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Beyond The First Order is a daily email newsletter that digs deep into the higher order effects of the Covid-19 pandemic on industries, ecosystems, economies, governments and more.
This is a paid newsletter that’s available exclusively to The Ken’s premium subscribers.
Covid-19 lockdowns around the world are unlike any previous recessions we’ve seen. Because they’ve almost completely shut down both the demand and supply side of economies.
What does a government attempt to fix when, under its own diktat, most businesses and factories shut and most workers and citizens are confined to their homes?
A morbid analogy for this predicament involves doctors putting critically injured patients into “medically induced comas” until they work out a treatment plan. Should governments do the same to economies?
No, says Mihir Sharma in the Business Standard. “Putting patients in a medically-induced coma while simultaneously trying to wake them up with a stimulus package makes no sense at all.”
Previous recessions may have some supply-shock component, but what economists seek to respond to is a slowdown in aggregate demand. By pushing money into the economy — whether through regular interest rates cuts, unconventional monetary policy such as bond-buying, tax cuts, or government spending — they usually seek to prop up aggregate demand.
[…]
And in this case, an aggregate demand shock is not the main issue. Yes, there may well be a demand shock as a consequence of supply-chain disruptions, lockdowns, and so on. But that is not the underlying problem. It is, in fact, part of the treatment of the underlying problem. We do not want production to resume at similar levels as earlier, because we do not live in the same society we did then — and will not, until a vaccine is formed. Aggregate demand, in other words, must indeed be lower by taking into account the fact that we want more people staying at home, and the consequent loss in production and efficiency. Any attempt to medicate the economy in such a way that it increases activity in the wrong areas is precisely the wrong treatment.
Sharma is right. Stimulus packages, by definition, stimulate an economy into growth. But how do you do that while forcing everything to stay shut and everyone indoors?
I came across a somewhat better analogy in a recent episode of the podcast “Capitalisn’t”, co-hosted by economists Luigi Zingales and Kate Waldock.
Zingales described the efforts of governments to protect their economies during slowdowns as akin to mothers “freezing” long-running Monopoly games in place after telling players to call it a night. (Pick up the board without disturbing any of the pieces or players’ progress, so it can be resumed at a later date effortlessly).
What governments wanted to achieve, said Zingales, is to freeze the economy in place, to whatever extent possible. So that when the lockdowns end, you do not have to restart the game.
How should governments do that?
The economists Emmanuel Saez and Gabriel Zucman — hardly fiscal hawks — suggest that one way of thinking about the correct way to respond would be to imagine the government as “the payer of the last resort”. The fisc would bear the burden of some form of universal unemployment insurance for those at home, as well as payments to locked-down businesses — for rent, interest, utilities, and so on. In the US, according to the two economists, the cost of such a programme would be 3.75 per cent of gross domestic product over the next few months. In some sense, given that sovereigns can generally borrow at the lowest rates in any economy, it makes sense that the cost of any such system-wide shock is borne largely by them, because that would have the lowest overall cost. What matters is that this is as direct, speedy, and transparent as possible, and that is why it should be a fiscal response but not a broad-based stimulus.
The wrong diagnosis, Business Standard
For every additional week that an entire country’s economy stays shut, it suffers permanent damage that cannot be undone. Like, in India:
A double unemployment whammy, where the rate at which employed people are losing their jobs is outpacing the rate at which India’s labour force is shrinking (because the already unemployed just quit looking for jobs)
Which is why it's perplexing that there still isn’t any direct support for the country’s businesses and employers, even after 21 days of a lockdown.
The fiscal policy response has been a real disappointment. We have announced one set of measures, after a delay, valued at 0.8 per cent of GDP in incremental spending. This package, though small, was rightly targeted at the bottom of the pyramid, but nothing has been announced for salaried workers and medium, small and micro enterprises (MSMEs) even as we approach the end of the 21-day lockdown. The government has to be bolder. We cannot be incremental in policy approach.
Despite the fiscal constraints, a fiscal package of 4-5 percent of GDP is necessary. It will not be inflationary as this is consumption support, to replace lost income and consumption, not a conventional fiscal stimulus, which is incremental. Besides, the global lockdown is a massive deflationary demand shock. As long as we can manage the agricultural harvest, we should not worry about inflation. No company, with sales down 50-60 per cent, has the pricing power today.
Investors will give a pass to the government for any such programme as long as it is time-bound, for specific consumption support and tracked transparently. After all, every major economy in the world is on this path today. India has announced the least fiscal support of any major economy. Nobody will penalise us in trying to save the economy.
Here’s a question: will India exit its (currently) 40-day lockdown before the government announces relief measures to freeze its economic Monopoly board in place? It’s a frightening possibility.
Reviewing these possible explanations of the divergence in death rates between Europe and Asia, it strikes me that the last three—superior policy implementation in Asian countries, better herd immunity across Asia, and inadequate health care systems in Western countries—all point to the same conclusion: investors should deploy more capital in Asia and less in Europe.
This brings me to a simple observation: this is the first time in my career that in the middle of a crisis Asian asset prices are not only outperforming (usually in downturns, Asian asset prices get beaten like a rented mule), but are outperforming with much lower volatility than Western assets.
Take renminbi debt as an example. In this crisis, renminbi bonds have proved the “anti-fragile” asset we always hoped they would be. Sure, they have underperformed US Treasuries. But renminbi bonds have outperformed US corporate bonds, eurozone government bonds and Japanese bonds. Better yet, they continue to offer a modicum of positive yield—which either promises future capital gains, or which will at least cushion the blow should yields elsewhere around the world start to rise again (see the chart below).
Now, over to Nadine.
See Australia first
Covid-19 has frozen international travel. Eventually things will bounce back to normal. But when? Here’s a signal that tells us it may take much, much longer to bring back international travel, at least the tourism-for-pleasure part.
Australia, for one, is urging its citizens to prioritise domestic travel at least for the rest of 2020, perhaps even longer. “See Australia first” once restrictions are eased, the tourism minister implored.
So, in addition to individual reasons—like less disposable income; minimising infection risk—there’s another force at play: nationalism and the need to rebuild domestic economies.
Australia will have lost a lot of income from inbound tourism in these past months ($4 billion according to the article) and the months to come. The last thing it wants is citizens spending precious dollars abroad.
But these dollars will be missed in Aussie-favoured destinations abroad, which include Southeast Asian countries. Thailand has, by far, the most international visitors, almost 40 million a year. About 800,000 are from Australia. Many more are from China. Tourism is a big part of Thailand’s GDP, over 10%.
The drop in inbound tourism in Thailand since January has been… striking.
It’s similar across Southeast Asian countries.
Of course, Australia isn’t alone. Every country will have the same incentive: prioritise domestic tourism and keep borders tightly controlled. But some countries will be more desperate than others to win inbound travellers. Steep discounts will ensue. Thinking about it takes me back to the days when Bali saw a huge drop in tourists after the nightclub bombings in 2002. Except every destination is a Bali, now.
From Bali, Arundhati brings us to banks.
Dear NBFCs, No means No
Ever since The Reserve Bank of India (RBI) gave millions of borrowers the option to defer repaying loans by three months, through this wonderful measure called a moratorium, one class of borrowers feels jilted.
The non-banking financial companies (NBFCs), or shadow lenders, who account for almost 20% of credit disbursals in India.
NBFCs have lent close to Rs 31,00,000 crore in the year ended March 2019. And most of the borrowers will have grabbed the chance of delaying repayments. But NBFCs have payments worth Rs 1,75,000 crore due in June, according to credit rating agency Crisil. And they have been repeatedly excluded from the sanctuary of a moratorium. Crisil estimates nearly a quarter of the NBFCs it rates will have liquidity pressure if collections do not pick up by June.
Here’s the rejection timeline:
On 27 March, RBI announced the moratorium.
Days later, State Bank of India, the country’s largest bank, said this courtesy wouldn’t be extended to NBFCs, setting a trend for other banks to follow.
On 7 April, NBFCs operating as microfinance institutions (NBFC-MFIs) sought clarity from RBI on their eligibility for the moratorium. No reply still.
Two days back, The Economic Timesreported that the RBI's monitoring mechanism shows NBFCs have enough liquidity and don't really need the help they are seeking. And the estimated Rs 1,75,000 crore due in June? “It could at best be about Rs 65,000-70,000 crore, and that is quite manageable,” one source told the business daily.
Deepak Parekh, banking veteran and founder of HDFC, told investors that banks would need to keep NBFCs on a tighter leash.
Most recently, Small Industries Development Bank of India, which also lends to NBFCs as well as micro, small and medium enterprises (MSMEs), asked the RBI whether NBFCs are eligible for the moratorium.
You know what they say about doing the same thing and hoping for different results. At stake is NBFCs’ ability to provide credit to small and medium industries once the country emerges from the lockdown. But NBFCs will need to find another way to show banks and RBI it is in dire straits. By the time NBFCs prove this point, though, it may be too late.
Speaking of too late, here’s Jon on SoftBank.
SoftBank’s Vision Fund decides to be a VC after all
Extreme times often elicit extreme responses. Against the odds, Softbank’s Vision Fund—the $100 billion startup bet from Masayoshi Son—has decided to identify as a venture capitalist.
Let me explain.
The Vision Fund has always positioned itself as something a bit special. Beyond that $100 billion war chest, Son has called the firm’s portfolio a collection of ‘global champions.’ Publicly, at least, he championed the firms backed by the fund as the creme de la creme, companies that could work together, thrive and own the future.
The gloves are definitely off now.
Speaking to Forbes in an interview published this week, Son starkly admitted 15 of its 88 company portfolio could go bankrupt as the impact of the Covid-19 outbreak hits hard.
A small quote in a long story, it is telling of the nasty streak SoftBank has been forced to develop as its investor-investee honeymoon ends. The firm began advising companies to seek sustainability last year, but it now shows a meanness that is far from Son’s once-cheerily optimistic Vision Fund presentations to SoftBank investors.
Controversial co-working startup WeWork is suing the firm for its decision to renege on a tender offer. There was no bailout offer for satellite firm OneWeb— which declared bankruptcy in March—or direct-to-consumer beauty product company Brandless—shuttered in February—while its stake in Wag, a dog-walking app often mocked by SoftBank critics, was sold back to the company at a loss.
Why the change? SoftBank’s utopian dream of 100-odd startups owning the future isn’t happening. Instead, it adopted true investor logic: a few big hitters will return the fund, the rest don’t matter.
The timing of that revised rhetoric is essential since SoftBank is forecasting a whopping $17 billion loss for its current fiscal year courtesy of losses from Vision Fund turkeys like WeWork, Uber (poor performing stock) and OneWeb. The idea that a home run or two will save the farm is the only idea to cling to at this point.
There’s merit to it, of course. SoftBank adheres to the same principles as other investors, but with far higher stakes. That’s pointed out by another key quote in the Forbes story.
People keep talking about the Vision Fund, the Vision Fund, but you’ve got to look at the size,” says Marcelo Claure, the former Sprint chief executive who is now SoftBank’s COO. “Alibaba can make us more in one week than the entire WeWork investment.
Masayoshi Son Talks WeWork, Vision Fund and SoftBank Under Seige, Forbes
Son’s acceptance to embrace failure is a clarion call to all Vision Fund founders: are you among the 15? Barron’s has a list of who might not make it.
SoftBank says it still has $20 billion on hand to support its portfolio—and most investees have picked up other investors who can chip in—but the name of the game is definitely survival now. That’s quite the bump to earth for the ‘global champions.’
“99.8% workforce in IT sector incapable of remote working”
There is a well-known secret tunnel to get featured in India’s most read newspapers – go via the Press Trust of India. PTI is a non-profit cooperative that is also India’s largest news agency.
Press Trust of India (PTI) is India’s premier news agency, having a reach as vast as the Indian Railways. It employs more than 400 journalists and 500 stringers to cover almost every district and small town in India. Collectively, they put out more than 2,000 stories and 200 photographs a day to feed the expansive appetite of the diverse subscribers, who include the mainstream media, the specialised presses, research groups, companies, and government and non-governmental organisations.
A story carried by PTI allows hundreds of other news organisations to usually abandon their own fact-checking or editing processes (if they have any) and carry it as “wire copy”.
This appeared in The Economic Times, India’s largest business newspaper.
About 99.8 percent of the workforce in the information technology sector is incapable of working from home and only 0.2 per cent are 'Work from Home' champions and showcase high productive attributes, according to the study by research-backed innovative venture SCIKEY MindMatch.
Isn’t it amazing? 99.8% of India’s IT workforce is “incapable of working from home.” How did SCIKEY MindMatch estimate this?
The study is based on more than 10,000 inputs of job-seekers in the IT sector on the MindMatch assessment through the SCIKEY Talent Commerce Marketplace.
Their patented algorithm is apparently so good it can “read human minds.”
🤯 🤯 🤯
That’s a wrap for today. Do write in with your thoughts and observations on how this pandemic is reshaping businesses, societies and economies. We will be back tomorrow.
Beyond The First Order is a daily newsletter on the far-reaching consequences of the Covid-19 pandemic. This newsletter is published by The Ken—a digital, subscription-driven publication focussing on technology, business, science and healthcare
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