As countries fight to contain the Covid-19 virus, the current state of the world has become increasingly more complex and difficult, both in the financial markets and in the geopolitical arena.
This global pandemic has brought about numerous business constraints and vast economic uncertainty to businesses and households. While the new economic landscape may look very different and difficult as we emerge from this global health crisis, the paradigm shift may also open doors to different opportunities for Singaporean companies.
For the past months, businesses have had to counter many fronts. From implementing immediate health protocols and distancing measures while attempting to sustain productivity levels in this health crisis, they also need to take into account implications of possible turmoil in the global financial market and geopolitical tension between China and the US, two of the biggest markets in the global economy.
Financial markets in times of pandemic: the safe-asset shortage
Over the past 20 years, we have observed a secular decline in long-run real interest rates in advanced economies. This is in spite of efforts from central banks to raise interest rates when needed. This is known as the Greenspan’s Conundrum.
With Covid-19, this trend will be exacerbated. In light of greater uncertainty, households tend to reduce consumption and increase their savings. This increase in precautionary savings will in turn further depress the interest rates in the global market.
The ultimate question remains: Where do the additional savings go? Historically, there is an abundance of safe assets that households and companies can use to preserve their wealth, either through sovereign bonds in advanced economies or securities backed by land, properties and commercial buildings.
However, with the European debt crisis of 2009, and the US housing crisis of 2008, the global supply of safe assets has shrunk substantially. The sovereign bonds in advanced economies and asset-backed securities have lost their “safe haven” status, leading to a shortage of safe-asset supply in the global economy.
International investors used to deem European sovereign debt as a safe investment. Now after the European debt crisis, they no longer think so. Prior to the housing market crash in 2008 in the US, investors thought land and assets backed by land could never fall sharply, they no longer hold that view.
This shortage of safe assets is amplified by investors’ reactions to the Covid-19 pandemic. Early warning signs such as the recent surge in the price of gold suggest so.
Because there is a limit to how low interest rates can go (a form of zero lower bound or negative interest rate) to clear this excess demand for safe assets, this excess demand can create a persistent stagnation in the global economy and a weakening of the effectiveness of monetary policies in difficult times. As a result, asset allocation and asset management will be particularly challenging in this environment.
Singapore’s financial market is characterised by its transparency and safety. Safe and sound financial intermediaries and companies from Singapore can take advantage of this increasing demand for safe assets if the world has a limited ability to produce these assets.
An open economy like Singapore’s that belongs to an exclusive and selective group of countries that have a “triple A” sovereign rating has a clear advantage in supplying these safe assets. This advantage enables it to better mitigate the impact of the present health crisis in the local economy. The increasing demand for safe assets can help to release fiscal resources to meet surging expenses to fight the Covid-19 virus.
Increasing geopolitical tension
In addition to economic uncertainty created by the current pandemic, the current state of the world is also clouded by an increasing tension between China and the United States. It remains unknown what will happen after November when the United States elections will be held.
This tension has not only been reflected in the trade war, but also on restrictions on technology access and knowledge.
Preserving the trade of goods and services during this pandemic is essential for a global recovery. Firms in Singapore are better positioned to navigate in these tumultuous times given the country position as an international hub.
Let’s never waste a crisis
To thrive in this world of great uncertainty, companies have to be flexible and innovative. After the Covid-19 pandemic, consumers and investors alike will demand safer options for products and services as well as safer investment products. There will be a great demand in sectors like agriculture technology, education technology, biotechnology and medicine.
It is a golden opportunity for companies to create environments that are conducive for the workforce to be productive and innovative regardless of location. Innovative companies that have a flexible working environment will emerge stronger after the pandemic ends. Homegrown companies can leverage the infrastructure in Singapore to emerge stronger and be ready to fill these gaps.
Dr Daolu Cai is a visiting senior fellow in strategy and policy with the National University of Singapore Business School. The opinions expressed are those of the writer and do not represent the views and opinions of NUS.
