Enduring the Hardship till the Cure Comes
THE global financial market is embracing the mother of all crisis. Analysts are increasingly convinced that the market collapse caused by the Covid-19 pandemic will be worse than the 2008 crisis, and indeed every other crisis in history.
Various data at the end of Q1 of 2020 depicts a world economy that has been severely damaged. Instead of growing, the global economy might fall into a deep contraction throughout 2020.
One example is unemployment numbers in the United States. In normal conditions, there would be around 500,000 people claiming unemployment insurance every two weeks. At the end of March, the number of these claims jumped to nearly 10 million—20 times of the normal levels.
This is a portent of the devastation that Covid-19 will bring upon the US economy. The same story is surely unfolding throughout the world. Numerous economic activities have practically come to a complete stop. The air travel and the entertainment industry are particularly hurt. The tourism industry, which is highly labor intensive with an extensive supply chain, is almost dead because people are forced to stay home.
The heavy blow in the real sector certainly is reflected in the fall of asset prices in financial markets around the globe. However, there are central banks that continuously give stimuli of almost unlimited liquidity. Consequently, while the financial market may be wildly volatile, it is still spared from total collapse. The question now becomes, how long can financial markets survive as the real sector will slowly but surely ground to a halt?
Meanwhile, the economic slowdown has started affecting the manufacturing sector as well. In various countries, including Indonesia, the purchasing manager index (PMI) which measures manufacturing activity has started to slip into recession levels. According to IHS-Markit, a global data firm based in London, Indonesia’s PMI is only 45.3 as of March. This is its lowest record since IHS-Markit started surveying Indonesia in 2011, and a sharp drop from February’s index which was 51.9.
Such a drop in manufacturing activity can be a serious signal of a new wave of unemployment. Industries that are under pressure will certainly reduce their workforce. This will add another burden to the economy. The Indonesian government has prepared various stimulus policies to anticipate the Covid-19 pandemic. However, the government should also start anticipating the threat of additional unemployment from the manufacturing sector, which seems to be missing from the various stimulus packages already in effect.
While the pressure in the real sector is building up, the bleeding has not stopped in the financial sector. Foreign investors are still in a fire sale mood of government bonds. As of April 1, foreign ownership of government bonds has declined by Rp143 trillion compared to its highest position on February 20.
In dealing with real sector problems, the government may still act by injecting right stimulus packages. However, nothing can stop foreign capital flight to safety if the plague persists. This is an insurmountable force of global trend. According to data from the Institute of International Finance, since the beginning of January, offshore investors have pulled out US$95 billion US of capital from stock and bond markets in the emerging economies.
Yes, the central bank might once again injects a stimulus. But, it would be just a temporary relief if the real sector conditions is continuously deteriorating. Market sentiment soon turns sour and the flight of capital to safety persists.
It seems that this grim situation cannot be overcome before a vaccine or a miracle cure for Covid-19 is invented. We can only try to endure this hardship until that magic moment arrives.