No business is ever set up to fail. No business can survive a government fiat that mandates the entire sector to be shut down and negates the ability to do business.
Yet this is exactly what millions of businesses throughout the world, both large and small, are having to deal with as government mandated shutdowns have sent shockwaves, leaving consumers, homeowners and businesses in “neverland”, a place where there are precious few that can come back.
That recovery is based on the size, scale and scope of fiscal and monetary stimulus that will be provided. In country after country, there are grants being offered to small businesses (with most being linked to the number of employees that are retained, which is the correct approach), payment deferrals on loan payments, rent holidays and even utility payment waivers.
This creates short term “circuit-breakers”. But these will have to be accompanied with more fiscal stimulus programmes if millions of jobs that have been lost have to be recovered. On the banking front, it is likely that banks will have regulatory relief on capital requirements (central banks throughout the world are already starting to take these measures), and banks that are not being co-operative with individuals and business owners will ultimately have to do so by government fiat just as the shutdown measures were adhered to.
Not all comparisons are true
When we compare this pandemic to the Spanish flu of 1918, the first observable difference is that stock prices did not fall during the outbreak (which led to between 20- and 50 million deaths). Why did we not see the financial panic then?
There are many reasons for this, but perhaps the most important one would be that asset ownership was not as high a century ago as it is now. With economic growth now being driven by asset prices, real estate ownership and the SME sectors, the shock is far greater in magnitude this time around.
The ability to withstand asset price declines erodes; so does any rule that drives revenues to near zero levels. This level of financial anxiety then takes a life of its own, and as default levels start to soar along with unemployment rates, the “fear pandemic” overtakes the damage resulting on the medical front.
The “negative asset bubble” that has developed throughout the Middle East and the emerging world is because people see prices falling, try to discover why, amplify these stories that explain the decline, which then leads to subsequent price declines.
It doesn’t help when financial counterparties do not assist in this time, and anecdotal narratives then burn through the ecosystem like wildfire.
Protect the jobs
We know why prices are down. We know why revenues have gone down to zero on balance-sheets. This is a time for programme after programme that grants relief on one front, and one that provides for fiscal stimulus on the other.
Monetary relief is more immediate and can be even more forceful with the introduction of specific measures for businesses, where not only existing loans are extended and suspended, but fresh loans are provided, attached to certain levels of employment being maintained. This is akin to the SBA programme that has been introduced by the US and parts of Europe.
It has to be immediate, and devoid of the bureaucracy that compliance departments are traditionally used to.
This arrests the decline of asset prices, and confidence, leading to some semblance of stability; only then can the fear pandemic be arrested. As individuals and business owners struggle to make their immediate payments in the aftermath of the worldwide shutdown by government fiat, it is imperative that stimulus measures be immediate, overwhelming and not be constrained by the bureaucratic hurdles that have been in place historically.
Economies are built on risk taking and few countries know that better than the UAE. This is not the time to penalize the risks that have been taken by the populace.
These are not the results of market forces, but rather exogenous circumstances that have conspired with human psychology. It need not result in disaster if the response measures are overwhelming.
As more of the world now starts to debate the economic costs of this shutdown, we know that this need not be an academic exercise if the same will power is utilized to restarting the economy with millions of stakeholders that will get back on their feet again.
Time is always of the essence and for this pandemic to end, we cannot merely give it our best shot. It is imperative that the only goal is success.
- Sameer Lakhani is Managing Director at Global Capital Partners.