Everybody is waiting for the arrival of a Covid-19 vaccine. News has been encouraging on that front as the whole world is making every effort to finding a cure --159 candidates to be exact. Some promise to deliver the vaccine as early as August, while others claim they have successfully tested it on humans. The vaccine will bring an end to this horrific pandemic and put the world economy back on its feet, they say.
But not so fast.
First, the vaccine will not be 100% effective. It never can nor will be. The vaccine will give us the antibody to fight against the virus, but beating the viral infection or not is up to each individual body. In the case of the H1N1 (Swine Flu) vaccine, the overall effectiveness is 56%. The vaccine is 89% effective for the 10-49 year-old-age group, but shows no significant effectiveness for younger and older people. From 15 years of statistics on the effectiveness of flu vaccines in the US, the best year is 2010 with a 60% effectiveness rate. The worst year, 2014, only saw 19% effectiveness.
Based on the experiences of other flu-type vaccines, it is best to expect about 50% effectiveness from the newly developed Covid-19 vaccine. The young, the old and the weak are still vulnerable to infections with or without vaccination. This means that preventive measures like social distancing, wearing masks and frequent hand washing will have to be permanently practiced. But I hope restrictions on activities like mass transit, restaurants, concerts, movie theatres, gyms and traditional massage can be relaxed. Everybody needs their normal lives back. Wearing masks while exercising or watching a four-hour opera will be out of the question for me.
When doctors say don't let your guard down just yet, they are right. But doctors are not telling you'll have to keep it up for life.
The second misconception is the economy will return to its normal growth trend once the outbreak is over. It will not, even when a complete cure is found. This is because the world will experience a major liquidity shortage. Besides, investors and consumers will become much more conservative in spending. By the way, these are the exact same circumstances that caused the Great Depression of 1929. Therefore, there is a high possibility that a new Great Depression will emerge in 2020.
To relieve economic hardship arising from the locking down of cities, many governments are offering financial packages to their citizens, ranging from free cash for everyone to wage support, as well as emergency loans for small and large businesses. The most generous in the world is Germany with support packages valued at 21.8% of GDP. India, which initially provided little support -- 0.8% of GDP -- later raised that share to 10%, on par with many other governments. Quickly sinking economies demand extraordinary support.
The question is where will these governments get the money to pay for these extraordinarily large financial packages. The easy answer is borrowing from domestic and international money markets. In the case of Thailand, the cabinet has approved an emergency loan decree of one trillion baht. But how can one be sure that the domestic money market has enough cash to buy that one trillion baht in bonds/debt instruments? The answer is it doesn't. Right now, the Thai money market has less than 300 billion baht of free cash. The money market needs 12-24 months to accumulate such a large amount of cash for the government.
Just think of yourself. You need 100 baht to buy something but you are only able to save 10 baht per month. So you have to save for 10 months before you can buy it. The monetary system works the same way. You need money. You wait. There is no way the government can borrow that entire one trillion baht in a three-month period. Furthermore, there are others who need cash from the monetary system too.
The government itself needs to borrow another 4.69 billion baht to finance the 2020 budget deficit. In fact, cash needed for deficit financing is likely lacking as tax revenue is way below target due to the shrinking economy. The Social Security Office needs cash to pay out unemployment claims. Businesses, big and small, need cash to finance their operations, as many are in the red. Consumers need to dig into their savings to sustain daily spending. Even THAI Airways International needs cash. Competition for liquidity will most likely be bloody in the second half. Anyone planning to raise liquidity this year should do it NOW.
I've often heard the argument that the government debt/GDP ratio is low in Thailand. The current ratio (before the 1 trillion baht borrowing) was 43% of GDP compared to 200% for the Japanese government, which technically means the Thai government can borrow a lot more. That is true, but not in one go. The Japanese government spent 40 years accumulating that amount of debt and only borrowed 5% of GDP a year from the local money market. Moreover, the Japanese government did not borrow that 5% slice of GDP in one or two months -- they gradually borrowed 0.42% of GDP every month so as not to upset the liquidity of the money market.
What is the option for Thai government then? The answer is to borrow only what is necessary. Despite the one trillion baht limit, the government only needs to borrow 375 billion baht or 125 billion per month for three consecutive months to finance the already-started "Leave no one behind" and farmer support programmes. Other such support programmes for SMEs and and local economies must wait (indefinitely). There's just no money.
Economists often overlook the liquidity issue which, by the way, is the root cause of the 1997 Tom Yum Kung crisis. Fiscal policy can only be effective if there is adequate liquidity to support the policy. Latin American economies are living examples of governments spending more than the monetary system can support.
I bet economists never tell you that.
Chartchai Parasuk, PhD, is a freelance economist.