COVID-19 Requires Coordinated Global Policy Response

Additionally, according to the Institute of International Finance, capital outflows from emerging markets (EM) during the current crisis have been greater than those during the 2008 GFC and dwarf those of the 1997 Asian financial crisis. That said, we believe that country-specific risks take precedence over sector- or security-specific risks in EM countries. The GFC of 2008, the Great Recession of 2008-09 and the European debt crises of 2010-2012 (Portugal, Ireland, Greece and Spain) led to sovereign debt defaults in developed countries, accompanied by the failure of financial institutions. These led to debt relief programs for debtor countries (which were not EM economies) as well as high unemployment rates and business failures combined with stringent solvency/liquidity measures initiated by governments and national banks.

The Human Toll and Demographics

Emerging patterns provide important directives for effective policy responses, particularly considering Italy and China. As serious as the circumstances were in China, Italy may be worse off because its fatality rate is much higher than in China. According to the World Health Organization, Italy’s fatality is about 5% versus around 2% for China and about 3.4% for the global average. While the data has its flaws, the difference is remarkable.

Our 2018 report titled “Italy’s Demographics Underpins its Growth, Debt, Stability and Politics” highlighted the country as the oldest in Europe with its fast growing 80-plus aged population as a source of a fiscal strain on its budgets. Further, Italy’s proportion of 80-plus aged population (Figure 2) is much higher than that of China. Italy’s high concentration of very old people in the Lombardy region helps explain its higher number of deaths.

Focusing public health efforts to isolate or protect regions with a higher percentage of the 80-plus aged demographic may help limit fatalities. Older men are especially at risk; fatality rates from Italy and China show a higher number of 80-plus aged groups and a significantly higher number of older males relative to older females.

A big country such as the United States (US) could focus on states with the highest percentage of elderly people (80-plus aged). As of 2018, the states with the highest percentage of the 80-plus population were Florida (5.3%), Hawaii (4.9%), Maine (4.9%) and Pennsylvania (4.8%).

Coordinated Fiscal and Social Policy Response

Experts from around the globe have stressed the importance of non-pharmaceutical, lifestyle changes to suppress infection transmission. The effectiveness of any one intervention in isolation is likely to be limited, so a combination of multiple interventions is crucial for a substantial impact. However, many governments are still acting in isolation.

It is paramount that the global macro-financial system coordinates across the G7 and G20 countries. In our opinion, a focus is needed on:

1. Marshalling public health resources – tests, masks, ventilators, doctors, nurses and hospitals.
2. Alleviating public health strains and transmission rates – necessary lockdowns, restricted movement and social distancing to mitigate and suppress the epidemic’s effects.
3. Supporting income and resources of the vulnerable – fiscal packages should be targeted to ensure equitable resource allocation. Global fiscal coordination within the European Union (EU) and across other regions must support income, credit lines, insurance and basic health care for the vulnerable.
   
   o Germany’s offer to help Italy and issue EU-wide debt is a positive step in this direction.
   o The US$2+ trillion economic stimulus plan targets mortgages, student loans, credit cards and public housing and should set the tone for other countries.
   
   
4. Providing liquidity, purchasing bonds, initiating QE and supporting banks – in addition to the set of impressive funding facilities from central banks, regulators need to consider relaxing selected bank/market-maker laws instituted post-2009 to allow for more normal operations.
   
   o Congressional mandate allowing Fed to buy corporate bonds may help as well.
   
   
5. Coordinating with multilateral agencies and regional development banks – the International Monetary Fund, the World Bank and the Inter-American Development Bank, among others, have a vital role to play in supporting national fiscal authorities and central banks in vulnerable EMs, particularly those that have high poverty rates, informal labour markets or high population density.
6. Leveraging the WHO-United Nations solidarity fund – governments could leverage this initiative, which could, in partnership with private sector, turn into a global change agent.
7. Joining forces with the G7 and G20 leadership – global leaders, along with local finance, health and social care ministers, among others, must expeditiously join forces for effective consolidated action.

Conclusions

The global COVID-19 pandemic may worsen the depth, duration and magnitude of a global recession. The importance of a coordinated global public policy cannot be overemphasized as we face volatile markets and profound family and societal challenges.

In market conditions such as these, the resilience of investors will be an important factor in determining the market’s aggregate future. In general gold, cash and US dollar-based Treasuries are relatively safer assets in periods of global contagion.

One-size-fits-all strategies rarely work in such dislocated markets and we standby to help clients and policymakers think through this unique period.