The spread of COVID-19 — which the WHO last week declared a pandemic — has triggered volatility and corrections in the global financial markets, leading many governments around the world to impose extensive travel restrictions as part of their efforts to contain the disease. It has also prompted several central banks to roll out emergency measures to cushion against any potential fallout from the pandemic. However, things are still rocky and the road to recovery could be bumpy.
Even though governments and central banks have touted plans to boost investor confidence and ease market concerns, panic appears to be persisting and financial markets are expected to remain volatile after last week’s global rout. That is because the underlying nature of the current threat is not economic; it is a pandemic that causes people to avoid going out to minimize social interaction and forces most economic activities to cool. That is different from what happened in 2008 and 2009 when a series of systemic and structural failures within financial institutions led to a global financial crisis.
Realistically, rather than buoying investor confidence, the rate cuts by central banks are more likely to deepen concerns that the disease might have a more severe effect on the economy than expected. As international oil prices plunged last week due to a price war between Russia and Saudi Arabia, and commodity prices also showed corrections amid a dimming growth outlook, while bond markets exhibited wild swings as traders had difficulty finding their desired prices, the signs of credit and liquidity risk are clear in financial markets. Rate cuts are not a vaccine, and even if the US Federal Reserve were to slash its benchmark rate again this week as expected, the effect would be limited — as long as the pandemic cannot be brought under control soon.
In Taiwan, the Legislative Yuan on Friday approved a NT$60 billion (US$1.99 billion) special budget to fund disease prevention and assist local sectors hardest hit by the outbreak. The move came on the same day that the TAIEX at one point fell below 10,000 points as fears about the global spread of the disease dominated the local market. Overall, the market plunged by 10.54 percent last week in a tumultuous week of trading. What is more serious is that the potential fallout could result in an extended period of subdued economic activity, which explains why the central bank last week said it would this week consider pre-emptive measures to handle repercussions from the pandemic.
Taiwan has had good results in controlling COVID-19 thus far, while the continued flow of returning Taiwanese businesses and anticipated orders for 5G and the Internet of Things are all likely to soften the blow to the economy. However, the nation should remain alert to supply chain disruptions and global consumer confidence if the pandemic continues to spread worldwide. As the country is heavily reliant on exports, which are directly affected by COVID-19, businesses are being affected by the virus to a different extent.
However, the real issue has always been demand, which would directly affect the economy, as a prolonged outbreak would most likely result in a sharp decline in tourist arrivals and keep people out of shopping or entertainment areas in the coming months. Now that the Legislative Yuan has passed a special budget for the outbreak, the government must provide immediate assistance to the affected sectors and furloughed employees. That would help maintain employee morale, ensure companies have a pool of experienced workers and retain consumer purchasing power, which are all necessary when the economy rebounds and demand accelerates.
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