There is no need to say that the impact from Covid-19 has been brutal to all economies. The International Monetary Fund (IMF) has just warned the world economy is most likely to enter recession in 2020 with negative economic growth. On Jan 9, the IMF released its World Economic Outlook report projecting that global economic growth would be a positive 3.3%.
However, major research houses like Goldman Sachs, Bank of America and JPMorgan Chase have projected a -12% to -24% GDP growth rate for the second quarter in the United States. Nobody has tried to estimate Europe's GDP growth as it is bound to cause heart attacks among investors and pensioners. However, I can tell you the numbers in China are equally shocking. Over the months of January and February, the industrial output has dropped 13.5%, retail sales dropped 20.5%, fixed asset investment dropped 24.5%, and car sales dropped almost 80% in China.
While economic numbers need compilations and projections, this is reality. It is estimated stock markets around the world have already lost US$26 trillion in value since mid-February. The impacts of Covid-19 are indeed at an epic level. The worst thing is that nobody knows when the pandemic will end, which means that all economic growth projections are based on current situations. But what if things get worse?
In response to damage wrought by the pandemic, governments and central banks have come out with strong monetary and fiscal measures. Monetary authorities have cut interest rates as much as they theoretically can, ie, approaching zero. Countries that already have 0% interest rates have no choice but to add more liquidity to the system. For instance, the Bank of Japan has announced that it will buy an additional 700 billion yen of government bonds to provide more liquidity. But nobody wants liquidity in Japan. Corporates are cash rich as they slowdown investment and Japanese people are too disciplined to borrow money. Monetary policies are deemed to be ineffective around the world, including Thailand.
Global stock markets have continued plunging after the announcement of policies and the Thai stock market is no exception.
With an ineffective monetary policy, the real hero can only be the fiscal policy. The Dow-Jones Index jumped 11%, the highest one day gain since 1933, with the news of the near agreement of President Donald Trump's $2 trillion fiscal stimulus package. The key word here is "$2 trillion" not "fiscal stimulus package". Remember, Mr Trump previously asked for $850 billion to $1 trillion stimulus package to battle the pandemic in mid-March. The markets did not respond favourably. But moving from "$1 trillion" to "$2 trillion" changes everything. The reason? The size of the US economy is about $20 trillion and a $1 trillion stimulus package is equivalent to 5% of GDP, which the public does not see as being enough. But jumping to $2 trillion or 10% is meaningful.
This article wants to warn all governments, particularly that of Prime Minister Prayut Chan-o-cha, that the success of a stimulus package critically depends on its size. More importantly, the answer lies in a fiscal stimulus package, not monetary stimulus package. I do not wish to go into complicated economic theories here, but let's just say that a fiscal stimulus package means "real" money, and monetary stimulus package is "imaginary" money.
A monetary stimulus package is essential when economic problems originate from the financial sector as was the case in the 1997 Tom Yum Kung crisis and the US sub-prime crisis of 2008. But monetary policy becomes a paper tiger when economic problems originate from the "real" sector as is the case of Covid-19 pandemic. In plain language, people need cash to buy food and survive and do not care about low interest rates or the ability to sell "repo" through the discount window of the Bank of Thailand.
Ignore the words "repo" and "discount window". You, the reader, do not need to understand as these words have no significant meaning for you. All you need to know is how much cash you can get out of the government and how soon.
Unfortunately, the Thai government's pocket is quite shallow. Let's use the US as an example, that the Covid-19 fiscal stimulus package should be around 10% of GDP to be meaningful. This translates to roughly about 1.6 trillion baht. There is no way the prime minister can find that kind of money in the current 2020 fiscal budget or anywhere in Thailand as all expenses are locked in. Finding a few billion baht might be possible. But a stimulus package of the magnitude of 100 billion baht or more is not possible. The trick is the government will and can use off-budget financing such as through state-owned banks and state enterprises, but there is a limit to that too.
To make thing worse, government revenue is also shrinking along with the economy during the pandemic. A prime example is the tourism industry which is worth around 1.5 trillion baht annually. If only one-third of that is damaged, it is worth roughly 0.5 trillion baht. The government will lose 100 billion baht in tax income from this industry alone. Then take into consideration shrinking tax income from domestic consumption, payroll tax and corporate income tax -- I don't know how that will damage the 2.75 trillion baht projected revenue in this year's fiscal budget, but my guess is that it will be huge.
Less revenue and more spending. The only solution is to go back to parliament for a revised budget with (a much) higher deficit. But that is not the end of the story. The money market has no cash or the willingness to buy more government bonds. In fact, Thai (and foreign) investors are currently selling government bonds for cash. That is why the Bank of Thailand has to offer a 1 trillion baht repo (repurchase agreement) facility to prevent commercial banks from running out of cash.
Japan is facing exactly this kind of problem. Prime Minister Shinzo Abe is planning to sell "deficit financing" bonds to finance the Covid-19 spending, but nobody wants to buy Japanese government bonds. It's not that they do not trust the Japanese government, but these bonds carry negative to ultra-low interest rates.
Of course, there are always buyers -- central banks. And in Thailand, it will be the Bank of Thailand. So, what do you think, governor?