 to 80, the former did much better on average in the next two years than the latter. The market also punished heavy debt during the downturn between June 2008 and March 2009 — when debt burdens were on average more than
Source: Yahoo Finance & Statista
emphasis
during
the
next
two
years
shifted
towards growth. Real estate — the most battered with the average company losing almost 70% — performed off the charts during the recovery with
M&A transactions (Suarez, 2020).
the
average
between
Asia
Figure 3: USA’s Equity Markets Recovering from the Crash in March
double of what they are now — the market’s
company
March
of
seeing
2009
and
five-fold March
returns
of
2011
Naturally, one would wonder if we will observe a similar trend of recovery this time as well with the
worst-affected
companies
bouncing
back
better than the rest. The one major difference is that virtualisation is likely to keep a damper on
(Dhar, 2020). While the stock markets around the pandemic’s
commercial real estate. Companies have realised
epicentre showed depreciation way before their
that technology is ready for remote work, with
American
less
and
European
counterparts,
the
decline was surprisingly not as severe.
need
for
expensive
office
space.
Data
centres will benefit as will technology providers powering virtualisation.
In Japan, the benchmark index, the Nikkei 225, had
fallen
by
3.6%.
The
Hong
Kong
Stock
Experts say that this surprising recovery which
Exchange fell 3.6%, while the Shanghai Stock
goes against the economic downturn happening
Exchange composite index was down 1.6%. The
in most countries currently is mainly due to two
FTSE Straits Times Index, the benchmark index
reasons. First, with interest rates at an all-time
for Singapore, fell 3.7%, while Taiwan’s TSEC
low and huge liquidity infusions being made by
was down 4%. The Mumbai Sensex was down 6.8% in India (Shu, 2020).
Figure 2: Asian Stock Markets Reacting to Covid-19 (Timeline) Source: Howmuch.net
central banks into the system, people have more money at hand and not a lot of prospective investment options.
The
stock
markets
are
not
good
examples
of
strong evidence of what happened yesterday or last month. They are trying to discount the future. Since
markets
investors expected
have to
be
tend
to
already a
be
forward-looking,
accounted
cataclysmic
drop
for in
what’s second-
quarter activity and are forecasting a relatively rapid economic recovery afterward. The Federal Reserve’s actions have also bolstered investors’ confidence that the bottom won’t fall out of the market (Mohanty, 2020).
In conclusion, equity markets are not accurate indicators of a country’s economic health. In fact, with
each
financial
crisis
that
we
face,
their
trends and forecasts look increasingly divorced from the economic reality (Philips, 2020).
THE EQUILIBRIUM NOV 2020| 24
THE EQUILIBRIUM NOV 2020| 25
Europe Initial
Public
Offerings
(IPO)
is
a
Market Recovery
process
through which a private company puts its shares on the public market for the first time to raise funds while trading it for a stake in their firm. The IPO market in Europe has been virtually
Equity markets around the world started showing signs of recovery from the month of May itself. As of 5th June 2020, the S&P 500 was up by 30%
inactive since early March.
and
NASDAQ
was
up
by
40%.
This,
combined with the data collected on stock market trends post a financial crisis, tell us that these are
Only
7
IPOs
on
European
between
were
launched
This brings me to the second reason. Why would
and those with large physical assets during the
people want to invest their money into something
meltdown between Feb 21 and March 18, 2020,
as high-risk as equity markets in the time of such
when the S&P 500 bottomed. Companies tend
uncertainty? Come to think of it, the answer to
to fund large physical infrastructure with debt.
this question boils down to a very simple concept
During the meltdown, the market feared whether
about equity markets, the fact that they absorb
such
extrapolated future events.
companies,
like
airlines,
would
have
sufficient staying power to service their debt burden if their revenues remained at zero for an extended period of time.
their respective regions.
exchanges
early
mid-April,
in stark contrast to the economic conditions in
The market punished companies with large debt
March
and
accumulating
S&P 500
a
NASDAQ 40%
30%
total of €26.2mn in proceeds Let
compared with €6.4bn issued
us
take
a
look
at
the
recovery
post
the
Financial crisis of 2008. During that time, the
in the same period of 2019.
market rewarded the hardest-hit companies the most. If a stock went from 100 to 20 and another
The noticeable implication though, has been the different use of these offerings by companies. Close
inspection
of
companies’
offering
documentation reveals that about €2.5bn of the €5.6bn
capital
raised
between
March-April
2020 was explicitly attributed to Covid-19 use. Firms needed to raise cash in the current market environment for debt repayment, for working capital
or
to
explore
potential
opportunistic
went from 100 to 80, the former did much better on average in the next two years than the latter. The market also punished heavy debt during the downturn between June 2008 and March 2009 — when debt burdens were on average more than
Source: Yahoo Finance & Statista
emphasis
during
the
next
two
years
shifted
towards growth. Real estate — the most battered with the average company losing almost 70% — performed off the charts during the recovery with
M&A transactions (Suarez, 2020).
the
average
between
Asia
Figure 3: USA’s Equity Markets Recovering from the Crash in March
double of what they are now — the market’s
company
March
of
seeing
2009
and
five-fold March
returns
of
2011
Naturally, one would wonder if we will observe a similar trend of recovery this time as well with the
worst-affected
companies
bouncing
back
better than the rest. The one major difference is that virtualisation is likely to keep a damper on
(Dhar, 2020). While the stock markets around the pandemic’s
commercial real estate. Companies have realised
epicentre showed depreciation way before their
that technology is ready for remote work, with
American
less
and
European
counterparts,
the
decline was surprisingly not as severe.
need
for
expensive
office
space.
Data
centres will benefit as will technology providers powering virtualisation.
In Japan, the benchmark index, the Nikkei 225, had
fallen
by
3.6%.
The
Hong
Kong
Stock
Experts say that this surprising recovery which
Exchange fell 3.6%, while the Shanghai Stock
goes against the economic downturn happening
Exchange composite index was down 1.6%. The
in most countries currently is mainly due to two
FTSE Straits Times Index, the benchmark index
reasons. First, with interest rates at an all-time
for Singapore, fell 3.7%, while Taiwan’s TSEC
low and huge liquidity infusions being made by
was down 4%. The Mumbai Sensex was down 6.8% in India (Shu, 2020).
Figure 2: Asian Stock Markets Reacting to Covid-19 (Timeline) Source: Howmuch.net
central banks into the system, people have more money at hand and not a lot of prospective investment options.
The
stock
markets
are
not
good
examples
of
strong evidence of what happened yesterday or last month. They are trying to discount the future. Since
markets
investors expected
have to
be
tend
to
already a
be
forward-looking,
accounted
cataclysmic
drop
for in
what’s second-
quarter activity and are forecasting a relatively rapid economic recovery afterward. The Federal Reserve’s actions have also bolstered investors’ confidence that the bottom won’t fall out of the market (Mohanty, 2020).
In conclusion, equity markets are not accurate indicators of a country’s economic health. In fact, with
each
financial
crisis
that
we
face,
their
trends and forecasts look increasingly divorced from the economic reality (Philips, 2020).
THE EQUILIBRIUM NOV 2020| 26
THE EQUILIBRIUM NOV 2020| 27
Strategy Refresh and Revenue Impacts
Private Equity Firms are working with companies to understand if the current strategy still makes sense in today’s environment. Are there things companies are doing within their existing footprint and revenue strategy Private equity (PE) is an alternative investment class and consists of capital that is not listed on a public
that need to be accelerated and adapted? Are there potential supply and demand gap dynamics that need to
exchange. Private equity is composed of funds and investors that directly invest in private companies, or
be addressed, and if so, what are the options? Is a pivot in the company’s strategy required, such as a shift
that engage in buyouts of public companies, resulting in the delisting of public equity.
from brick - mortar to a heavier online presence, and if so, what elements are required to execute?
Early (EY)
surveys across
conducted
Private
by
Equity
Ernst firms
&
Young
around
the
time of Jan-Feb 2020 revealed that only a minor portion of firms predicted a recession in 2020 and claimed that their firm is resilient enough to withstand severe downturns. The same figure jumped to two-thirds of the firms modelling a recession when the survey was done again in March (Saenz, 2020).
factors
that
Understanding Liquidity Needs
Firms are performing supply chain intelligence
For many portfolio companies, a combination of
and
where
immediate higher cash needs and limited ability
constraints exist, what their options are and how
to fund them can lead to liquidity shortfalls.
to build better communication between network
Firms are helping to better identify portfolio
nodes.
companies
analytics
Firms
PE
funds
companies need to consider:
and
portfolio
exercises
are
to
understand
helping
companies
to
with
short-
term
To sum up, businesses are flexing their delivery
to
medium-term
dynamically optimize where necessary, and to
cash needs, and the size of those needs over the
perform
next several months under a range of different
integrated
management.
The nature of the crisis means that there are critical
Assessing Supply Chains
planning
and
supplier
scenarios. For some, corrective actions will be available, while others may require additional equity from the sponsor.
models
in
order
to
remain
responsive
to
customers under the constraints of the pandemic. The
elevated
likely
to
levels
experience
of
uncertainty
over
the
next
that 12
we’re to
18
months mean that the companies that survive, and even thrive, will be those that can most quickly pivot and adjust to changing conditions. Agility and adaptability will be the key factors that will drive growth post Covid-19.
THE EQUILIBRIUM NOV 2020| 26
THE EQUILIBRIUM NOV 2020| 27
Strategy Refresh and Revenue Impacts
Private Equity Firms are working with companies to understand if the current strategy still makes sense in today’s environment. Are there things companies are doing within their existing footprint and revenue strategy Private equity (PE) is an alternative investment class and consists of capital that is not listed on a public
that need to be accelerated and adapted? Are there potential supply and demand gap dynamics that need to
exchange. Private equity is composed of funds and investors that directly invest in private companies, or
be addressed, and if so, what are the options? Is a pivot in the company’s strategy required, such as a shift
that engage in buyouts of public companies, resulting in the delisting of public equity.
from brick - mortar to a heavier online presence, and if so, what elements are required to execute?
Early (EY)
surveys across
conducted
Private
by
Equity
Ernst firms
&
Young
around
the
time of Jan-Feb 2020 revealed that only a minor portion of firms predicted a recession in 2020 and claimed that their firm is resilient enough to withstand severe downturns. The same figure jumped to two-thirds of the firms modelling a recession when the survey was done again in March (Saenz, 2020).
factors
that
Understanding Liquidity Needs
Firms are performing supply chain intelligence
For many portfolio companies, a combination of
and
where
immediate higher cash needs and limited ability
constraints exist, what their options are and how
to fund them can lead to liquidity shortfalls.
to build better communication between network
Firms are helping to better identify portfolio
nodes.
companies
analytics
Firms
PE
funds
companies need to consider:
and
portfolio
exercises
are
to
understand
helping
companies
to
with
short-
term
To sum up, businesses are flexing their delivery
to
medium-term
dynamically optimize where necessary, and to
cash needs, and the size of those needs over the
perform
next several months under a range of different
integrated
management.
The nature of the crisis means that there are critical
Assessing Supply Chains
planning
and
supplier
scenarios. For some, corrective actions will be available, while others may require additional equity from the sponsor.
models
in
order
to
remain
responsive
to
customers under the constraints of the pandemic. The
elevated
likely
to
levels
experience
of
uncertainty
over
the
next
that 12
we’re to
18
months mean that the companies that survive, and even thrive, will be those that can most quickly pivot and adjust to changing conditions. Agility and adaptability will be the key factors that will drive growth post Covid-19.
THE EQUILIBRIUM NOV 2020| 28
THE EQUILIBRIUM NOV 2020| 29
Past, Present and Future of Bond Market Written By: Shannen Davelyn Kosasih
Pre-Covid-19:
Introduction
Economy Slowdown
Similar to peanut butter and jelly, bond and stock markets are pronounced correlative in many instances.
Even before the Covid-19 crisis landed and wreaked havoc on the global economy, the U.S. yield curve
As to whether it is positively or negatively associated, one has to assess the underlying conditions of the
inverted in May 2019 where the 3-month Treasury’s yield was higher than the 10-year Treasury’s yield
respective market and the state of the economy. Generally, bond is perceived safer than stock and thus,
followed with Britain’s government bond yield curve inversion, where the 10-year gilt’s yield fell below
traditionally preferred in a period of uncertainty. In the 1500s, when the first stock exchange was
the two-year gilt’s yield. Accompanied with this looming sign of a recession, there was a rising stock of
established, only promissory notes and bonds recognized as stocks were traded. Historically, bonds -
negative-yielding bonds with $15 trillion worth of government bonds trading at negative yields in the first
particularly government bonds - were tools utilized to fund wars during the 1100s in Venice, the 1600s in
half of 2019 - tripled the amount since October 2018 (Fitzgerald, 2019). Deriving from its very name,
England
negative bond yield is a rare situation whereby bondholders are paying debt issuers at the maturity date
and
followed
with
more
bond
issuance
globally
government bond was issued during the revolutionary war.
including
in
the
US
when
the
first
US
and not conversely. These were potentially investors' response to economic uncertainty that existed even before the pandemic, which mainly resulted from the ongoing US-China trade war, tit-for-tat tariffs, Brexit
In essence, bond is synonymous to the term IOU, an
and the spread of Europe Japanification globally.
acknowledgement of one party’s owing to another and
is
generally
issued
by
corporations
and
the
government to raise capital for financing purposes. In exchange for funding, lenders would generally be rewarded
with
a
fixed
coupon
payment
until
it
reaches the maturity date. Bond market, as a whole, refers to the marketplace of all debt securities in which
it
primary
is
segregated
market
for
into
new
two
segments
issuance
and
-
the
secondary
market for trade. The largest sectors of the bond market
include
government
bonds
and
corporate
bonds. Unlike in the past, however, more diverse and
innovative
types
of
bonds
are
developed
-
mainly contributed by the process of securitization in
which
various
groups
of
together and resold as bonds.
assets
are
bundled Figure 1: Total negative debt in world Source: Deutsche Bank, CNBC
THE EQUILIBRIUM NOV 2020| 28
THE EQUILIBRIUM NOV 2020| 29
Past, Present and Future of Bond Market Written By: Shannen Davelyn Kosasih
Pre-Covid-19:
Introduction
Economy Slowdown
Similar to peanut butter and jelly, bond and stock markets are pronounced correlative in many instances.
Even before the Covid-19 crisis landed and wreaked havoc on the global economy, the U.S. yield curve
As to whether it is positively or negatively associated, one has to assess the underlying conditions of the
inverted in May 2019 where the 3-month Treasury’s yield was higher than the 10-year Treasury’s yield
respective market and the state of the economy. Generally, bond is perceived safer than stock and thus,
followed with Britain’s government bond yield curve inversion, where the 10-year gilt’s yield fell below
traditionally preferred in a period of uncertainty. In the 1500s, when the first stock exchange was
the two-year gilt’s yield. Accompanied with this looming sign of a recession, there was a rising stock of
established, only promissory notes and bonds recognized as stocks were traded. Historically, bonds -
negative-yielding bonds with $15 trillion worth of government bonds trading at negative yields in the first
particularly government bonds - were tools utilized to fund wars during the 1100s in Venice, the 1600s in
half of 2019 - tripled the amount since October 2018 (Fitzgerald, 2019). Deriving from its very name,
England
negative bond yield is a rare situation whereby bondholders are paying debt issuers at the maturity date
and
followed
with
more
bond
issuance
globally
government bond was issued during the revolutionary war.
including
in
the
US
when
the
first
US
and not conversely. These were potentially investors' response to economic uncertainty that existed even before the pandemic, which mainly resulted from the ongoing US-China trade war, tit-for-tat tariffs, Brexit
In essence, bond is synonymous to the term IOU, an
and the spread of Europe Japanification globally.
acknowledgement of one party’s owing to another and
is
generally
issued
by
corporations
and
the
government to raise capital for financing purposes. In exchange for funding, lenders would generally be rewarded
with
a
fixed
coupon
payment
until
it
reaches the maturity date. Bond market, as a whole, refers to the marketplace of all debt securities in which
it
primary
is
segregated
market
for
into
new
two
segments
issuance
and
-
the
secondary
market for trade. The largest sectors of the bond market
include
government
bonds
and
corporate
bonds. Unlike in the past, however, more diverse and
innovative
types
of
bonds
are
developed
-
mainly contributed by the process of securitization in
which
various
groups
of
together and resold as bonds.
assets
are
bundled Figure 1: Total negative debt in world Source: Deutsche Bank, CNBC
THE EQUILIBRIUM NOV 2020| 30
THE EQUILIBRIUM NOV 2020| 31
February
Covid-19:
and
March
were
months
of
extreme
The New Normal Era
corporate
sector
investors
global outbreak was announced on the 11th of March
the
particularly
the
bond markets. (Figure 3)
detrimental
that
symptoms
same
of
month,
Covid-19
in
rates
advanced
led
economy
to
market
expectations
with
The flight from risky to safe assets is evident as
Figure 3: Advanced economy government bond yields Source: Bloomberg Finance L.P.; IMF
Looking into the corporate bond market, it is predominantly segmented into investment-grade bond (also known as high-grade bond) and junk bond (also known as high-yield bond) in which alternatively,
could
be
understood
as
low-risk
The global bond market size is estimated to be
low return bond and high-risk high return bond
as
respectively.
USD$128.3
trillion
of
which
is
Investment
grade
bonds
have
a
primarily bifurcated into two spheres, the SSA
classification model based on ratings given by
and corporate bonds. SSA is an acronym for
credit rating agencies with the big three being
Sovereigns,
of
S&P Global Ratings, Moody’s and Fitch Group
which constitutes a majority of 73% sovereign
with a minimum of Baa or BBB rated bonds.
bonds (ICMA analysis using Bloomberg Data,
Amidst the increased liquidity and credit risk,
2020).
credit
By
government
Supranational
definition,
agencies,
sovereign
ratings
downgrades
escalated
as ‘negative outlooks’ on their sovereign ratings.
is
For
to
fund
a
spending and obligation while a corporate bond bond
to
is
tremendously with a total of 17 countries labelled
issued
bond
bond
government
company
issued
and
raise
capital
for
bond
USD$35.6
U.S.
billion
instance,
1,287
S&P’s
ratings
are
on
fund while
outflows USD$249
government money
a week in March due to widening yield spreads,
experienced
similarly perceived as a risk premium (Boston,
(Stubbington & Smith, 2020). This is to say safe
Raimonde,
assets were not regarded safe enough to avoid the
&
Harris,
2020).
Evidently,
U.S.
junk bonds in affected sectors deteriorated with
volatile
spreads reaching up to 1,000 basis points and
expectation.
over
900
October
basis
2011
points
-
(Boston,
the
first
Raimonde,
time &
price while narrow spreads indicate higher bond price.
a
This imbalance between the demand for risky
700
and safe instruments was further exacerbated by
thinks of buying or selling bonds, the age of the
market
(Jones
bond
Furthermore,
the
deepest
reduced
trade from
post-global
plays
a
volumes
for
balance
sheet
financial
major
role
riskier
constraints
crisis.
in
When
determining
one
its
corporate bond sell-off since the 2008 financial
identity among others existing in the market.
first
crisis took place by mid-March 2020 - with over
Apart from its maturity date, issuance date is a
USD$34
complementary
interest
in
rate
history, cut
volatility
expectations
resulting and
from
mounting
demand for safe assets in the debt market is
market
inevitable.
2020).
billion
(Deering,
being
withdrawn
Skinner,
Burgin
from &
the
Colaco,
factor
of
divide
between
the
most recently issued U.S. Treasury bonds and those issued before.
Figure 5: Spread between off-the-run and on-the-run bonds
assets
prices plunging into negative territory for the time
society's
Put simply, wide spreads indicate lower bond
, reached record high-levels due to the pandemic 2020).
March
for the yield that is received by the investors.
investors’ confidence in the ruins of where the
M.,
contradicting
of
2020). These basis points are points of reference
faced
oil
beginning
Harris,
bonds downgraded from investment-grade bonds
by
market,
the
since
activities vanquished the global economy with
Accompanied
in
average spread over treasuries reaching up to
experienced by dealers due to strict regulations
next.
premium due to higher risk involved (Figure 5).
compared to a record low of below 0.4 per cent
2009. Fallen angels, which are referring to junk
heading
liquidity
quadrupled to nearly USD$1 trillion in less than
Consequently, an abrupt halt in the economic
is
the
US Treasury yields rose above 1.2%, a large gap
referring
emanating
was
increased
defaulted securities or those approaching default
debt,
1,028 downgrades of the financial crisis back in
virus
bonds
investors also experienced price drop as 10-year
Distressed
reinforced.
the
issued
to
2020).
the
the
old
Harris,
the
into
and
risky assets, safe assets regarded as havens by
downgrades impacted previously exceeding the
adding
low trade volume contributing to longer dated
Despite the deep sell-off experienced by more
In the first half of 2020, global lockdown to curb
warning
on-the-run securities. Hence, the volatility and
short-term instruments (Boston, Raimonde, &
downgrade
of
especially
market funds - funds investing in liquid and
financing purposes.
spread
were
off-the-run securities are traded less heavily than
US
billion flowed into the U.S.
as
dates
interest rate as compared to short term bonds and
Source: Pimco
reached
large
maturity
impacted possibly due to the high perception of
investment-grade
Global
longer
long term bonds are more sensitive to changes in
asset values.
Source: Haver, Bank of America Merrill Lynch
two
Figure 4: Investment Grade & Speculative Grade Classification
of
Figure 2: Volatility Estimate Index 1-month
are
interest rate risk attached to it. In simpler terms,
expectations of values and through the lens of market,
treasuries
crisis on the rise, off-the-run bonds and bonds
government
economy lies uncertainty, a trigger of society’s
financial
off-the-run
new batch and the old respectively. With liquidity
yields
financial market skyrocketed. In the heart of the
the
and
ends of the spectrum, referring to those of the
for
collapsing and significantly increasing bond price in
interest
scrambling
The WHO official declaration of Covid-19 as a
and
Falling
with
safety.
2020
On-the-run
distress as the liquidity crisis expanded across the
Source: Haver, Brooking
European In contrast to the 131% increase in investmentgrade bond issuance in the period of March to mid- April in 2020 as compared to 2019, the high yield debt issuance declined by 93% in the same period while credit spreads more than doubled as European high yield spreads increased from 300 p
THE EQUILIBRIUM NOV 2020| 30
THE EQUILIBRIUM NOV 2020| 31
February
Covid-19:
and
March
were
months
of
extreme
The New Normal Era
corporate
sector
investors
global outbreak was announced on the 11th of March
the
particularly
the
bond markets. (Figure 3)
detrimental
that
symptoms
same
of
month,
Covid-19
in
rates
advanced
led
economy
to
market
expectations
with
The flight from risky to safe assets is evident as
Figure 3: Advanced economy government bond yields Source: Bloomberg Finance L.P.; IMF
Looking into the corporate bond market, it is predominantly segmented into investment-grade bond (also known as high-grade bond) and junk bond (also known as high-yield bond) in which alternatively,
could
be
understood
as
low-risk
The global bond market size is estimated to be
low return bond and high-risk high return bond
as
respectively.
USD$128.3
trillion
of
which
is
Investment
grade
bonds
have
a
primarily bifurcated into two spheres, the SSA
classification model based on ratings given by
and corporate bonds. SSA is an acronym for
credit rating agencies with the big three being
Sovereigns,
of
S&P Global Ratings, Moody’s and Fitch Group
which constitutes a majority of 73% sovereign
with a minimum of Baa or BBB rated bonds.
bonds (ICMA analysis using Bloomberg Data,
Amidst the increased liquidity and credit risk,
2020).
credit
By
government
Supranational
definition,
agencies,
sovereign
ratings
downgrades
escalated
as ‘negative outlooks’ on their sovereign ratings.
is
For
to
fund
a
spending and obligation while a corporate bond bond
to
is
tremendously with a total of 17 countries labelled
issued
bond
bond
government
company
issued
and
raise
capital
for
bond
USD$35.6
U.S.
billion
instance,
1,287
S&P’s
ratings
are
on
fund while
outflows USD$249
government money
a week in March due to widening yield spreads,
experienced
similarly perceived as a risk premium (Boston,
(Stubbington & Smith, 2020). This is to say safe
Raimonde,
assets were not regarded safe enough to avoid the
&
Harris,
2020).
Evidently,
U.S.
junk bonds in affected sectors deteriorated with
volatile
spreads reaching up to 1,000 basis points and
expectation.
over
900
October
basis
2011
points
-
(Boston,
the
first
Raimonde,
time &
price while narrow spreads indicate higher bond price.
a
This imbalance between the demand for risky
700
and safe instruments was further exacerbated by
thinks of buying or selling bonds, the age of the
market
(Jones
bond
Furthermore,
the
deepest
reduced
trade from
post-global
plays
a
volumes
for
balance
sheet
financial
major
role
riskier
constraints
crisis.
in
When
determining
one
its
corporate bond sell-off since the 2008 financial
identity among others existing in the market.
first
crisis took place by mid-March 2020 - with over
Apart from its maturity date, issuance date is a
USD$34
complementary
interest
in
rate
history, cut
volatility
expectations
resulting and
from
mounting
demand for safe assets in the debt market is
market
inevitable.
2020).
billion
(Deering,
being
withdrawn
Skinner,
Burgin
from &
the
Colaco,
factor
of
divide
between
the
most recently issued U.S. Treasury bonds and those issued before.
Figure 5: Spread between off-the-run and on-the-run bonds
assets
prices plunging into negative territory for the time
society's
Put simply, wide spreads indicate lower bond
, reached record high-levels due to the pandemic 2020).
March
for the yield that is received by the investors.
investors’ confidence in the ruins of where the
M.,
contradicting
of
2020). These basis points are points of reference
faced
oil
beginning
Harris,
bonds downgraded from investment-grade bonds
by
market,
the
since
activities vanquished the global economy with
Accompanied
in
average spread over treasuries reaching up to
experienced by dealers due to strict regulations
next.
premium due to higher risk involved (Figure 5).
compared to a record low of below 0.4 per cent
2009. Fallen angels, which are referring to junk
heading
liquidity
quadrupled to nearly USD$1 trillion in less than
Consequently, an abrupt halt in the economic
is
the
US Treasury yields rose above 1.2%, a large gap
referring
emanating
was
increased
defaulted securities or those approaching default
debt,
1,028 downgrades of the financial crisis back in
virus
bonds
investors also experienced price drop as 10-year
Distressed
reinforced.
the
issued
to
2020).
the
the
old
Harris,
the
into
and
risky assets, safe assets regarded as havens by
downgrades impacted previously exceeding the
adding
low trade volume contributing to longer dated
Despite the deep sell-off experienced by more
In the first half of 2020, global lockdown to curb
warning
on-the-run securities. Hence, the volatility and
short-term instruments (Boston, Raimonde, &
downgrade
of
especially
market funds - funds investing in liquid and
financing purposes.
spread
were
off-the-run securities are traded less heavily than
US
billion flowed into the U.S.
as
dates
interest rate as compared to short term bonds and
Source: Pimco
reached
large
maturity
impacted possibly due to the high perception of
investment-grade
Global
longer
long term bonds are more sensitive to changes in
asset values.
Source: Haver, Bank of America Merrill Lynch
two
Figure 4: Investment Grade & Speculative Grade Classification
of
Figure 2: Volatility Estimate Index 1-month
are
interest rate risk attached to it. In simpler terms,
expectations of values and through the lens of market,
treasuries
crisis on the rise, off-the-run bonds and bonds
government
economy lies uncertainty, a trigger of society’s
financial
off-the-run
new batch and the old respectively. With liquidity
yields
financial market skyrocketed. In the heart of the
the
and
ends of the spectrum, referring to those of the
for
collapsing and significantly increasing bond price in
interest
scrambling
The WHO official declaration of Covid-19 as a
and
Falling
with
safety.
2020
On-the-run
distress as the liquidity crisis expanded across the
Source: Haver, Brooking
European In contrast to the 131% increase in investmentgrade bond issuance in the period of March to mid- April in 2020 as compared to 2019, the high yield debt issuance declined by 93% in the same period while credit spreads more than doubled as European high yield spreads increased from 300 p
THE EQUILIBRIUM NOV 2020| 32
basis
points
up
to
866
basis
points in the January to March period
(Suarez
&
Johnston,
THE EQUILIBRIUM NOV 2020| 33
-0.23%, which regardless of its
demand has undoubtedly lower
‘Japanification’
negative
bond
experienced
highest
return return
proposed in
months
year UK bonds (Stubbington &
€3.5bn per week and €3bn per
Smith, 2020). This was a drastic
week
pattern
respectively.
These
change
of
investors’
outflows were mostly redirected
selling bonds instead of buying
towards
term
bonds. The is to say investors
money
frantically need cash and bond’s
liquid
instruments market
and
such
funds
short as
and
sovereign
bonds similar to the trend seen
liquidity
offset
its
safe
haven
label.
in the US.
fallen angel bonds.
medium-run and long run, the
&
Smith,
(Figure
Consequently,
Existing
disadvantages
China’s bonds
of
domestic-denominated such
as
its
faster
the
11).
yield
curve
for Japanese government bonds steepened
-
a
similar
trend
occurring in other regions.
borrowing
foreign investors. This stability
had
was a display of great resilience
cost of borrowings for both the
in Asian bond prices in spite of
short-term
Looking
into
Figure 8: Japan’s 10/30-year yield spread
bond
market,
130
basis
points
points
while
to
high
286 yield
points up to 1500 basis points (Lockett, 2020). This worsened the decline in high yield bonds impacted
the two big players of the bond
2020
first
market
in
the
region.
As
quarter
compared of
2020
to
the
illustrated
strict
regulatory
restrictions in place for issuers to
issuance in the second quarter of as
by
the
Asia
meaning
bonds
circulating outside of mainland China.
the
Uncertainty still lies ahead as the continues
navigating remedies available to pave
a
path
unforeseeable bank’s
towards future.
response
long-term
road
to
the
rates
recovery.
the
Central to
previously
utilized
during the Great Recession, was once
market
lowered
again
between June,
employed
mid-March
securities
and
and mid-
purchases
rose
by 1.5 times from $3.9 trillion to $6.1 trillion (Cheng, Skidmore,
potential might need
of
there
possibility second
and
relating
the
the
in government bonds witnessed
remained
stable
throughout
Figure 7: 10-year bond yields comparison Source: Bloomberg, Financial Times
world began to introduce various
the
especially
monetary
actions taken by the fed coupled
countries. Mounting an influx of debt
all
around
policy
actions
the
to
adopting
to
short
extraordinary
the
safe
run,
program
continuous
reduce central bank credibility
banks
an
its
however,
bonds but to corporate bonds. In
Central
post-Covid-19.
to
of
run,
policies - one of which would
the
name
the
QE
following
support in the long run might blur
the
US,
asset
purchase
government’s
economic
subsidies,
increased
benefits
and
is
existing fiscal
a
those
perceived
in
double
short the
and
term
monetary
emerging
edge
sword.
financing
economy as
boundary
afloat
somewhat
to is a
helped
necessity in times of crisis, the
Market Corporate Credit Facility
smooth the credit flow and ease
consequence of paying its price
(PMCCF),
Market
the
to
in the future has more than one
Facility
prevent
liquidity
fixed path ahead - one of which
(SMCCF) and few others were
stresses economy,
Corporate
which is notorious for its low
government debt yield reached
bonds.
yield
-0
demand
‘Japanification’ condition
Bold
government
ownership of sovereign renminbi
its
crisis.
limited
market as the 10-year German
to
health
of
future
initiated.
due
containment
between
On the other side of Asia, Japan
bonds
factors
Infinity with its shopping list not
trillion increase in total foreign
foreign
other
for
and pessimistic outlooks of the
bond
in
vaccine
level,
escape
Increase
a
the
revolving around the optimistic
March with a record Rmb2.27
European
pandemic,
heightened
in the U.S. Treasuries did not the
prospective
primary focus on this discussion
economy
expansion
programs
and
a
the
The
denominated
limelight
loosened
exogenous shocks would be the
on
the
an
to market recovery in the short
the
Yen,
stolen
to
and government might have led
& Wessel, 2020).
& Johnston, Impact of Covid-19
Market Update, 2020). Volatility
up
moves made by the central bank
unemployment
has
to
public
In
market
wave
Covid-19
US treasuries, gold and Japanese
bond
pandemic
and
of
of
fiscal measures required (Suarez
Markets:
assessed.
remained
discovery
keep
Capital
wave
still
wage
European
carefully
still
social restrictions. Nonetheless,
injection as their primary goal.
renminbi-
future
leading
additional
traditional
China’s
that
insubstantial recession with no
financing needed to supply the
the
the
Covid-19
time
While
as
the
would last for a shorter period
stimulus - such as tax deferrals,
such
in
be
the
to a stable ground with liquidity
havens
arise
view,
extreme market volatility felt in
government
in
Through an optimistic point of
with
the
markets
circumstances
to
induce the liquidity stresses back
of
to
offshore,
down
and
recovery
financial
the
magnitude
opposed
Pacific
raise
Post-Crisis Outlook
global
economic
successfully
weapon
US
Chinese
desired
Quantitative easing, a powerful
Source: Bloomberg
China’s
bonds rose from below 600 basis
are
and
the
basis
China
overnight
need to be taken account of by
rose
and
funds rate, the rate for interbank
interest rates to remain low until
currency
investment-grade bonds spreads
Japan
The reduction in its targeted fed
barriers of entry are risks that
of
dollar-denominated
Notably,
a
forward guidance on setting the
corporate
the European government bond
of
and
depreciation
market.
A substantial increase of 71% in
ratings
only in the U.S. but globally.
the
(Stubbington
its correlation to the U.S. bond
China & Japan
by
bonds, especially those holding
insignificant
which was a result of the lack of
Source: Barclays, Afme
caused
not
spiked
is
the market turmoil in the U.S. of
Figure 6: European AAA corporate spreads (bps)
impacts
markets
As to unravel the well-being of
2020).
of
negative
securities
diversified portfolio of corporate
0.79% surge in the yields of 10-
outflows
spread
other
as its long-term borrowing costs
and
fund
widening
the
compared to U.S. Treasuries in March
experienced
a
cushion
between its 10 and 30 year-yield
This rise was accompanied by a
market
the
helped
as
change
EPFR data, the investment grade bond
2020).
however,
(FOMC)
downgraded
(Stubbington
yield
Smith,
yields,
2020). According to ING with
high
&
two
the
condition
such
as
Secondary Credit
Primary
many
others
-
financial a
had
conditions
ripple
of
to
the
is a scenario of inflating the debt
which
is
away and what it takes to set a
implementations by the Federal
particularly aimed at the treasury
high inflation target as a policy
Open
market
move.
(FOMC)
These
Market
policy
Committee
other
and
as
shock
one
the
foundation
of
THE EQUILIBRIUM NOV 2020| 32
basis
points
up
to
866
basis
points in the January to March period
(Suarez
&
Johnston,
THE EQUILIBRIUM NOV 2020| 33
-0.23%, which regardless of its
demand has undoubtedly lower
‘Japanification’
negative
bond
experienced
highest
return return
proposed in
months
year UK bonds (Stubbington &
€3.5bn per week and €3bn per
Smith, 2020). This was a drastic
week
pattern
respectively.
These
change
of
investors’
outflows were mostly redirected
selling bonds instead of buying
towards
term
bonds. The is to say investors
money
frantically need cash and bond’s
liquid
instruments market
and
such
funds
short as
and
sovereign
bonds similar to the trend seen
liquidity
offset
its
safe
haven
label.
in the US.
fallen angel bonds.
medium-run and long run, the
&
Smith,
(Figure
Consequently,
Existing
disadvantages
China’s bonds
of
domestic-denominated such
as
its
faster
the
11).
yield
curve
for Japanese government bonds steepened
-
a
similar
trend
occurring in other regions.
borrowing
foreign investors. This stability
had
was a display of great resilience
cost of borrowings for both the
in Asian bond prices in spite of
short-term
Looking
into
Figure 8: Japan’s 10/30-year yield spread
bond
market,
130
basis
points
points
while
to
high
286 yield
points up to 1500 basis points (Lockett, 2020). This worsened the decline in high yield bonds impacted
the two big players of the bond
2020
first
market
in
the
region.
As
quarter
compared of
2020
to
the
illustrated
strict
regulatory
restrictions in place for issuers to
issuance in the second quarter of as
by
the
Asia
meaning
bonds
circulating outside of mainland China.
the
Uncertainty still lies ahead as the continues
navigating remedies available to pave
a
path
unforeseeable bank’s
towards future.
response
long-term
road
to
the
rates
recovery.
the
Central to
previously
utilized
during the Great Recession, was once
market
lowered
again
between June,
employed
mid-March
securities
and
and mid-
purchases
rose
by 1.5 times from $3.9 trillion to $6.1 trillion (Cheng, Skidmore,
potential might need
of
there
possibility second
and
relating
the
the
in government bonds witnessed
remained
stable
throughout
Figure 7: 10-year bond yields comparison Source: Bloomberg, Financial Times
world began to introduce various
the
especially
monetary
actions taken by the fed coupled
countries. Mounting an influx of debt
all
around
policy
actions
the
to
adopting
to
short
extraordinary
the
safe
run,
program
continuous
reduce central bank credibility
banks
an
its
however,
bonds but to corporate bonds. In
Central
post-Covid-19.
to
of
run,
policies - one of which would
the
name
the
QE
following
support in the long run might blur
the
US,
asset
purchase
government’s
economic
subsidies,
increased
benefits
and
is
existing fiscal
a
those
perceived
in
double
short the
and
term
monetary
emerging
edge
sword.
financing
economy as
boundary
afloat
somewhat
to is a
helped
necessity in times of crisis, the
Market Corporate Credit Facility
smooth the credit flow and ease
consequence of paying its price
(PMCCF),
Market
the
to
in the future has more than one
Facility
prevent
liquidity
fixed path ahead - one of which
(SMCCF) and few others were
stresses economy,
Corporate
which is notorious for its low
government debt yield reached
bonds.
yield
-0
demand
‘Japanification’ condition
Bold
government
ownership of sovereign renminbi
its
crisis.
limited
market as the 10-year German
to
health
of
future
initiated.
due
containment
between
On the other side of Asia, Japan
bonds
factors
Infinity with its shopping list not
trillion increase in total foreign
foreign
other
for
and pessimistic outlooks of the
bond
in
vaccine
level,
escape
Increase
a
the
revolving around the optimistic
March with a record Rmb2.27
European
pandemic,
heightened
in the U.S. Treasuries did not the
prospective
primary focus on this discussion
economy
expansion
programs
and
a
the
The
denominated
limelight
loosened
exogenous shocks would be the
on
the
an
to market recovery in the short
the
Yen,
stolen
to
and government might have led
& Wessel, 2020).
& Johnston, Impact of Covid-19
Market Update, 2020). Volatility
up
moves made by the central bank
unemployment
has
to
public
In
market
wave
Covid-19
US treasuries, gold and Japanese
bond
pandemic
and
of
of
fiscal measures required (Suarez
Markets:
assessed.
remained
discovery
keep
Capital
wave
still
wage
European
carefully
still
social restrictions. Nonetheless,
injection as their primary goal.
renminbi-
future
leading
additional
traditional
China’s
that
insubstantial recession with no
financing needed to supply the
the
the
Covid-19
time
While
as
the
would last for a shorter period
stimulus - such as tax deferrals,
such
in
be
the
to a stable ground with liquidity
havens
arise
view,
extreme market volatility felt in
government
in
Through an optimistic point of
with
the
markets
circumstances
to
induce the liquidity stresses back
of
to
offshore,
down
and
recovery
financial
the
magnitude
opposed
Pacific
raise
Post-Crisis Outlook
global
economic
successfully
weapon
US
Chinese
desired
Quantitative easing, a powerful
Source: Bloomberg
China’s
bonds rose from below 600 basis
are
and
the
basis
China
overnight
need to be taken account of by
rose
and
funds rate, the rate for interbank
interest rates to remain low until
currency
investment-grade bonds spreads
Japan
The reduction in its targeted fed
barriers of entry are risks that
of
dollar-denominated
Notably,
a
forward guidance on setting the
corporate
the European government bond
of
and
depreciation
market.
A substantial increase of 71% in
ratings
only in the U.S. but globally.
the
(Stubbington
its correlation to the U.S. bond
China & Japan
by
bonds, especially those holding
insignificant
which was a result of the lack of
Source: Barclays, Afme
caused
not
spiked
is
the market turmoil in the U.S. of
Figure 6: European AAA corporate spreads (bps)
impacts
markets
As to unravel the well-being of
2020).
of
negative
securities
diversified portfolio of corporate
0.79% surge in the yields of 10-
outflows
spread
other
as its long-term borrowing costs
and
fund
widening
the
compared to U.S. Treasuries in March
experienced
a
cushion
between its 10 and 30 year-yield
This rise was accompanied by a
market
the
helped
as
change
EPFR data, the investment grade bond
2020).
however,
(FOMC)
downgraded
(Stubbington
yield
Smith,
yields,
2020). According to ING with
high
&
two
the
condition
such
as
Secondary Credit
Primary
many
others
-
financial a
had
conditions
ripple
of
to
the
is a scenario of inflating the debt
which
is
away and what it takes to set a
implementations by the Federal
particularly aimed at the treasury
high inflation target as a policy
Open
market
move.
(FOMC)
These
Market
policy
Committee
other
and
as
shock
one
the
foundation
of
BEYOND CORONAVIRUS
THE PATH TO A NEW NORMAL
FOREWORD The world was first announced of a potential coronavirus outbreak from Wuhan, China in December 2019, which was named “Covid-19.” A few months has passed, and we have seen the fastest spread of the pandemic of the decade, in comparison to several coronaviruses we have faced such as SARS, MERS, Ebola and H1N1. With over tens of millions infected and close to a million deaths, Covid-19 or Coronavirus disease 2019 have caused large widespread suffering and have caused devastating economic and social impacts which threatened the daily livelihood of billions of people globally. With the pandemic bearing adverse effects impacting billions, it is important to understand these effects which befell on us so that we can adapt and be on the recovery path towards the new normal. However, such a task is difficult as even governments worldwide have been scrambling to understand its economic impacts and to provide fiscal “parachutes” to rescue it’s failing economies. The problem with pandemics is that it is not just a supply shock like an oil price shock or global supply chain disruptions nor is it a demand shock caused by falling consumer or business confidence. Pandemics potentially causes combinations of supply, demand and financial shocks to fragile global economies. Hence, the issue of Covid-19 is extremely complex and often difficult to understand. What this newsletter aims to accomplish is to identify and provide some key insights and analysis of industries and the labor markets which are adversely hit by the effects of the virus, and to illustrate economic climate changes in the global and local context. This part of the newsletter “Beyond Covid-19, Path to a new normal” will start off with analysis on the effects on the global economy, and then taking on a local Singapore perspective and how Covid-19 impacted the Services and Manufacturing Industries in Singapore. There is a quote by G. Michael Hopf says: “Hard times create strong men and strong men create good times.” While we face the economic and social crisis caused by the pandemic, I want to believe that facing tough times help to mold us and provide us opportunities to grow more resilient, to adapt to the new normal and emerge from this crisis stronger. I would like to think this is the case, will you too? Hoo Chi Yang, Director at SIMES.
THE EQUILIBRIUM NOV 2020| 36
THE EQUILIBRIUM NOV 2020| 37
The pandemic which originated from Wuhan, China is likely to change the global economy as we know it. The rapidly spreading virus has not
A Crisis Like No Other, An Uncertain Recovery
only affected the demand for various goods and
services but has also managed to make a dent in
Written By: Earth Chadha
the global supply chain.
The pandemic which originated from Wuhan, China is likely to change the global economy as we know it. The rapidly spreading virus has not only affected the demand for various goods and services but has
The Initial hit The pandemic has pushed the global economy into a recession. Covid-19 disruptions have led to a rise in unemployment worldwide, as more than a billion people were estimated to have lost their jobs. These estimates were mainly based on data collected from the so-called “informal� sector which includes migrant, agricultural, or shift workers in developing countries and gig workers, which in addition to service-industry staff,
were
wealthier
increasingly economies
predominant
(International
in
the
Labour
Organisation, 2020).
is
estimated
that
the
global
economy
will
Covid-19
pandemic
lasts
for
a
The
Covid-19
(mainly from China), as well as the import and
pandemic
export
of
pharmaceuticals.
Countries
such
as
Germany, Switzerland, Belgium are expected to
2009 global financial crisis. Economies such as
automotive industry. It has caused disruptions
be the worst hit. There is also the potential for
the US, UK, Japan, Germany, France, Italy and
in
negative impacts of both a medium- and longer-
Spain are expected to contract this year by 7.9%,
manufacturing interruptions across Europe, and
term
7.5%,
the closure of assembly plants in the United
activities,
States.
projects/programmes
respectively.
8%, As
7.2%,
seen
in
9.1%
figure
1,
and
8%
advanced
This
economies are expected to be hit harder, which
industry
together
downshift
are
expected
(International
Monetary
other
hand,
emerging
to
shrink
Fund,
markets
by
2020). and
On
8%. the
developing
parts
places
which in
globally
and
integrated
Chinese
the
swiftly
severely
6.2%,
impacted
had
shrink by 3% in 2020 which is far worse than the
exports,
intense
large
scale
pressure
on with
was
already
coping
global
demand
(Vitale,
an a
2020).
expected
to
be
most
adversely
hit,
(International
Belgium, France, Sweden and Italy (6 out of
numbers
favour
the
Fund,
emerging
2020).
markets
The
mainly
the
top
10
automotive
even a severe outbreak of the virus didn’t have
followed
much
of
United Kingdom and South Korea with $51.40
companies operating in these countries, this is
billion, $42 billion, 38.20 billion respectively
also coupled with the fact that such developing
(Workman, 2020).
the
quarterly
results
where there is high demand for economical goods which are being produced in these developing countries.
as
R&D well
chain/data
not
and as
manufacturing a
related
management
delay to
the
on core
operations
(Mahajan, 2020).
by
exports
Japan,
of
countries)
with
on
combined
exporting
because of countries like India and China where
impact
supply
on
mainly
because of countries such as Germany, Spain,
Monetary
nature
Figure 2 shows how the European Union is
economies are expected to contract by just 3%
domestic markets and potential foreign markets
product) Source: International Monetary Fund
current
medium/long period, it may impact the supply of
Automotive Sector
economies have very strong and rapidly growing
Figure 1: Growth Projections (as % of Gross domestic
Business Sectors Affected
the
active pharmaceutical ingredients and materials
also managed to make a dent in the global supply chain.
It
If
The
$278.10
United
billion
States,
The
Figure 2: Estimated Impact on the automotive
Pharmaceutical Sector During
these
pharmaceutical
unprecedented companies
have
times, to
rapidly
respond to challenges arising from a disruption in
supply
chains
business processes.
and
the
need
to
change
sector as of June 2020 (in Million U.S. dollar) Source: United Nations Conference on Trade and Development
THE EQUILIBRIUM NOV 2020| 36
THE EQUILIBRIUM NOV 2020| 37
The pandemic which originated from Wuhan, China is likely to change the global economy as we know it. The rapidly spreading virus has not
A Crisis Like No Other, An Uncertain Recovery
only affected the demand for various goods and
services but has also managed to make a dent in
Written By: Earth Chadha
the global supply chain.
The pandemic which originated from Wuhan, China is likely to change the global economy as we know it. The rapidly spreading virus has not only affected the demand for various goods and services but has
The Initial hit The pandemic has pushed the global economy into a recession. Covid-19 disruptions have led to a rise in unemployment worldwide, as more than a billion people were estimated to have lost their jobs. These estimates were mainly based on data collected from the so-called “informal� sector which includes migrant, agricultural, or shift workers in developing countries and gig workers, which in addition to service-industry staff,
were
wealthier
increasingly economies
predominant
(International
in
the
Labour
Organisation, 2020).
is
estimated
that
the
global
economy
will
Covid-19
pandemic
lasts
for
a
The
Covid-19
(mainly from China), as well as the import and
pandemic
export
of
pharmaceuticals.
Countries
such
as
Germany, Switzerland, Belgium are expected to
2009 global financial crisis. Economies such as
automotive industry. It has caused disruptions
be the worst hit. There is also the potential for
the US, UK, Japan, Germany, France, Italy and
in
negative impacts of both a medium- and longer-
Spain are expected to contract this year by 7.9%,
manufacturing interruptions across Europe, and
term
7.5%,
the closure of assembly plants in the United
activities,
States.
projects/programmes
respectively.
8%, As
7.2%,
seen
in
9.1%
figure
1,
and
8%
advanced
This
economies are expected to be hit harder, which
industry
together
downshift
are
expected
(International
Monetary
other
hand,
emerging
to
shrink
Fund,
markets
by
2020). and
On
8%. the
developing
parts
places
which in
globally
and
integrated
Chinese
the
swiftly
severely
6.2%,
impacted
had
shrink by 3% in 2020 which is far worse than the
exports,
intense
large
scale
pressure
on with
was
already
coping
global
demand
(Vitale,
an a
2020).
expected
to
be
most
adversely
hit,
(International
Belgium, France, Sweden and Italy (6 out of
numbers
favour
the
Fund,
emerging
2020).
markets
The
mainly
the
top
10
automotive
even a severe outbreak of the virus didn’t have
followed
much
of
United Kingdom and South Korea with $51.40
companies operating in these countries, this is
billion, $42 billion, 38.20 billion respectively
also coupled with the fact that such developing
(Workman, 2020).
the
quarterly
results
where there is high demand for economical goods which are being produced in these developing countries.
as
R&D well
chain/data
not
and as
manufacturing a
related
management
delay to
the
on core
operations
(Mahajan, 2020).
by
exports
Japan,
of
countries)
with
on
combined
exporting
because of countries like India and China where
impact
supply
on
mainly
because of countries such as Germany, Spain,
Monetary
nature
Figure 2 shows how the European Union is
economies are expected to contract by just 3%
domestic markets and potential foreign markets
product) Source: International Monetary Fund
current
medium/long period, it may impact the supply of
Automotive Sector
economies have very strong and rapidly growing
Figure 1: Growth Projections (as % of Gross domestic
Business Sectors Affected
the
active pharmaceutical ingredients and materials
also managed to make a dent in the global supply chain.
It
If
The
$278.10
United
billion
States,
The
Figure 2: Estimated Impact on the automotive
Pharmaceutical Sector During
these
pharmaceutical
unprecedented companies
have
times, to
rapidly
respond to challenges arising from a disruption in
supply
chains
business processes.
and
the
need
to
change
sector as of June 2020 (in Million U.S. dollar) Source: United Nations Conference on Trade and Development
THE EQUILIBRIUM NOV 2020| 38
THE EQUILIBRIUM NOV 2020| 39
There
Shipping and Logistics Sector The logistics chains are going through unusual and massive losses from the disruption caused by the Covid-19 pandemic. The disruption is both
from
Terminals,
the
supply
CFSs,
ICDs
and and
demand
side.
warehouses
are
feeling the heat. The shutdown of factories and scarcity of manpower to de-stuff cargo as well as drivers to operate trucks for cargo evacuation has derailed the trade and smooth functioning of the
logistics
industry.
The
estimate
is
a
cumulative loss of $9 trillion to the global GDP
is
also
a
5.25
percent
decline
in
cargo
volume in March of 2020 vs March of 2019. In the case of containers, the downfall is about 12.51 percent. The turnaround time at ports is around 12.2 days, which was about 3 days in the preCovid-19 According
scenario to
(Maritimegateaway,
Agility
(a
leading
2020).
warehousing
company, transport and supply chain management company) and as seen in figure 3 and 4, countries like India, China, South Africa and Bangladesh
Travel and Tourism Sector
the
Travel and tourism are one of the most affected sectors with airplanes grounded, hotels closed, and travel restrictions imposed in virtually all countries
around
the
world.
The
tourism
industry accounts for 10% of the world’s GDP and jobs. Current scenarios point to declines of 57% in international tourist arrivals for the year (United Nations World Tourism Organisation,
shutdown
influence
on
minimum.
On
have
of
malls
and
essential the
benefited
goods
other
due
shops
hand,
to
while
the
retailers
is
online
retailers
extraordinary
sales
volumes with companies like Amazon registering 40% higher sales volumes year on year helping the company record $5.2 billion in net income for three months to the end of June (Lee, 2020). Overall, the sector’s outlook is likely to improve steadily over time.
2020).
seem to be the worst affected both with regards to the ocean and air freight holding capacities.
and the world trade has already witnessed a decline
by
witnessed
32 a
percent.
50-60
International
percent
fall
in
ports traffic,
operating at 30-40 percent capacity.
Figure 5: International tourist arrivals, Jan, Feb, March 2020 (% change) Source: United Nations World Tourism Organisation, 2020
As seen in Figure 5, Asia seems to be affected
Conclusion
the most, with a 64% drop in the arrival of international tourists in March and an estimated 30 million jobs expected to be lost (United Nations World Tourism Organisation, 2020). The statistic is followed by Europe, America, Africa and the Middle East with a drop of 60%, 46%, 44% and 41% respectively, in the arrival Figure:3 Impact of Covid-19 on Global Air freight Capacities
of International tourist in March and 7 million,
Source: Agility, Global Integrated Logistics
5
million,
4
million
and
1.25
million
jobs
expected to be lost respectively (United Nations World Tourism Organisation, 2020). This is by far the worst result in the historical series of international tourism since 1950 and would put an abrupt end to 10 years of sustained growth since the 2009 financial crisis. Retail Sector Organised retailers (retail chain supported by a well-defined supply chain which usually has a small number of middlemen when compared to Figure:4 Impact of Covid-19 on Global Ocean Freight Capacities Source: Agility, Global Integrated Logistics
the unorganised sector) are heavily impacted by
The
spread
disrupting
of
the
virus
economic
is
likely
activity
to
and
continue
negatively
impacting manufacturing and service industries, especially in developed countries, there is still a question as to whether this unfolding crisis will have
a
lasting
structural
economy
or
economic
consequences.
evident
that
largely
impact
short-term In
have
economic
and
the
potential
financial
global economies.
costs
the
case,
diseases to on
global
financial
either
communicable
Covid-19
on
and it
such
inflict
is as
severe
regional
and
THE EQUILIBRIUM NOV 2020| 38
THE EQUILIBRIUM NOV 2020| 39
There
Shipping and Logistics Sector The logistics chains are going through unusual and massive losses from the disruption caused by the Covid-19 pandemic. The disruption is both
from
Terminals,
the
supply
CFSs,
ICDs
and and
demand
side.
warehouses
are
feeling the heat. The shutdown of factories and scarcity of manpower to de-stuff cargo as well as drivers to operate trucks for cargo evacuation has derailed the trade and smooth functioning of the
logistics
industry.
The
estimate
is
a
cumulative loss of $9 trillion to the global GDP
is
also
a
5.25
percent
decline
in
cargo
volume in March of 2020 vs March of 2019. In the case of containers, the downfall is about 12.51 percent. The turnaround time at ports is around 12.2 days, which was about 3 days in the preCovid-19 According
scenario to
(Maritimegateaway,
Agility
(a
leading
2020).
warehousing
company, transport and supply chain management company) and as seen in figure 3 and 4, countries like India, China, South Africa and Bangladesh
Travel and Tourism Sector
the
Travel and tourism are one of the most affected sectors with airplanes grounded, hotels closed, and travel restrictions imposed in virtually all countries
around
the
world.
The
tourism
industry accounts for 10% of the world’s GDP and jobs. Current scenarios point to declines of 57% in international tourist arrivals for the year (United Nations World Tourism Organisation,
shutdown
influence
on
minimum.
On
have
of
malls
and
essential the
benefited
goods
other
due
shops
hand,
to
while
the
retailers
is
online
retailers
extraordinary
sales
volumes with companies like Amazon registering 40% higher sales volumes year on year helping the company record $5.2 billion in net income for three months to the end of June (Lee, 2020). Overall, the sector’s outlook is likely to improve steadily over time.
2020).
seem to be the worst affected both with regards to the ocean and air freight holding capacities.
and the world trade has already witnessed a decline
by
witnessed
32 a
percent.
50-60
International
percent
fall
in
ports traffic,
operating at 30-40 percent capacity.
Figure 5: International tourist arrivals, Jan, Feb, March 2020 (% change) Source: United Nations World Tourism Organisation, 2020
As seen in Figure 5, Asia seems to be affected
Conclusion
the most, with a 64% drop in the arrival of international tourists in March and an estimated 30 million jobs expected to be lost (United Nations World Tourism Organisation, 2020). The statistic is followed by Europe, America, Africa and the Middle East with a drop of 60%, 46%, 44% and 41% respectively, in the arrival Figure:3 Impact of Covid-19 on Global Air freight Capacities
of International tourist in March and 7 million,
Source: Agility, Global Integrated Logistics
5
million,
4
million
and
1.25
million
jobs
expected to be lost respectively (United Nations World Tourism Organisation, 2020). This is by far the worst result in the historical series of international tourism since 1950 and would put an abrupt end to 10 years of sustained growth since the 2009 financial crisis. Retail Sector Organised retailers (retail chain supported by a well-defined supply chain which usually has a small number of middlemen when compared to Figure:4 Impact of Covid-19 on Global Ocean Freight Capacities Source: Agility, Global Integrated Logistics
the unorganised sector) are heavily impacted by
The
spread
disrupting
of
the
virus
economic
is
likely
activity
to
and
continue
negatively
impacting manufacturing and service industries, especially in developed countries, there is still a question as to whether this unfolding crisis will have
a
lasting
structural
economy
or
economic
consequences.
evident
that
largely
impact
short-term In
have
economic
and
the
potential
financial
global economies.
costs
the
case,
diseases to on
global
financial
either
communicable
Covid-19
on
and it
such
inflict
is as
severe
regional
and
THE EQUILIBRIUM NOV 2020| 40
THE EQUILIBRIUM NOV 2020| 41
Overview and Key Insights of Shocks and Unemployment on Singapore’s Economy Written By: Hoo Chi Yang
pattern due to Covid-19, Kim, Koh & Zhang (2020) conducted a study of Singaporeans between 50 to 70,
Introduction
showed total consumer spending decreased by 7.3% in February, 9.0% in March and 22.8% in April as Covid-19 cases surged where consumption reduction was greater for households with higher net worth
At the time of this writing, the coronavirus Covid-19 has claimed 953,903 lives and infected more than 30
while lower net-worth households face more negative labour market outcomes. These numbers are based
million globally, of which 57 thousand are infected Singaporeans (WHO, 2020). Drastic measures have
on the difference-in-difference model where Kim, Koh & Zhang analyse changes in consumption and
since been implemented by the Singapore Government to combat the health effects of the virus such as the
labour market outcomes between the month of year 2020 against the same month of 2019, on the same
‘circuit-breaker’ measures implemented on May 2020. With the severity of such a crisis, it is pertinent that
individuals.
we discuss the shocks to Singapore's economy and its economic implications.
A plausible reason for this result is that high net-worth individuals are likely to spend more money on entertainment and travel which are more severely affected by the pandemic. Given travel restrictions and how Covid-19 tended to affect this age group more, many vacations and holidays would be cancelled. Lower net worth individuals in the age group could largely be working in the services sector which are severely affected by the crisis. Data from the Ministry of Manpower (2007) showed that 77% of older workers are employed in the service sector, of which 42% are in the Administrative & support services ssasa
sector and 38% are in the hotels & restaurant sector. It is supported by evidence from Kim, Koh & Zhang
Shocks to Confidence
(2008) which showed that consumption in entertainment fell by 83%, tours and vacation fell by 153%, spending on food & beverages from restaurants fell by 32.2% but spending on food & beverages from grocery stores/supermarkets increased by 13.6%. Given that the service sector is labour intensive, it is
Pandemics causes large demand shocks by affecting consumers and business confidence. These effects are
expected that junior front end staff will be affected more than senior management staff. There is a lack of
reflected in decreased consumer spending and a reduction in business investments. A simulation study
data on the younger demographic but it is expected that as the subjective probability of unemployment
conducted by Keogh Brown & Smith (2008) demonstrated that the economic impact of SARS, a
increases as the global economy goes into a recession, individual’s risk avoidance behaviour would result
coronavirus like Covid-19, depended heavily on household changes in lifestyle to avoid public interaction
in people saving more on average.
such as a reduction in travel, leisure, and touring activities. To understand the changes in consumption dads
THE EQUILIBRIUM NOV 2020| 40
THE EQUILIBRIUM NOV 2020| 41
Overview and Key Insights of Shocks and Unemployment on Singapore’s Economy Written By: Hoo Chi Yang
pattern due to Covid-19, Kim, Koh & Zhang (2020) conducted a study of Singaporeans between 50 to 70,
Introduction
showed total consumer spending decreased by 7.3% in February, 9.0% in March and 22.8% in April as Covid-19 cases surged where consumption reduction was greater for households with higher net worth
At the time of this writing, the coronavirus Covid-19 has claimed 953,903 lives and infected more than 30
while lower net-worth households face more negative labour market outcomes. These numbers are based
million globally, of which 57 thousand are infected Singaporeans (WHO, 2020). Drastic measures have
on the difference-in-difference model where Kim, Koh & Zhang analyse changes in consumption and
since been implemented by the Singapore Government to combat the health effects of the virus such as the
labour market outcomes between the month of year 2020 against the same month of 2019, on the same
‘circuit-breaker’ measures implemented on May 2020. With the severity of such a crisis, it is pertinent that
individuals.
we discuss the shocks to Singapore's economy and its economic implications.
A plausible reason for this result is that high net-worth individuals are likely to spend more money on entertainment and travel which are more severely affected by the pandemic. Given travel restrictions and how Covid-19 tended to affect this age group more, many vacations and holidays would be cancelled. Lower net worth individuals in the age group could largely be working in the services sector which are severely affected by the crisis. Data from the Ministry of Manpower (2007) showed that 77% of older workers are employed in the service sector, of which 42% are in the Administrative & support services ssasa
sector and 38% are in the hotels & restaurant sector. It is supported by evidence from Kim, Koh & Zhang
Shocks to Confidence
(2008) which showed that consumption in entertainment fell by 83%, tours and vacation fell by 153%, spending on food & beverages from restaurants fell by 32.2% but spending on food & beverages from grocery stores/supermarkets increased by 13.6%. Given that the service sector is labour intensive, it is
Pandemics causes large demand shocks by affecting consumers and business confidence. These effects are
expected that junior front end staff will be affected more than senior management staff. There is a lack of
reflected in decreased consumer spending and a reduction in business investments. A simulation study
data on the younger demographic but it is expected that as the subjective probability of unemployment
conducted by Keogh Brown & Smith (2008) demonstrated that the economic impact of SARS, a
increases as the global economy goes into a recession, individual’s risk avoidance behaviour would result
coronavirus like Covid-19, depended heavily on household changes in lifestyle to avoid public interaction
in people saving more on average.
such as a reduction in travel, leisure, and touring activities. To understand the changes in consumption dads
THE EQUILIBRIUM NOV 2020| 42
THE EQUILIBRIUM NOV 2020| 43
Effects of Unemployment Figure 1: Re-entry into Employment Rate, Quarterly
Through
Source: singstat.gov.sg
several
businesses,
the
measures
to
government
save
has
jobs
tried
to
and slow
down the rate of job loss, such as the Job Support Scheme (JSS) which covers a percentage of up to 50% However, this is to be tested, as the Food and Beverage industry is among the most affected industries inflation
and due
According
to
currently to
faces
supply
Ting
chain
(2020)
cost-push disruptions.
from
The
Straits
Times, “Food was the only component of the Overall sectoral demand for services would be more adversely affected compared to demand
consumer price index to see a faster rise in
Shocks to Food & Labour Supply
for manufactured goods as decrease in the latter
costs, with prices up by 2.2 percent year on
of
salary
increase
depending
employment
on
rates
industry
through
and
the
to
Jobs
Growth Incentive where sectors that are doing well are encouraged to create new hires (Gov.sg, 2020). Based on data from Singstat (2020), reentry into jobs fell more in Q1 and Q2 in 2020 than compared in 2019. However, based on the statistic, quite
the
mild.
effect If
on
reemployment
without
inventions
seemed
to
speed
rehiring efforts, the effect could be much worse.
year last month, from 2.1 per cent in April.”
can be caused by wait-and-see purchase delays
Supply
while the former demand for services will not
goods from being produced by producers, which
Sectors
recover. Demand for services will have a ‘L’
are affected by the price level and wages. There
severely
affected.
shaped recovery as people will be unlikely to
are potentially two sectors that may face the brunt
measures
were
double up on social activities such as missed
of supply side shocks; i.e. F & B businesses and
construction activities were forced to cease due
government
restaurant trips, and hence shocks to tourism,
construction
to
showing a mild decrease, this meant that there
transportation services and domestic activities
sectors that are not considered essential services
resulting
will have permanent effects (Baldwin, R., &
or firms that cannot conduct operations remotely
these
Mauro, B. W. D, 2020).
are
engineering
–
also
business Investment demands have been often seen to be
side
shocks
&
are
shocks
maritime
adversely services,
that
hinders
engineering.
affected,
which
transportation
&
Other
includes storage
falling global demands. Finance professionals mentioned that many Singapore firms are facing cash flow problems. The head of ACCA, Mr Reuter Chua said “Our data for June reveals continued cash flow challenges, with more than a third in Singapore saying this is a problem” (Subhani,
2020).
The
states
that
investment
accelerator investment
theory
of
demand
is
dependent on the growth rate of output and is determined increases
by
in
investment. consumer economy,
the
firm's
revenue With
goods firms
and
cash profits
decreased and
a
flow
encourages
demand
contracting
experiencing
where
for
global
decreased
cash
flows are less likely to invest, thus exacerbating the negative effects of Covid-19.
the
outbreak in
The
migrant
When
in
the
severe
workers
the
majority
worker’s
restrictions
result
were is
a
&
global
supply
chain,
given
Singapore’s
limited land space for domestic food production. According to the Singapore Food Agency (2020),
at
shipyards
were
disrupted,
in
a
51%
decrease in private and 48% decrease in public certified quarter
progress
payments
(Ministry
of
in
Trade
Singapore, 2020).
24% of eggs are produced in 2018. This means that Singapore is a price taker in the global food Despite these issues, Singapore tops the
food security index which tracks how affordable,
Figure 2: Seasonally Adjusted Unemployment Rate,
accessible, safe and nutritious the food is (Liu,
Second Quarter 2020 Source: Ministry of Trade and Industry Singapore
the
and
about 13% of all vegetables, 9% of all fish and
2019).
severely
reduction
90% of all food are imported while domestically
market.
on
maritime
hence 43%
of
dormitories, imposed
Construction
sectors
are
‘circuit-breaker’
place,
in
workers.
affected.
work Food security might be threatened by disruptions in
employ
output of marine & offshore engineering as
sectors.
positively correlated with consumption demand will also see a decline as with exports due to
an
that
second Industry
Data
from
the
Second
Quarter
report
of
the
Economic Survey of Singapore showed that the rate
will
of
retrenchments efforts.
be
adjusted
With
extended
unemployment.
In
overall,
has
increased
the
rate
periods
June
2020,
resident
of
of the
despite re-entry
higher
seasonally-
and
citizen
unemployment rates (Figure 2.) rose compared to March 2020.
THE EQUILIBRIUM NOV 2020| 42
THE EQUILIBRIUM NOV 2020| 43
Effects of Unemployment Figure 1: Re-entry into Employment Rate, Quarterly
Through
Source: singstat.gov.sg
several
businesses,
the
measures
to
government
save
has
jobs
tried
to
and slow
down the rate of job loss, such as the Job Support Scheme (JSS) which covers a percentage of up to 50% However, this is to be tested, as the Food and Beverage industry is among the most affected industries inflation
and due
According
to
currently to
faces
supply
Ting
chain
(2020)
cost-push disruptions.
from
The
Straits
Times, “Food was the only component of the Overall sectoral demand for services would be more adversely affected compared to demand
consumer price index to see a faster rise in
Shocks to Food & Labour Supply
for manufactured goods as decrease in the latter
costs, with prices up by 2.2 percent year on
of
salary
increase
depending
employment
on
rates
industry
through
and
the
to
Jobs
Growth Incentive where sectors that are doing well are encouraged to create new hires (Gov.sg, 2020). Based on data from Singstat (2020), reentry into jobs fell more in Q1 and Q2 in 2020 than compared in 2019. However, based on the statistic, quite
the
mild.
effect If
on
reemployment
without
inventions
seemed
to
speed
rehiring efforts, the effect could be much worse.
year last month, from 2.1 per cent in April.”
can be caused by wait-and-see purchase delays
Supply
while the former demand for services will not
goods from being produced by producers, which
Sectors
recover. Demand for services will have a ‘L’
are affected by the price level and wages. There
severely
affected.
shaped recovery as people will be unlikely to
are potentially two sectors that may face the brunt
measures
were
double up on social activities such as missed
of supply side shocks; i.e. F & B businesses and
construction activities were forced to cease due
government
restaurant trips, and hence shocks to tourism,
construction
to
showing a mild decrease, this meant that there
transportation services and domestic activities
sectors that are not considered essential services
resulting
will have permanent effects (Baldwin, R., &
or firms that cannot conduct operations remotely
these
Mauro, B. W. D, 2020).
are
engineering
–
also
business Investment demands have been often seen to be
side
shocks
&
are
shocks
maritime
adversely services,
that
hinders
engineering.
affected,
which
transportation
&
Other
includes storage
falling global demands. Finance professionals mentioned that many Singapore firms are facing cash flow problems. The head of ACCA, Mr Reuter Chua said “Our data for June reveals continued cash flow challenges, with more than a third in Singapore saying this is a problem” (Subhani,
2020).
The
states
that
investment
accelerator investment
theory
of
demand
is
dependent on the growth rate of output and is determined increases
by
in
investment. consumer economy,
the
firm's
revenue With
goods firms
and
cash profits
decreased and
a
flow
encourages
demand
contracting
experiencing
where
for
global
decreased
cash
flows are less likely to invest, thus exacerbating the negative effects of Covid-19.
the
outbreak in
The
migrant
When
in
the
severe
workers
the
majority
worker’s
restrictions
result
were is
a
&
global
supply
chain,
given
Singapore’s
limited land space for domestic food production. According to the Singapore Food Agency (2020),
at
shipyards
were
disrupted,
in
a
51%
decrease in private and 48% decrease in public certified quarter
progress
payments
(Ministry
of
in
Trade
Singapore, 2020).
24% of eggs are produced in 2018. This means that Singapore is a price taker in the global food Despite these issues, Singapore tops the
food security index which tracks how affordable,
Figure 2: Seasonally Adjusted Unemployment Rate,
accessible, safe and nutritious the food is (Liu,
Second Quarter 2020 Source: Ministry of Trade and Industry Singapore
the
and
about 13% of all vegetables, 9% of all fish and
2019).
severely
reduction
90% of all food are imported while domestically
market.
on
maritime
hence 43%
of
dormitories, imposed
Construction
sectors
are
‘circuit-breaker’
place,
in
workers.
affected.
work Food security might be threatened by disruptions in
employ
output of marine & offshore engineering as
sectors.
positively correlated with consumption demand will also see a decline as with exports due to
an
that
second Industry
Data
from
the
Second
Quarter
report
of
the
Economic Survey of Singapore showed that the rate
will
of
retrenchments efforts.
be
adjusted
With
extended
unemployment.
In
overall,
has
increased
the
rate
periods
June
2020,
resident
of
of the
despite re-entry
higher
seasonally-
and
citizen
unemployment rates (Figure 2.) rose compared to March 2020.
THE EQUILIBRIUM NOV 2020| 44
THE EQUILIBRIUM NOV 2020| 45
While significantly lower than the peak of the Global
quarter,
Financial Crisis, retrenchments (Figure 3.) in the second
decreased
employment (exhibit 1.6) declined by 131,500 on a
contraction workers
on
basis,
record.
(FDWs),
the
sharpest
Excluding
total
employment
fell
intervention,
‘hysteresis’
more
of
the
effects.
The
any
workers
SG-United job scheme to provide fresh graduates with
the
labour
This
shows
of
Trade
that
and
overall
Industry domestic
of
government budget the
policy
is
constraint.
historical
constrained It
is
impact
by
important
of
the
the to
fiscal
crisis where only $4.9 billion was drawn as compared to the Figure 3: Rate of Retrenchment, Second Quarter 2020 Source: Ministry of Trade and Industry Singapore
internship opportunities and also has helped to facilitate keep
2020).
(Ministry
past reserves, the first was during the global financial
individuals as well as assisting them in their job search.
to
have
time that the Singapore government has touched on its
workshops and programs to retrain these unemployed
transitions
items
implementation of the government. It is only the second
fail. It is very necessary that governments introduce
The Singapore government has since implemented the
use
understand
and relevance as job vacancies shrink and businesses
career
13.1%
government’s
will
likely become ‘discouraged’ workers, as they lose skills
mid-life
all
have strong stabilising effects on the economy.
Without
unemployed
–
shocks and S$193 billion worth of fiscal injections could
These shocks could cause persistent negative labour or
index
The economy could be predominantly affected by demand
121,800
(Ministry of Trade and Industry Singapore, 2020).
outcomes
price
supply is not severely affected by the Covid-19 pandemic.
domestic
by
by
Singapore,
quarterly
foreign
consumer
decreased by 0.7% and the domestic supply price index
quarter were double that in the preceding quarter. Total
quarter-on-quarter
the
astronomical
amount
of
S$193
billion
to
combat
Covid-19 (Singapore Budget, 2020). Furthermore, there are
concerns
that
the
depleted
reserves
may
be
insufficient in supporting fiscal expansion over long term.
force
Given the prudence of the Singapore government, much
updated with the new demands of the market.
higher taxes would surely be imposed in the future which imposes a greater burden to future generations, in order to
Fiscal Policy
restore fiscal sustainability. In a parliamentary speech, the finance minister Heng Swee Keat has mentioned that GST increase from 7% to 9% while delayed presently
& Future Taxes
would
most
definitely
be
imposed
by
2025
(Yuen-C,
2020).
During an economic crisis, the government's role is to stabilise the economy. However, fiscal policy is only appropriate when there is a demand shock. When the economy is hit by a supply-side shock, expansionary fiscal
policy
stabilises
output
but
at
the
cost
Conclusion
of
increasing the price level under temporary shock while Covid-19 has caused severe health, social and economic
there will be further destabilisation effects if the shock
effects
is permanent. The problem with pandemics is that it causes
demand,
supply
and
financial
shocks.
economic
instability
if
the
wrong
policy
as
countries
become
ever
more
connected in 2020. The coronavirus pandemic has the
Policy
capacity to cause large scale changes to how businesses
prescription can therefore be difficult and could result in
internationally
are conducted and how people live worldwide as we adapt
is
to the effects of the virus. While the future may be filled
introduced.
with uncertainty, what is certain is the ‘clean’ leadership of the Singapore government and its fiscal prudence that
In the first quarter of 2020, the consumer price index – all items have grown by 0.4% Year on Year growth, but the domestic supply price index has decreased by 3.5% in terms of Year-on-year growth (Ministry of Trade and Industry quarter,
Singapore,
2020).
However,
in
the
second
Figure 4: Change in Total Employment, Second Quarter 2020 Source: Ministry of Trade and Industry Singapore
is displayed over the years to prepare us from a crisis like Covid-19 and others more in the future.
THE EQUILIBRIUM NOV 2020| 44
THE EQUILIBRIUM NOV 2020| 45
While significantly lower than the peak of the Global
quarter,
Financial Crisis, retrenchments (Figure 3.) in the second
decreased
employment (exhibit 1.6) declined by 131,500 on a
contraction workers
on
basis,
record.
(FDWs),
the
sharpest
Excluding
total
employment
fell
intervention,
‘hysteresis’
more
of
the
effects.
The
any
workers
SG-United job scheme to provide fresh graduates with
the
labour
This
shows
of
Trade
that
and
overall
Industry domestic
of
government budget the
policy
is
constraint.
historical
constrained It
is
impact
by
important
of
the
the to
fiscal
crisis where only $4.9 billion was drawn as compared to the Figure 3: Rate of Retrenchment, Second Quarter 2020 Source: Ministry of Trade and Industry Singapore
internship opportunities and also has helped to facilitate keep
2020).
(Ministry
past reserves, the first was during the global financial
individuals as well as assisting them in their job search.
to
have
time that the Singapore government has touched on its
workshops and programs to retrain these unemployed
transitions
items
implementation of the government. It is only the second
fail. It is very necessary that governments introduce
The Singapore government has since implemented the
use
understand
and relevance as job vacancies shrink and businesses
career
13.1%
government’s
will
likely become ‘discouraged’ workers, as they lose skills
mid-life
all
have strong stabilising effects on the economy.
Without
unemployed
–
shocks and S$193 billion worth of fiscal injections could
These shocks could cause persistent negative labour or
index
The economy could be predominantly affected by demand
121,800
(Ministry of Trade and Industry Singapore, 2020).
outcomes
price
supply is not severely affected by the Covid-19 pandemic.
domestic
by
by
Singapore,
quarterly
foreign
consumer
decreased by 0.7% and the domestic supply price index
quarter were double that in the preceding quarter. Total
quarter-on-quarter
the
astronomical
amount
of
S$193
billion
to
combat
Covid-19 (Singapore Budget, 2020). Furthermore, there are
concerns
that
the
depleted
reserves
may
be
insufficient in supporting fiscal expansion over long term.
force
Given the prudence of the Singapore government, much
updated with the new demands of the market.
higher taxes would surely be imposed in the future which imposes a greater burden to future generations, in order to
Fiscal Policy
restore fiscal sustainability. In a parliamentary speech, the finance minister Heng Swee Keat has mentioned that GST increase from 7% to 9% while delayed presently
& Future Taxes
would
most
definitely
be
imposed
by
2025
(Yuen-C,
2020).
During an economic crisis, the government's role is to stabilise the economy. However, fiscal policy is only appropriate when there is a demand shock. When the economy is hit by a supply-side shock, expansionary fiscal
policy
stabilises
output
but
at
the
cost
Conclusion
of
increasing the price level under temporary shock while Covid-19 has caused severe health, social and economic
there will be further destabilisation effects if the shock
effects
is permanent. The problem with pandemics is that it causes
demand,
supply
and
financial
shocks.
economic
instability
if
the
wrong
policy
as
countries
become
ever
more
connected in 2020. The coronavirus pandemic has the
Policy
capacity to cause large scale changes to how businesses
prescription can therefore be difficult and could result in
internationally
are conducted and how people live worldwide as we adapt
is
to the effects of the virus. While the future may be filled
introduced.
with uncertainty, what is certain is the ‘clean’ leadership of the Singapore government and its fiscal prudence that
In the first quarter of 2020, the consumer price index – all items have grown by 0.4% Year on Year growth, but the domestic supply price index has decreased by 3.5% in terms of Year-on-year growth (Ministry of Trade and Industry quarter,
Singapore,
2020).
However,
in
the
second
Figure 4: Change in Total Employment, Second Quarter 2020 Source: Ministry of Trade and Industry Singapore
is displayed over the years to prepare us from a crisis like Covid-19 and others more in the future.
THE EQUILIBRIUM NOV 2020| 46
THE EQUILIBRIUM NOV 2020| 47
The Service Industry during Covid-19 Written By: Evangeline Zhang
Introduction The
service
industry
Impact on the Service Industry – Retail and F&B
constitutes
the
fundamental
backbone
of
an
economy
and
has
contributed
significantly to the development of a country. It is one of the key industries that drives Singapore’s economy and also one of the main contributors to our national Gross Domestic Product (GDP). In 2019, the service industry contributed 70.38% to the GDP of Singapore (Plecher, 2020). The industry consists of retail services, food & beverage services as well as transport services. These sectors depend heavily on consumer needs which is one of the determinants of demand.
Retail Sector – Apparel and Supermarkets
During the circuit breaker period and the announcement on the closure of non-essential services, retail outlets in Singapore were unable to operate and had to remain closed till 18 June 2020. As a result, sellers of discretionary items were hit the hardest by these moves, with the sales of wearing apparel and footwear dropping 85.3%, sales at department stores also plunged some 84.6% (Tan, 2020). Fashion brands such as Uniqlo, Zara and Cotton On had to rely on sales from their online shopping platforms during this period.
Although there was a rise in e-commerce sales, they were not nearly enough to cover the loss of in-store sales. This is because online platforms are usually supplementary and not their main channel of sales (Tay, 2020). As a result, some retail outlets that were unable to remain competitive had to close their businesses. In addition, when the employment rate is low, people become more selective in their spending. Hence, consumers spend less on apparel as they are not necessities. This resulted in a decrease in purchase quantity which led to a drop in consumer demand for apparel. Therefore, retail outlets witnessed a sharp decline in their sales.
On the other hand, the sales of supermarkets outperform that of apparel. Due to the panic buying of food and groceries, there was a surge in sales for the supermarkets. According to the Department of Statistics (SingStat), sales of the Supermarkets & Hypermarkets sector grew by 28.6% on a year-on-year basis in The world is currently battling the Covid-19 pandemic which has cast a pall over the economy. Due to the outbreak, businesses have been impacted, daily activities have been affected and plans have been disrupted.
Without
knowing
when
normality
will
return,
Singapore’s
economy
has
already
been
significantly impacted. The service industry is one of Singapore’s key sectors that has been hit heavily by the global pandemic. This has forced companies in the service sector to adapt to the new normal and rethink their business approaches.
July 2020 due to an increased demand for groceries during the circuit breaker period. However, there was a decline of 9.8% on a month-on-month basis in July 2020 as demand for groceries slowed following Phase Two re-opening from 19 June 2020 (Department of Statistics, 2020). Despite this, the Supermarkets & Hypermarkets sector remains as one of the better performing sectors in the service industry.
THE EQUILIBRIUM NOV 2020| 46
THE EQUILIBRIUM NOV 2020| 47
The Service Industry during Covid-19 Written By: Evangeline Zhang
Introduction The
service
industry
Impact on the Service Industry – Retail and F&B
constitutes
the
fundamental
backbone
of
an
economy
and
has
contributed
significantly to the development of a country. It is one of the key industries that drives Singapore’s economy and also one of the main contributors to our national Gross Domestic Product (GDP). In 2019, the service industry contributed 70.38% to the GDP of Singapore (Plecher, 2020). The industry consists of retail services, food & beverage services as well as transport services. These sectors depend heavily on consumer needs which is one of the determinants of demand.
Retail Sector – Apparel and Supermarkets
During the circuit breaker period and the announcement on the closure of non-essential services, retail outlets in Singapore were unable to operate and had to remain closed till 18 June 2020. As a result, sellers of discretionary items were hit the hardest by these moves, with the sales of wearing apparel and footwear dropping 85.3%, sales at department stores also plunged some 84.6% (Tan, 2020). Fashion brands such as Uniqlo, Zara and Cotton On had to rely on sales from their online shopping platforms during this period.
Although there was a rise in e-commerce sales, they were not nearly enough to cover the loss of in-store sales. This is because online platforms are usually supplementary and not their main channel of sales (Tay, 2020). As a result, some retail outlets that were unable to remain competitive had to close their businesses. In addition, when the employment rate is low, people become more selective in their spending. Hence, consumers spend less on apparel as they are not necessities. This resulted in a decrease in purchase quantity which led to a drop in consumer demand for apparel. Therefore, retail outlets witnessed a sharp decline in their sales.
On the other hand, the sales of supermarkets outperform that of apparel. Due to the panic buying of food and groceries, there was a surge in sales for the supermarkets. According to the Department of Statistics (SingStat), sales of the Supermarkets & Hypermarkets sector grew by 28.6% on a year-on-year basis in The world is currently battling the Covid-19 pandemic which has cast a pall over the economy. Due to the outbreak, businesses have been impacted, daily activities have been affected and plans have been disrupted.
Without
knowing
when
normality
will
return,
Singapore’s
economy
has
already
been
significantly impacted. The service industry is one of Singapore’s key sectors that has been hit heavily by the global pandemic. This has forced companies in the service sector to adapt to the new normal and rethink their business approaches.
July 2020 due to an increased demand for groceries during the circuit breaker period. However, there was a decline of 9.8% on a month-on-month basis in July 2020 as demand for groceries slowed following Phase Two re-opening on 19 June 2020 (Department of Statistics, 2020). Despite this, the Supermarkets & Hypermarkets sector remains as one of the better performing sectors in the service industry.
THE EQUILIBRIUM NOV 2020| 48
THE EQUILIBRIUM NOV 2020| 49
Most supermarkets in Singapore also saw immense growth in their e-commerce platforms. For example,
The food & beverage services sector would most likely be able to recover its revenue as food and
James Chang, CEO of Lazada Singapore mentioned that orders on RedMart exceeded the company’s
beverages are considered necessities in life. Consumers need food to survive and hence, would buy food
weekly average by 300% as people rushed to buy in bulk (Choudhury, 2020). According to the Retail
regardless of the change in their income. Necessities also have an income elasticity of demand of between
Sales Index for July 2020 by SingStat, online retail sales of Supermarkets & Hypermarkets industry made
0 and 1. This means that a change in consumer income level would have a small effect on the consumer
up 11.4% of the total sales of their respective industry (Department of Statistics, 2020). People are buying
demand for necessity goods.
more groceries as they spend more time at home and avoid eating out. The surge in demand for groceries has caused major disruptions to the supply chain and drove up prices. Despite the increase in prices of
How Has Government Intervention Come into Play?
groceries, consumer demand remains relatively high as groceries are necessary if consumers prefer not to dine out.
The Singapore government came up with several measures to help Singaporeans through the pandemic.
Food & Beverage Services Sector:
These measures ranged from cash payouts to job traineeships. There are some measures that would be of The food & beverage services sector has also been impacted by the coronavirus outbreak, especially with
greater help to the service industry. For example, the Job Support Scheme (JSS) which was launched at
government
food
the start of the pandemic, helps companies to retain jobs by covering the salary of workers – initially up to
establishments were only allowed to operate for takeaways, many eateries witnessed a drop in revenue.
August 2020. The JSS has now been extended by up to seven months, covering wages paid up to March
According to SingStat, sales of food & beverage services fell 43.6% in June 2020 as food & beverage
2021 (gov.sg, 2020). For sectors in the service industry such as food & beverage services, land transport
establishments operated on a takeaway or delivery basis until 18 June 2020 (Department of Statistics,
services and retail services, 30% of wages would be covered for seven more months (gov.sg, 2020). This
2020).
measure is a great initiative to reduce the number of layoffs for companies.
With the re-opening of Phase Two where diners were allowed to dine in, there was still a drop in sales for
Government interventions are extremely important for countries that are battling a pandemic crisis. These
food establishments due to the limitation of a maximum of five diners per table on-premise. According to
interventions serve as a security net for Singaporeans by letting them know that they are not alone in the
the Food & Beverage Services Index for July 2020 by SingStat, within the food & beverage services
fight
sector, year-on-year declines were recorded across all industries. Turnover of Restaurants, Cafes, Food
Resilience and Fortitude, coming up to a total of $92.9 billion (Yuen-C, 2020). Such measures can help
Courts & Other Eating Places and Fast Food Outlets fell between 11.5% and 29.9% during this period as
individuals and companies tide through this difficult period.
implementations
in
place.
Since
consumers
were
not
allowed
to
dine
in
and
against
Covid-19.
To
date,
the
government
has
implemented
4
Budgets
–
Unity,
Solidarity,
part of safe distancing requirements (Department of Statistics, 2020). On a seasonally adjusted basis, sales of Restaurants and Cafes, Food Courts & Other Eating Places and Fast Food Outlets grew by between 7.2% and 61.0% compared to June 2020, with more people dining in at food & beverage establishments in Phase Two.
Overall Outlook on the Future of the Service Industry
Faced with the coronavirus outbreak, companies in the service industry need to rapidly adapt to the pandemic to remain competitive. Most companies in the service industry ranging from fashion apparel to supermarkets have been relying on e-commerce platforms to make up for the loss in sales in physical stores. With more consumers turning to online shopping, we can expect more companies to adopt the idea of using e-commerce. This could be a new way of purchasing for Singapore in the future. Therefore, it is vital for companies to find ways to adapt to survive amid the pandemic.
The coronavirus pandemic is highly likely to change the way consumers buy and retailers would have to innovate and adapt to the new normal. According to Ernst & Young (EY), it is important for retailers to understand the need to adopt a sound multi-channel strategy, consistent online engagement, relevant product mix, focus on online marketing and pro-actively invest in back-end operations (Enriquez, 2020). Although it is difficult to determine how long the service industry would take to recover from the effects Figure 1: Change in Food & Beverage Sales by Industry Source: singstat.gov.sg
of the pandemic, the industry still has a positive outlook. But innovation and adaptation would be important factors to determine the success of the service industry.
THE EQUILIBRIUM NOV 2020| 48
THE EQUILIBRIUM NOV 2020| 49
Most supermarkets in Singapore also saw immense growth in their e-commerce platforms. For example,
The food & beverage services sector would most likely be able to recover its revenue as food and
James Chang, CEO of Lazada Singapore mentioned that orders on RedMart exceeded the company’s
beverages are considered necessities in life. Consumers need food to survive and hence, would buy food
weekly average by 300% as people rushed to buy in bulk (Choudhury, 2020). According to the Retail
regardless of the change in their income. Necessities also have an income elasticity of demand of between
Sales Index for July 2020 by SingStat, online retail sales of Supermarkets & Hypermarkets industry made
0 and 1. This means that a change in consumer income level would have a small effect on the consumer
up 11.4% of the total sales of their respective industry (Department of Statistics, 2020). People are buying
demand for necessity goods.
more groceries as they spend more time at home and avoid eating out. The surge in demand for groceries has caused major disruptions to the supply chain and drove up prices. Despite the increase in prices of
How Has Government Intervention Come into Play?
groceries, consumer demand remains relatively high as groceries are necessary if consumers prefer not to dine out.
The Singapore government came up with several measures to help Singaporeans through the pandemic.
Food & Beverage Services Sector:
These measures ranged from cash payouts to job traineeships. There are some measures that would be of The food & beverage services sector has also been impacted by the coronavirus outbreak, especially with
greater help to the service industry. For example, the Job Support Scheme (JSS) which was launched at
government
food
the start of the pandemic, helps companies to retain jobs by covering the salary of workers – initially up to
establishments were only allowed to operate for takeaways, many eateries witnessed a drop in revenue.
August 2020. The JSS has now been extended by up to seven months, covering wages paid up to March
According to SingStat, sales of food & beverage services fell 43.6% in June 2020 as food & beverage
2021 (gov.sg, 2020). For sectors in the service industry such as food & beverage services, land transport
establishments operated on a takeaway or delivery basis until 18 June 2020 (Department of Statistics,
services and retail services, 30% of wages would be covered for seven more months (gov.sg, 2020). This
2020).
measure is a great initiative to reduce the number of layoffs for companies.
With the re-opening of Phase Two where diners were allowed to dine in, there was still a drop in sales for
Government interventions are extremely important for countries that are battling a pandemic crisis. These
food establishments due to the limitation of a maximum of five diners per table on-premise. According to
interventions serve as a security net for Singaporeans by letting them know that they are not alone in the
the Food & Beverage Services Index for July 2020 by SingStat, within the food & beverage services
fight
sector, year-on-year declines were recorded across all industries. Turnover of Restaurants, Cafes, Food
Resilience and Fortitude, coming up to a total of $92.9 billion (Yuen-C, 2020). Such measures can help
Courts & Other Eating Places and Fast Food Outlets fell between 11.5% and 29.9% during this period as
individuals and companies tide through this difficult period.
implementations
in
place.
Since
consumers
were
not
allowed
to
dine
in
and
against
Covid-19.
To
date,
the
government
has
implemented
4
Budgets
–
Unity,
Solidarity,
part of safe distancing requirements (Department of Statistics, 2020). On a seasonally adjusted basis, sales of Restaurants and Cafes, Food Courts & Other Eating Places and Fast Food Outlets grew by between 7.2% and 61.0% compared to June 2020, with more people dining in at food & beverage establishments in Phase Two.
Overall Outlook on the Future of the Service Industry
Faced with the coronavirus outbreak, companies in the service industry need to rapidly adapt to the pandemic to remain competitive. Most companies in the service industry ranging from fashion apparel to supermarkets have been relying on e-commerce platforms to make up for the loss in sales in physical stores. With more consumers turning to online shopping, we can expect more companies to adopt the idea of using e-commerce. This could be a new way of purchasing for Singapore in the future. Therefore, it is vital for companies to find ways to adapt to survive amid the pandemic.
The coronavirus pandemic is highly likely to change the way consumers buy and retailers would have to innovate and adapt to the new normal. According to Ernst & Young (EY), it is important for retailers to understand the need to adopt a sound multi-channel strategy, consistent online engagement, relevant product mix, focus on online marketing and pro-actively invest in back-end operations (Enriquez, 2020). Although it is difficult to determine how long the service industry would take to recover from the effects Figure 1: Change in Food & Beverage Sales by Industry Source: singstat.gov.sg
of the pandemic, the industry still has a positive outlook. But innovation and adaptation would be important factors to determine the success of the service industry.
THE EQUILIBRIUM NOV 2020| 50
THE EQUILIBRIUM NOV 2020| 51
How the Manufacturing Industry Handled Covid-19 Written By: Jane Clarissa Aryanto
Effects towards the Manufacturing Industry
The Manufacturing Industry
The manufacturing industry, which is responsible for the mass production of raw materials, semi
As the Covid-19 pandemic affects many across the globe, it is no wonder that the manufacturing industry
completed,
major
is also deeply affected by it. Manufacturers of the automobile, chemical, electronics, and aircraft are
contributors to the economy, accounting as much as 18% of the global GDP as of 2019, and makes up
facing concerns regarding the availability of raw material. In the electronics sector, smartphones and
around 25% of Singapore’s GDP. Mainly, the key industries that dominate the market are the electronics,
consumer electronics companies have started to reduce production and operations and postpone the
chemicals, biomedical products, logistics and transport engineering industries. Globally, Singapore is the
introduction of new products, disrupting the supply of components. The three broadest business sectors:
fourth largest exporter of advanced technology products.
manufacturing, construction, and services are all collapsing.
and
finalized
products
through
a
chemical
or
biological
process,
is
one
of
the
However, after the outbreak of coronavirus, the global FDI (Foreign Direct Investment) inflows have witnessed a sharp decline. According to the estimation made by the United Nations Conference on Trade and Development (UNCTAD), the Covid-19 outbreak could cause global FDI to shrink by 5%-15%, due to the downfall in the manufacturing sector, causing multiple factories to shut down. The negative effects of Covid-19 on FDI investments are expected to be high in the automotive and airlines industries, as there are travelling restrictions globally, both internationally and domestically.
The disruption of manufacturing caused by Covid-19 has immense operational, social, and financial consequences. It is forcing manufacturers to rethink risk management, backup plans for the future of the industry, and new workplace safety protocols.
Ever since the first case of Covid-19 in Singapore, the output of the manufacturing industry has since experienced a sharp decline by approximately -22.1 percent in February as the Covid-19 pandemic deepened. However, as industries struggle to stay alive, there was a drastic increase in the output, rising to 21.7 percent. Excluding biomedical manufacturing, output grew 2.5 percent. As of July 2020, the output decreased by -8.4 percent. As the medical field has been frantic about finding cures and vaccines for Covid-19, the biomedical manufacturing sector posted the largest increase at 91.4 percent in March compared to the same period last year. One reason that may cause this immense rise is due to the volatile nature of the biomedical sector.
THE EQUILIBRIUM NOV 2020| 50
THE EQUILIBRIUM NOV 2020| 51
How the Manufacturing Industry Handled Covid-19 Written By: Jane Clarissa Aryanto
Effects towards the Manufacturing Industry
The Manufacturing Industry
The manufacturing industry, which is responsible for the mass production of raw materials, semi
As the Covid-19 pandemic affects many across the globe, it is no wonder that the manufacturing industry
completed,
major
is also deeply affected by it. Manufacturers of the automobile, chemical, electronics, and aircraft are
contributors to the economy, accounting as much as 18% of the global GDP as of 2019, and makes up
facing concerns regarding the availability of raw material. In the electronics sector, smartphones and
around 25% of Singapore’s GDP. Mainly, the key industries that dominate the market are the electronics,
consumer electronics companies have started to reduce production and operations and postpone the
chemicals, biomedical products, logistics and transport engineering industries. Globally, Singapore is the
introduction of new products, disrupting the supply of components. The three broadest business sectors:
fourth largest exporter of advanced technology products.
manufacturing, construction, and services are all collapsing.
and
finalized
products
through
a
chemical
or
biological
process,
is
one
of
the
However, after the outbreak of coronavirus, the global FDI (Foreign Direct Investment) inflows have witnessed a sharp decline. According to the estimation made by the United Nations Conference on Trade and Development (UNCTAD), the Covid-19 outbreak could cause global FDI to shrink by 5%-15%, due to the downfall in the manufacturing sector, causing multiple factories to shut down. The negative effects of Covid-19 on FDI investments are expected to be high in the automotive and airlines industries, as there are travelling restrictions globally, both internationally and domestically.
The disruption of manufacturing caused by Covid-19 has immense operational, social, and financial consequences. It is forcing manufacturers to rethink risk management, backup plans for the future of the industry, and new workplace safety protocols.
Ever since the first case of Covid-19 in Singapore, the output of the manufacturing industry has since experienced a sharp decline by approximately -22.1 percent in February as the Covid-19 pandemic deepened. However, as industries struggle to stay alive, there was a drastic increase in the output, rising to 21.7 percent. Excluding biomedical manufacturing, output grew 2.5 percent. As of July 2020, the output decreased by -8.4 percent. As the medical field has been frantic about finding cures and vaccines for Covid-19, the biomedical manufacturing sector posted the largest increase at 91.4 percent in March compared to the same period last year. One reason that may cause this immense rise is due to the volatile nature of the biomedical sector.
THE EQUILIBRIUM NOV 2020| 52
THE EQUILIBRIUM NOV 2020| 53
As demand for products has decreased, manufacturers are
slowing
causing
a
or
lot
bankruptcy.
shutting
of
Hin
down
production
manufacturing Leong
industries
Trading,
which
Singapore’s Approach to
volumes, to
is
Rebuild the Industry
declare one
Singapore took several strategies when looking for
In addition, Singapore’s Deputy Prime Minister
new
and Minister for Finance Heng Swee Keat has
sources
reusable
of
of
cloth
surgical
masks.
masks
Thus,
and
it
is
stockpiling
decided
that
announced
Singapore will make local surgical masks. In mid-
financial
that
Singapore
support
for
the
will
people
be
providing
in
Singapore,
Singapore’s largest oil trading company, is one of the
The Singapore government is doing its best to
February,
surgical
called the Resilience Budget. The purpose of this is
handful of industries that has filed for bankruptcy. As oil
prevent
From
mask was produced by ST Engineering. Mr Gareth
to support workers, preserving jobs and businesses
prices decreased a lot due to the Saudi-Russia price war
April 2020 to mid-June 2020, the government
Tang, head of ST Engineering's open innovation
that are facing financial challenges. In order to
and the weak global demand caused by the coronavirus
implemented
Circuit
a
lab Innosparks, has mentioned that staff had to
bolster economic and social buoyancy, S$4 billion
pandemic, the company has been losing money for the
stay-at-home
order
of
assemble the tools needed to make the masks,
is to be used for additional support measures (Kit,
last few years, which eventually leads to the company’s
Singapore to go out only to buy food, drinks,
ensuring
2020).
insolvency.
and necessities from the supermarket. People
workers to manufacture the masks. They have also
that are not working in essential services are
been working with local manufacturers to continue
to work from home or go to workplaces in
improving
rotation with other co-workers. With this new
masks
rule enforcement, how are the manufacturing
periods.
further
spread
of
the
virus.
Breaker
that
measures,
allows
citizens
the
the
first
arrival
the
for
made-in-Singapore
of
the
materials
more
supplies,
used
comfortable
for
and
the
use
train
Future of the Manufacturing
reusable
for
longer
Industry Post-Covid-19
sectors holding up? The Medicom Group, one of the world's leading
Before the outbreak of the coronavirus, Singapore
manufacturers of surgical and respiratory masks,
has
predicted that there would be a sharp rise in
has
manufacturing
demand
Singapore. Established as the KHM Engineering
intelligence
company,
improvement in the industry is known as “industry
When
would
Figure 1: Singapore’s Manufacturing Output
the
outbreak
for be
a
surgical
first
appeared,
masks
shortfall
in
and
its
that
supply.
it
is
there The
opened
per
a
the
mask
factory
ongoing Covid-19 pandemic has accentuated
masks
month
the importance of pliant supply chains for
medical
personal protective equipment, which is why
spread of the virus.
field
and
in for
manufacturing
will
produce
support society
facility
millions
in
of
of
workers
in
the
to
prevent
further
been
4.0”,
working
is
such
advanced
a
new
enhancing as
artificial
robotics.
course
This
focusing
on
automation and data swapping in manufacturing technologies.
The
firms are doing their best to provide supplies
reshape
the
outlook
of these appliances.
further
improving
Source: edb.gov.sg
further
technologies, and
which
on
manufacturing
purpose of the
in
of
this
global
trend
is
to
manufacturing,
traditional
roles
economies’
of
structural
transformation, growth, and job formation. Due to As
of
2019,
the
natural
unemployment
rate
in
Singapore
is
recent
events,
although
future
releases
of
new
around 4.11 percent, but it is forecasted to increase by the end of
materials and plans for the industry will certainly
2020. As of June 2020, the unemployment rate has risen sharply
be
to 2.9 percent, which is the highest unemployment rate so far
improve in order to keep the world moving and
ever since September 2009. The economy entered a recession in
further excelling in the field of the industry.
pushed
back,
hopefully,
the
situation
will
the second quarter of 2020 due to the threat of the second wave of Covid-19. The jobless rate increased for both residents (3.9
The uncertainty of the manufacturing industry’s
percent vs 3.2 percent in Q1) and citizens (4 percent vs 3.5
future due to the pandemic can cause long term
percent). The total employment (excluding Foreign Domestic
ambivalence towards the economy. Nonetheless,
Workers) decreased by 121,800, where around 6,700 workers
several
were
industry,
trying period, such as managing workplace safety
employment rate is predicted to decrease by 7% for the third
and flexibility, adjusting physical production, and
quarter
establishing manufacturing environment activities.
put
of
on
unpaid
2020.
leave.
One
In
theory
the
that
manufacturing
can
explain
the
current
unemployment situation is the Physical Capital Stock Theory, where the forecasted high unemployment rate is presumed to be caused
by
economic
experiencing.
recession,
which
Singapore
is
currently
Figure 2: Singapore Unemployment Rate Source: TradingEconomics.com
actions
can
be
taken
to
overcome
this
THE EQUILIBRIUM NOV 2020| 52
THE EQUILIBRIUM NOV 2020| 53
As demand for products has decreased, manufacturers are
slowing
causing
a
or
lot
bankruptcy.
shutting
of
Hin
down
production
manufacturing Leong
industries
Trading,
which
Singapore’s Approach to
volumes, to
is
Rebuild the Industry
declare one
Singapore took several strategies when looking for
In addition, Singapore’s Deputy Prime Minister
new
and Minister for Finance Heng Swee Keat has
sources
reusable
of
of
cloth
surgical
masks.
masks
Thus,
and
it
is
stockpiling
decided
that
announced
Singapore will make local surgical masks. In mid-
financial
that
Singapore
support
for
the
will
people
be
providing
in
Singapore,
Singapore’s largest oil trading company, is one of the
The Singapore government is doing its best to
February,
surgical
called the Resilience Budget. The purpose of this is
handful of industries that has filed for bankruptcy. As oil
prevent
From
mask was produced by ST Engineering. Mr Gareth
to support workers, preserving jobs and businesses
prices decreased a lot due to the Saudi-Russia price war
April 2020 to mid-June 2020, the government
Tang, head of ST Engineering's open innovation
that are facing financial challenges. In order to
and the weak global demand caused by the coronavirus
implemented
Circuit
a
lab Innosparks, has mentioned that staff had to
bolster economic and social buoyancy, S$4 billion
pandemic, the company has been losing money for the
stay-at-home
order
of
assemble the tools needed to make the masks,
is to be used for additional support measures (Kit,
last few years, which eventually leads to the company’s
Singapore to go out only to buy food, drinks,
ensuring
2020).
insolvency.
and necessities from the supermarket. People
workers to manufacture the masks. They have also
that are not working in essential services are
been working with local manufacturers to continue
to work from home or go to workplaces in
improving
rotation with other co-workers. With this new
masks
rule enforcement, how are the manufacturing
periods.
further
spread
of
the
virus.
Breaker
that
measures,
allows
citizens
the
the
first
arrival
the
for
made-in-Singapore
of
the
materials
more
supplies,
used
comfortable
for
and
the
use
train
Future of the Manufacturing
reusable
for
longer
Industry Post-Covid-19
sectors holding up? The Medicom Group, one of the world's leading
Before the outbreak of the coronavirus, Singapore
manufacturers of surgical and respiratory masks,
has
predicted that there would be a sharp rise in
has
manufacturing
demand
Singapore. Established as the KHM Engineering
intelligence
company,
improvement in the industry is known as “industry
When
would
Figure 1: Singapore’s Manufacturing Output
the
outbreak
for be
a
surgical
first
appeared,
masks
shortfall
in
and
its
that
supply.
it
is
there The
opened
per
a
the
mask
factory
ongoing Covid-19 pandemic has accentuated
masks
month
the importance of pliant supply chains for
medical
personal protective equipment, which is why
spread of the virus.
field
and
in for
manufacturing
will
produce
support society
facility
millions
in
of
of
workers
in
the
to
prevent
further
been
4.0”,
working
is
such
advanced
a
new
enhancing as
artificial
robotics.
course
This
focusing
on
automation and data swapping in manufacturing technologies.
The
firms are doing their best to provide supplies
reshape
the
outlook
of these appliances.
further
improving
Source: edb.gov.sg
further
technologies, and
which
on
manufacturing
purpose of the
in
of
this
global
trend
is
to
manufacturing,
traditional
roles
economies’
of
structural
transformation, growth, and job formation. Due to As
of
2019,
the
natural
unemployment
rate
in
Singapore
is
recent
events,
although
future
releases
of
new
around 4.11 percent, but it is forecasted to increase by the end of
materials and plans for the industry will certainly
2020. As of June 2020, the unemployment rate has risen sharply
be
to 2.9 percent, which is the highest unemployment rate so far
improve in order to keep the world moving and
ever since September 2009. The economy entered a recession in
further excelling in the field of the industry.
pushed
back,
hopefully,
the
situation
will
the second quarter of 2020 due to the threat of the second wave of Covid-19. The jobless rate increased for both residents (3.9
The uncertainty of the manufacturing industry’s
percent vs 3.2 percent in Q1) and citizens (4 percent vs 3.5
future due to the pandemic can cause long term
percent). The total employment (excluding Foreign Domestic
ambivalence towards the economy. Nonetheless,
Workers) decreased by 121,800, where around 6,700 workers
several
were
industry,
trying period, such as managing workplace safety
employment rate is predicted to decrease by 7% for the third
and flexibility, adjusting physical production, and
quarter
establishing manufacturing environment activities.
put
of
on
unpaid
2020.
leave.
One
In
theory
the
that
manufacturing
can
explain
the
current
unemployment situation is the Physical Capital Stock Theory, where the forecasted high unemployment rate is presumed to be caused
by
economic
experiencing.
recession,
which
Singapore
is
currently
Figure 2: Singapore Unemployment Rate Source: TradingEconomics.com
actions
can
be
taken
to
overcome
this
EVENTS
A REVIEW OF EVERYTHING WE HAVE DONE SO FAR
THE ECONOMICS SUMMIT Ever since 2016, the Economics Summit has been the annual flagship event for the SIM Economics Society. The Economics Summit helps students understand the ideology of ongoing events and analyse the current changes taking place in the economic environment worldwide. The Summit is a conference style panel discussion on current economic issues, hoping to promote and nourish critical thinking among SIMGE students and teach them about the application of economics in real-life scenarios.
In 2019, the 4th Economic summit titled “Beyond the Margin� focused on two topics namely "Behavioural Economics" and "Navigating the future of ASEAN". The panel discussion was inclusive in covering topics such as prospect and nudge theory as part of behavioural economics, trade between ASEAN countries and the rise of technology for the expansion of infrastructure in ASEAN countries. The aim of this summit is to allow students to conceive the current economic problems, to keep up with global issues and for them to eventually be better leaders.
ANNUAL GENERAL MEETING
The Annual General Meeting, conducted by SIM Economics Society, is a yearly gathering that is carried out to welcome new committee members and give thanks to outgoing committee members. The event usually starts off with a message from the president, followed by each executive member addressing their particular department. They reminisce their time at SIMES as an EXCO and their journey through the year. We then have the certificate ceremony, where each member receives a token of appreciation for their efforts throughout the year. This is a platform for us to recognise all the hard work and effort put in by our committee members as we aim to encourage them to work harder and inspire the incoming committee and subcommittee members. This year, due to the COVID pandemic, the AGM was successfully held online.
MACRO PERSPECTIVE What are your plans after graduation? Figuring out the answer to this question can be a tricky process for several students. With so many choices available, students often find themselves under immense pressure and stress while picking the career they want to pursue. Our Macro perspective event ‘LIFE AFTER SIMES’ was specially organised for students to gain insights as they embark on their own journey of making a career after graduating.
We invited our SIMES alumni to share their experiences with the students and members of SIMES. They spoke about their life upon graduation and the skills they acquired to secure their future. Each alumnus had a different experience in terms of their overall student lives, which gives a more layered and detailed dimension to the discussion. The panel spoke in detail about the job finding process, how important it was to focus on one’s application, when to start applying for jobs and how to measure the pros and cons of the sectors that you want to work in. They laid emphasis on the leadership qualities and encouraged students to participate in other CCAs and activities. Students also got the opportunity to interact with our alumni directly during the networking session where they were able to discuss their goals and get advice on the same.
MEET OUR TEAM
THE ONES WHO SPENT HOURS BRINGING THIS PROJECT TO LIFE
WRITERS, EDITORS, AND DESIGN
DIVYA TYAGI
HOO CHI YANG
JANE CLARISSA ARYANTO
PRIYAN PUROHIT
EARTH CHADHA
SHANNEN DAVELYN KOSASIH
EVANGELINE ZHANG JIELIN
PAU KHUA MUNG
TANVI JUDITH GABRIEL
MATURI LAKSHMI TUSHARA
SAACHI BELANI
ABOUT US WHO ARE WE? SIM Economics Society is a studdent-led society at the Singapore Institute of Management, formed by a community of students who are passionate about economics, committed to learn and research global economic challenges.
OUR VISION SIM Economics Society aims to make learning economics fun and enjoyable through a variety of activities ranging from economics-related discussions to seminars and fun-filled activities and beyond the context of the classroom.
OUR MISSION We aim to foster students' understanding of economic concepts and their application in real life, and encourage discussions regarding global economic issues and possible solutions for them.
BIBLIOGRAPHY THE FUTURE OF BANKING AND CAPITAL MARKETS BANKING: PAST AND PRESENT Gavin J Gunning, V. C. (2020). For Asia-Pacific Banks, COVID-19 Crisis Could Add US$300 Billion To Credit Costs. S&P Global. Grant, M. (2020). Retrieved from Investopedia. Kenton, W. (24 June, 2019). Retrieved from Investopedia: Reuters, S. (16 June, 2020). U.S. bank profits fell 69.6% in Q1 2020 as pandemic spread - FDIC. Reuters. Scaggs, A. (2020). Worry Over the ‘Japanification’ of the U.S. Economy Is Overblown, Economists Say. Barron's. Sharad Jain, G. C. (2020). Industry Report Card: Top 60 Asia-Pacific Banks: COVID-19 Drives Downside Risks As Credit Losses Jump And Earnings Fall. S&P Global Ratings. Steve, L. (2020). Federal Reserve cuts rates to zero and launches massive $700 billion quantitative easing program. CNBC. Val Srinivas, J.-T. S. (2019). 2020 Banking and Capital Markets Outlook. Deloitte. Working Group. (2018). Committee on the Global Financial System. CGFS Papers, 22.
CENTRAL BANKS NAVIGATING THE UNCHARTED WATERS OF COVID-19 AND REDEFINING CENTRAL BANKS Cavallino, P., & De Fiore, F. (2020). Central banks’ response to Covid-19 in advanced economies. BIS. Martinez-Diaz, L., & Christianson, G. (11 May, 2020). Quantitative Easing for Economic Recovery Must Consider Climate Change. Retrieved from World Resources Institute. Albuquerque, F. (2016). The problem with helicopter money. Retrieved from Global Risk Insights.
Benigno, G., Hartley, J., García-Herrero, A., Rebucci, A., & Ribakova, E. (29 June, 2020). Credible emerging market central banks could embrace quantitative easing to fight COVID-19. Retrieved from VOXEU. Cukierman, A. (27 July, 2020). Quantitative easing and helicopter money: Not so distant cousins. Retrieved from VOXEU. Duncan, F. (19 June, 2020). Combatting COVID-19: How Central Banks Are Responding To The Crisis. Retrieved from Intuition . Williams, D. (21 May, 2020). How Will the Coronavirus Change the Role of Central Banks? Retrieved from Alliance Bernstein. Yardeni, E., & Quintana, M. (2020). Central Banks: Monthly Balance Sheets. Yardeni Research, Inc. Krogstrup, S., & Oman, W. (2019). Macroeconomic and Financial Policies for Climate Change Mitigation: A Review of the Literature. International Monetary Fund. Bolton, P., Despres, M., Pereira Da Silva, L. A., Samama, F., & Svartzan, R. (2020). The green swan. BIS. Jourdan, S. (2020). GREEN QE IS ABOUT MORE THAN BUYING CLIMATE- FRIENDLY BONDS. Retrieved from Positive Money Europe. Moret, L., Val, A., & Pombo, M. (2018). Financing the transition to a 2°C World, the UN’s Sustainable Development Goals and what needs to happen next. Investment Managers. (2020). Design choices for Central Bank Digital Currency. WORKING PAPER 140, GLOBAL ECONOMY & DEVELOPMENT. Bikas, K., & Livingstone, Z. (2020). Money We Trust. Positive Money . Todd, R., & Rogers, M. (2020). A Global Look at Central Bank Digital Currencies. The Block . (2020). Could CBDC pave the way for helicopter money in the COVID-19 crisis? Institute and Faculty of Actuaries.
Coronavirus rescue: Time for helicopter money, universal basic Income, bridge loans? (2020). Retrieved from ETBFSI. General government net lending/borrowing. (2019). Retrieved from International Monetary Fund. Carletti, E., Claessens, S., Fatas, A., & Vives, X. (2020). The Bank Business Model in the PostCovid-19 World. Centre for Economic Policy Research. Boar, C., Holden, H., & Wadsworth, A. (2020). Impending arrival – a sequel to the survey on central bank digital currency. BIS. Nee lee, Y. (February , 2020). Hong Kong’s cash handout could boost the economy by 1%, says financial secretary. Retrieved from CNBC. Sin, Y. (April, 2020). All adult Singaporeans to receive one-off $600 Solidarity Payment in April to cope with Covid-19. Retrieved from The Straits Times. Schnabel, I. (2020). Never waste a crisis: COVID19, climate change and monetary policy. INSPIRE research network. Frankfurt: BIS. Retrieved from BIS
EQUITY MARKETS: HOW IS RISK PROSPERING AMIDST UNCERTAINTY? Dhar, V. (2020, June 12). Stocks in the post-Covid world: What now for investors? Retrieved from Bloomberg Quint. Funakoshi, M. (2020, March 23). Mad March: How the stock market is being hit by Covid-19. Retrieved from World Economic Forum. Goldstein, S. (2020, April 27). The coronavirus stock market crash has looked a lot like the global financial crisis and 1987. The recovery hasn't. Retrieved from Market Watch. Hayes, A. (2020, September 4). Initial Public Offering (IPO). Retrieved from Investopedia. Mohanty, P. (2020, July 2). Why stock market is booming when Covid-19 hit economy sinks. Retrieved from Business Today. Philips, M. (2020, May 20). Repeat after me: The markets are not the economy. Retrieved from The New York Times.
Saenz, A. (2020). PE Pulse: Quarterly insights and intelligence on PE trends. EY. Shu, C. (2020, March 12). Asian stock markets fall as Covid-19 is declared a pandemic. Retrieved from Tech Crunch. Stoffel, B. (2020). EY Pulse. EY Global. Suarez, J. (2020). Initial impact of Covid-19 on European Capital Markets. Association for Financial Markets in Europe (AFME). Sweeney, J. (2020). 2020 Outlook: Trends in US Capital Markets. SIFMA.
PAST, PRESENT AND FUTURE OF BOND MARKET Boston, C., Raimonde, O., & Harris, A. (2020, March 20). High-Grade Bond-Fund Outflows Hit $35.6 Billion, Smashing Record. Retrieved from Bloomberg. Bruce, A. (2019, August 14). UK yield curve inverts for first time since 2008 as global market gloom sets in. Retrieved from Reuters. Calhoun, G. (2020, April 21). How COVID-19 Will Change Finance: Ford, The Fed, And The Bond Market. Retrieved from Forbes. Carstens, A. (2020, May 28). Countering Covid-19: The nature of central banks' policy response. Retrieved from BIS. Cheng, J. W. (2020, May 01). How did COVID-19 disrupt the market for U.S. Treasury debt? Retrieved from Brookings. Cheng, J., Skidmore, D., & Wessel, D. (2020, July 17). What’s the Fed doing in response to the COVID-19 crisis? What more could it do? Retrieved from Brookings. Deering, J., Skinner, C., Burgin, F., & Colaco, P. (2020). Private Companies and COVID-19: Accessing the Debt Markets During and After the Crisis. Deloitte. Diao, R. (2020, June 7). Are Chinese corporate bonds presenting opportunities following the Covid-19 sell off? Retrieved from Schroders. Jones, C. (2019, December 31). 2019's Yield Curve Inversion Means A Recession Could Hit In 2020. Retrieved from Forbes. Jones, M. (2020, May 27). Coronavirus pushes global credit rating downgrade threat to record high. Retrieved from Reuters.
Fitzgerald, M. (2019, August 7). Amount of global debt with negative yields balloons to $15 trillion. Retrieved from CNBC. Hamdan, A., Al-Ammer, M., Hammad, W., & Ismail, A. (2018). The Relationship of Gold Price with the Stock Market: The Case of Frankfurt Stock Exchange. International Journal of Energy Economics and Policy, 8(5),357-371. Kolchin, K. (2020, July). SIFMA Insights COVID-19 Related Market Turmoil Recap: Part II Fixed Income & Structured Products. SIFMA. Kondo, M. (2020, June 29). Yield Curve in Japan Keeps Steepening With BOJ Holding Back. Retrieved from Bloomberg. Lockett, H. (2020, March 25). China’s $13tn bond market shines as Treasuries turn treacherous. Retrieved from Financial Times.
N.Goetzmann., W. (2016, April 12). Money Changes Everything: How Finance Made Civilization Possible. Princeton University Press. O’Shea, V., & Valderrabano, P. (2017, September). The Future of Global Debt Issuance: 2025 Outlook. Aite. Smith, N. (2020, May 7). Inflation Is the Way to Pay Off Coronavirus Debt. Retrieved from Bloomberg News. Stubbington, T., & Smith, C. (2020, March 19). Bond and equity slump leaves investors with ‘nowhere to hide’. Retrieved from Financial Times. Suarez, J., & Johnston, M. (2020, July). Impact of COVID-19 on European Capital Markets: Market Update. Retrieved from Afme. Suarez, J., & Johnston, M. (2020, April). Initial Impact of COVID-19 on European Capital Markets. Retrieved from Afme.
BEYOND CORONAVIRUS: THE PATH TO A NEW NORMAL A CRISIS LIKE NO OTHER, AN UNCERTAIN RECOVERY International Labour Organisation. (2020, June). As job losses escalate, nearly half of global workforce at risk of losing livelihoods. International Monetary Fund. (2020). World Economic Outlook Update, June 2020. International Monetary Fund. Lee, D. (2020, July). ft.com. Retrieved from Amazon doubles quarterly profit despite Covid-19 costs. Mahajan, R. (2020). Covid-19 Respose for Pharma Companies . Deloitte. Maritimegateaway. (2020, June). http://www.maritimegateway.com. United Nations World Tourism Organisation. (2020). Retrieved from UNWTO.ORG. Vitale, J. (2020). Understanding the impact of COVID-19 Automotive sector . Deloitte . Workman, D. (2020). Car Exports by Country. Retrieved from Worldstopexports.com.
OVERVIEW AND KEY INSIGHTS OF SHOCKS AND UNEMPLOYMENT ON SINGAPORE’S ECONOMY Baldwin, R., & Mauro, B. W. D. (2020). Economics in the Time of Covid-19. Gov.sg (2020, August 17). More support for workers and jobs through the Jobs Support Scheme and Covid-19 Support Grant. Retrieved September 06, 2020, from Gov.sg Kim, S., Koh, K., & Zhang, X. (2020). Short-term Impacts of Covid-19 on Consumption and Labor Market Outcomes: Evidence from Singapore. Available at SSRN 3612738. Keogh-Brown, M. R., & Smith, R. D. (2008). The economic impact of SARS: how does the reality match the predictions? Health policy, 88(1), 110-120. Liu, V. (2019, December 10). Singapore tops food security index for 2nd straight year. Retrieved September 06, 2020, from The Straits Times
Ministry of Trade and Industry Singapore. (2020). Economic Survey of Singapore Second Quarter 2020. Singapore: Author. Retrieved from mti.gov.sg. Ministry of Manpower (2007). A Statistical Profile of Older Workers. Retrieved September 06, 2020, from mom.gov.sg. Singstat (2020). M181571 - Re-Entry Into Employment Rate, Quarterly. Retrieved September 06, 2020, from singstat.com Singapore Food Agency. (2020). Singapore's Food Supply. Retrieved September 06, 2020, from sfa.gov.sg Singapore Budget (2020). Supplementary Budget Statement. Retrieved September 11, 2020, from singaporebudget.gov.sg Subhani, O. (2020, August 25). Finance professionals say Singapore firms face cash flow problems from Covid-19 demand hit: Survey. Retrieved September 11, 2020, from The Straits Times. Ting, C. (2020, June 23). Singapore core, overall inflation stay negative in May amid circuit breaker measures. Retrieved September 11, 2020, from The Straits Times. WHO (2020). WHO Coronavirus Disease (Covid-19) Dashboard. Retrieved September 20, 2020, from https://covid19.who.int/ Yuen-C, T. (2020, June 06). Parliament: Planned increase in GST will need to be done by 2025, says DPM Heng Swee Keat. Retrieved September 06, 2020, from The Straits Times.
HOW THE MANUFACTURING INDUSTRY HANDLED COVID-19 Amber, P. (21 April, 2020). Former Singapore Billionaire Lim's Oil Giant Files For Bankruptcy. Retrieved from Forbes. Cheng, I. (26 March, 2020). COVID-19 Budget: What you need to know about the Resilience Budget measures. Retrieved from CNA: https://www.channelnewsasia.com/news/singapore/c ovid19-coronavirus-budget-5-things-heng-swee-keat12579156 Kit, T. S. (21 February, 2020). Budget 2020: S$4 billion support package for workers, firms amid COVID-19 outbreak. Retrieved from CNA.
See, S. (27 April, 2020). Singapore lay-offs may hit 100,000 in 2020, with unemployment at 4-5%. Retrieved from The Business Times. Singapore: A leading manufacturing hub. (21 May, 2018). Retrieved from edb.gov.sg. What makes the Singapore economy tick? (18 September, 2020). Retrieved from GuideMeSingapore. Yang, C. (7 May, 2020). Coronavirus: Singapore boosting production of masks since February. Retrieved from The Straits Times.
THE SERVICE INDUSTRY DURING COVID-19 Choudhury, S. R. (2020, February 28). Demand for online grocery and food delivery ticks higher in Singapore amid coronavirus outbreak. Retrieved from CNBC. Enriquez, M. (2020, August 31). The future of retail after COVID-19. Retrieved from Channel News Asia. More support for workers and jobs through the Jobs Support Scheme and COVID-19 Support Grant. (2020, August 17). Retrieved from gov.sg. Plecher, H. (2020, November 18). Singapore: Distribution of gross domestic product (GDP) across economic sectors from 2009 to 2019. Retrieved from Statista. Retail Sales Index and Food & Beverage Services Index (2020, July). Retrieved from singstat.gov.sg. Tan, S.-A. (2020, June 5). Singapore retail sales see worst-ever 40.5% plunge in April on Covid-19 circuit breaker. Retrieved from The Straits Times. Tay, T. F. (2020, May 5). Coronavirus: Singapore retailers must adapt to new shopping habits. Retrieved from The Straits Times. Yuen-C, T. (2020, June 5). Four Budgets projected to help avert $23.4 billion in economic losses. Retrieved from The Straits Times.
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