The Economist - USA (2020-08-01)

The EconomistAugust 1st 2020 Finance & economics 57

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Nor is it likely to be complete. Past epi-

demics have left a permanent mark. Three

years after sars, mers, Ebola and Zika, in-

vestment was 9% lower in stricken econo-

mies, on average, compared with the un-

stricken, according to the World Bank.

Output per worker was almost 4% lower.

The lasting damage from covid-19 is likely

to be far worse.

The pandemic has, for example, inter-

rupted the education of many of the devel-

oping world’s youngsters. Those aged be-

tween five and 19 constitute a bigger share

of the population in poor countries than in

rich ones (26% versus 17%) and therefore a

more significant share of the future work-

force. The hiatus in their schooling is also

more likely to become permanent. People

cannot afford to remain on the “sidelines”

in poor countries, points out Ayhan Kose of

the World Bank. Youngsters feel a “bigger

push” to get a part-time job, which can eas-

ily end up severing their ties to school.

Human capital is not the only kind that

will suffer. When growth prospects are

weak and uncertain, entrepreneurs are un-

likely to invest in new premises, ideas or

machinery, even if they can raise the fi-

nance to do so. According to the bank, gov-

ernments in 58 developing countries have

offered credit guarantees of various kinds

to encourage lending. But banks remain

risk-averse, says Bhanu Baweja of ubs.

The pandemic has also disrupted trade,

which was already unsettled by tensions

between America and China. For emerging

economies, trade and foreign investment

are sources of both hard currency and

know-how. Firms learn about the world by

selling to it; countries learn by hosting

firms from elsewhere. By damaging global

supply chains and denting international

collaboration, “the pandemic could alter

the very structures upon which the growth

of recent decades was built”, warn Mr Kose

and his co-authors in the bank’s latest “Glo-

bal Economic Prospects” report.

If that is true, some industries in emerg-

ing economies will need reinvention. But

contrary to folk wisdom, a crisis is not a

good time for such a makeover. Research

by Lucia Foster and Cheryl Grim of Ameri-

ca’s Census Bureau and John Haltiwanger

of the University of Maryland found that

the reallocation of workers across firms

slowed in America during its last reces-

sion. The crisis winnowed out productive

firms as well as weaker rivals. Job destruc-

tion increased. But job creation fell just as

much. In better times, workers can leave

sunset industries for promising, sunrise

sectors. But in a crisis, ousted workers sim-

ply get lost in the gloaming.

To their credit, policymakers in emerg-

ing economies have tried to keep banks

and firms intact. In March central banks in

42 developing countries cut interest rates,

according to the World Bank, far more than

in any month in 2008. Many have also be-

come more ecumenical lenders of last re-

sort. India’s central bank, for example, is

helping to shore up shadow banks.

A number of central banks have also

bought sovereign bonds, helping govern-

ments provide as much stimulus as they

dare (see chart). During the global financial

crisis, recalls Mr Kose, some policymakers

would say: “Maybe we shouldn’t do this, or

we shouldn’t do that.” Those conversations

have not happened this time.

On top of fiscal stimulus, financial reg-

ulators have become more forgiving. They

have eased prudential limits on banks and

allowed lenders to indulge in creative ac-

counting, turning a blind eye to souring

loans. In Russia, financial institutions can

value the securities they hold at prices on

March 1st. India introduced a moratorium

on loan payments (see next story).

In some cases these macro-impruden-

tial measures have interrupted reforms go-

ing in the other direction. China’s credit

push reverses several years of attempted

deleveraging. In the Philippines, an

amendment to the central bank’s charter

had strengthened its financial indepen-

dence from the finance ministry. Now the

central bank is busy buying its bonds.

Measures of this kind were necessary.

But they may prove tricky to undo. Govern-

ments will have to arrest the increase in

their debt without jeopardising the recov-

ery. And regulators will eventually have to

allow some loans to be written off and

some firms to go bust, if new industries are

to enjoy room to grow.

One reason why covid-19 inflicts lasting

harm on those infected is the aggressive

immune reaction it can trigger. This “cyto-

kine storm” may help kill the disease. But it

can also endanger the patient. Policymak-

ers in developing countries must take care

to prevent something similar happening to

their economies. They have responded

with justifiable aggression to the pandem-

ic. If left unchecked, however, this storm of

defensive measures could have some nasty

side-effects of its own. 7

Cash injections

Governments’ fiscal response to covid-19

ToJuly2020,%ofGDP

Sources: IMF; World Bank

Low-income

Middle-income

Advanced

economies

2520151050

Loanguaranteesandothercreditmeasures

Discretionary fiscal measures

S

oon afterIndia went into a strict lock-

down in March, its central bank allowed

borrowers to put off loan repayments for

three months. That moratorium has since

been extended by a further three months,

and another extension is reportedly being

considered. It appears to have been a boon

to borrowers. But top financiers, such as

Deepak Parekh, the chairman of hdfc, a big

mortgage lender, and Uday Kotak, the chief

executive of Kotak Mahindra Bank, are be-

ginning to worry that it is damaging the fi-

nancial system. They are urging the Re-

serve Bank of India (rbi), the central bank,

to change course.

The moratorium was intended to pre-

vent the cash crunch induced by lock-

downs translating into a more lasting

shock, by allowing revenue-starved com-

panies time to pay back their debts. India

has not been alone in using payment holi-

days, though those in other countries have

tended to be more limited in duration and

scope. But India’s government is less able

than those in the rich world to afford other

ways of supporting borrowers, such as gen-

erous cash handouts.

Huge numbers of borrowers have

availed themselves of the payment holiday.

In its financial-stability report, published

on July 24th, the rbinoted that half of all

loans went unpaid in April. Fully two-

thirds of loans made by publicly controlled

banks, which hold 70% of the industry’s as-

sets, were unpaid. A smaller yet sizeable

chunk of lending went unpaid at private

banks, from a third of total loans at domes-

tic lenders to a tenth at foreign ones.

One reason for the disparity between

private and public lenders is that different

banks attract different sorts of borrowers.

Small and medium-sized firms, which rely

on state-run lenders, were keen users of

the moratorium. These are unlikely to have

huge cash buffers; as revenues dried up

they may have had little recourse but to de-

fer loan payments. By contrast, foreign

banks mainly serve multinational compa-

nies with deeper pockets. Some banks

asked borrowers to opt in to the scheme.

Others at first employed a more generous

“opt-out” approach, though they have

since changed tack.

Banks’ earnings reports for the second

quarter, released over the past two weeks,

suggest that the take-up of the schemes

may well have reflected the exigencies of

lockdown. Axis Bank andicici, large priv-

A payment holiday shields borrowers,

but defers the pain for lenders

India’s banks

Delayed reaction