Coronavirus Brings ‘Unquantifiable Uncertainty’ To Economies, Says JPMorgan’s Sajjid Chinoy
Indian traffic police officers wearing protective masks stands guard next to a statue of Mahatma Gandhi Statue at Parliament House in New Delhi. Photographer: T. Narayan/Bloomberg

Coronavirus Brings ‘Unquantifiable Uncertainty’ To Economies, Says JPMorgan’s Sajjid Chinoy

The rapid spread of the novel coronavirus locally is an “unquantifiable uncertainty” for the global and local economy, said Sajjid Chinoy, chief India economist at JPMorgan.

Cautioning that disruptions in the credit markets and labour markets could quickly emerge due to containment measures put in place by the governments, Chinoy said these must be tackled quickly to avoid second round impacts. “We’re seeing the confluence of two really potent forces,” Chinoy told BloombergQuint in an interview.

The first of these forces is the norm of introducing “draconian social distancing” measures, which extracts a large economic cost. “Along with that, we’re seeing what I call the Minsky-moment, where we had a lot of leverage build up outside the banking system across the global economy, which is now deleveraging rapidly,” Chinoy said.

“That’s why you are seeing panic selling across all asset classes right now.” A Minsky-moment is defined as as a sudden collapse in asset values due to a turn in an economic cycle.

The forces playing out globally will be mirrored to a large extent in India should the virus continue to spread locally.

As the cases have risen, policymakers have rightly clamped down. At least in the near term, the economic impact will be material. 
Sajjid Chinoy, Chief India Economist, JPMorgan

Watch the full interview here

Unpacking The Economic Impact

The economic impact for India will flow through a number of channels.

Exports

Global growth forecasts have been pared by over 350 basis points since January and a contraction in the global economy is now feared. That will hurt exports, which make up 20 percent of GDP, Chinoy said, adding that the fall in crude oil prices will help growth at the margin.

Non-Government Services

The local spread of the virus and social distancing measures put in place will first start to hurt the non-government services segment. “About 35 percent of GDP is what we call discretionary services. The first impact will be on those services. That segment has been growing at about 8 percent a year,” Chinoy said. “Even if that halves, you see a hit of 100-150 basis points to GDP.”

Consumption

If businesses see incomes fall sharply, that hit then gets passed on to employees via job cuts and salary cuts, creating a second round impact. That needs to be avoided to the extent possible, said Chinoy. “Around the world growth slowdowns get prolonged if you have labour market implications.”

We need to see several sets of measures. One is regulatory forbearance. Second, what we’re seeing around the world, is some form of partial loan guarantees, where you are back-stopping banks to keep lending to these sectors so that working capital doesn’t dry up.
Sajjid Chinoy, Chief India Economist, JPMorgan

Chinoy said that policymakers will also need to stand ready to consider ways to support the informal sector. We have some form of insurance in the MGNREGA scheme and we have to ensure that continues to function well.

But more policies may need to be designed to support contract workers.

“One way to ensure that social distancing works, which is critical at this stage, is that daily wage workers are adequately compensated so they don’t have to step out to earn a living. One thought is that we quickly filter the Jan Dhan account network and put some cash in those accounts,” Chinoy said.

For small businesses and low income households, tax deferments, refunds and rebates may need to be considered.

This is not a linear process. You will see a sudden stop, so the demand impact to businesses is sudden, sharp and non-linear. Time is of the essence. We now have an empowered committee looking into this so I would expect that measures will be rolled out very soon.
Sajjid Chinoy, Chief India Economist, JPMorgan

Financial Market Dislocation

Regulators will also need to move quickly to quell disruptions in financial markets. Central banks will have to use a variety of tools from interest rate cuts to liquidity lines.

The RBI has so far used unconventional measures, such as forex swaps, long-term repo operations and bond purchases, to keep markets orderly. “It may be looking to preserve the space for rate cuts for when it has a meaningful impact on the economy in terms of helping growth,” said Chinoy, adding that he expects a rate cut at the April meeting.

While judging the extent of rate cuts, central banks of emerging markets will have to weigh two conflicting factors, he said.

When central banks decide on the extent of interest rate easing, they have to weigh the benefit of that rate cut on the economy against how much more pressure does it put on the currency and whether that endangers financial stability.
Sajjid Chinoy, Chief India Economist, JPMorgan
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