What We Think

April 10, 2020

Whatever it takes

As health authorities continue with measures to flatten the curve, so are governments trying to flatten the recession curve. Focus is now on protecting people and their jobs and ensuring that the imminent economic recessions do not transform into deep depressions. The risk is real, yet over the course of the past weeks we have seen international governments declare post-war like budgets with large fiscal injections. The threat is real, the war is here. It is now a question of economic survival.

Earlier this week, Prime Minister Abela launched the third set of measures to cushion the economic blow. This set of measures has given a proportion of affected people some hope that they are not alone in facing the crisis. The cash injection will alleviate some of the hardships that some employers are facing. The first priority must remain workers and securing their employment. Although ambitious, the package has targeted specific sectors. Though still early days, the ramifications of this economic crisis will go well-beyond these specific sectors. There are many other businesses feeling the brunt of the crisis and they too need reassurances from Government that if and when needed, support will be available to them. Shoring up the confidence of economic operators is critical for the economy.

A modern globalized economy is a complex web of interconnected parties: employees, firms, suppliers, consumers, banks and financial intermediaries. Everyone is someone else’s employee, customer, lender, etc. If one of this buyer-seller links is broken by this crisis, the outcome will be a cascading chain of disruptions which if not halted can quickly turn a recession into a protracted depression.

As more sectors will start feeling the brunt, they too will have to start benefit from direct financial assistance before their financial buffer will too dry up, seriously undermining their ability to invest further in the future. In the interim, the package consisting of deferrals and soft loans will be of support. However, should the effects of the virus extend, much more direct measures will be needed in the coming months.

This will undoubtedly increase government debt. Even though government has the fiscal space to manoeuvre, the direct financial package together with the deferral programmes will definitely require the raising of additional debt. Luckily, we are living in a low interest environment and the European institutions have issued further funds and initiatives to support governments in extending their balance sheets. Government needs to therefore ensure that the additional liquidity reaches the firms that need it. It is the mechanics of such schemes and incentives that will determine their impact and success.

The critical link will be the banking and financial sector. Delivering the much-needed liquidity through soft loans and overdrafts needs to be swift. The lag between measures being communicated and them being implemented needs to be minimised. Application processes and on-boarding procedures by the banks, too need to be shortened and made much more efficient. This is especially true for start-ups that were still in the process of opening bank accounts or obtaining financing. Banks need to come together at this critical time of our economy to protect individuals, today’s companies as well as the companies of tomorrow. The Malta Development Bank has a critical role to play in this time.

This further highlights the importance of having a holistic national social pact that goes beyond the social partners but includes all banking and financial players, including the capital markets. Government needs to ensure that nothing stands in the way of the announced measures.

This is not a cyclical or normal economic downswing. This is a multi-layered and multi-faceted crisis which requires a new mindset to deal with it effectively. Government’s response is going to be critical together with a firm commitment to do whatever it takes.

For further information on the above kindly contact:

JP Fabri

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