India Could Consider A Pandemic Bond To Fund Coronavirus Response: DBS Bank’s Taimur Baig

The global spread of the coronavirus has spared virtually no country now. In response, nations have locked down borders and started looking inwards. But the funding needed to counter the economic fallout should be globally pooled, according to Taimur Baig, chief economist at DBS Bank Ltd.

“This is a global crisis. The coronavirus knows no borders. And so the funding to fight this should also be globally pooled,” Baig said in an interview with BloombergQuint.

Last week, the U.S. extended dollar swap lines to a number of countries, including emerging economies, as a way to tackle a shortage of dollars. These swap lines, according to Baig, had a salutary effect on the global funding market.

India is yet to put in place a dollar swap line with the U.S. Federal Reserve. “India sits in the G20. I would love to see it use its international standing to get such lines in place,” Baig said.

‘A Pandemic Bond’

India should also consider raising resources internationally to fight the economic cost of the pandemic. While the Indian government has so far announced a small fiscal package of Rs 1.7 lakh crore, or 0.8 percent of GDP, more may be needed.

Such a financing strategy could also be designed in the local currency if needed, he said.

‘Going Beyond The 2008 Playbook’

While the fiscal response across India and many other nations is still playing out, monetary authorities, which tend to be more nimble, have taken a number of preemptive measures, said Baig.

In India, the central bank has announced a sharp cut in rates along with additional liquidity provisions and targeted relief for corporate bonds and bank borrowers. The measures announced by both India and other central banks have closely followed the playbook adopted post the global financial crisis.

Given the nature of this crisis, will central banks need to do more? In an article in the Financial Times, Bank of International Settlements chief Agustin Carstens wrote that central bank interventions need to reach the individuals and businesses who are ultimately affected. “The last mile of this channel is not yet in place and needs to be bridged urgently,” he wrote.

Baig said this might be difficult to do particularly for emerging market central banks.

Countries that have reserve currencies can do these things much more readily than India, where you do not have a reserve currency and you run a balance of payments deficit, Baig said.

‘Asymmetric Business Cycle Dynamics’

According to Baig, early forecasts for the growth impact across global economies have significant downside risks. The key question is how quickly economies and businesses can ramp up even after lockdown and other restrictions are removed.

“We should all recognise a rather cruel economic reality, which is that business cycle dynamics are asymmetric. You can have a very sharp increase in unemployment due to a lockdown but you will not have a very sharp decrease in unemployment the moment the lockdown ends,” said Baig.

He said in many cases, the current crisis would become a tipping point for businesses that had past troubles to deal with. “So, the notion that the sharp decline in economic activity will be followed by a sharp pick-up in activity is wishful thinking.”

This uncertainty will also continue to play out across equity and credit markets. In equity markets, where valuations were rich going into this crisis, will continue to see pressure. “The quicker we realise that normalcy will be elusive, the better it will be for us,” said Baig, adding that markets will have no choice but to assign very poor multiples to businesses due to the prevailing uncertainty.

The same uncertainty will play through credit markets.

Also Read: All That Needs To Be Done To Fix A Covid-19 Wrecked Economy

“Our entire focus right now is on the credit markets... How much credit spread widening are we going to see, what happens to these companies as they try to refinance or raise more funds. For many sectors like energy, transportation and even hospitality, there is as yet no light at the end of the tunnel,” Baig said.

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