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The Impact of COVID-19 to the Global Finance

A Presentation by

GROUP MEMBERS

Andreas Novianto W.W. (19/440489/SP/28848)

Davina Tri Damayanti (19/440490/SP/28849)

Dexter Ananda (19/440491/SP/28850)

Muhammad Daffa Al Gazhali (19/440495/SP/28854)

Ngurah Gede Satria A. (19/444331/SP/29135)

Shafanissa Widyawan (19/444337/SP/29141)

Shafira Alisya (19/444338/SP/29142)

Introduction

INTRODUCTION

  • The start of 2020 was marked with the pandemic of the COVID-19 virus which had originated from Wuhan, China that started around December 2019. As of April 2020, the pandemic had reached around 1.7 Million confirmed cases worldwide, in which it had spread across every continents and regions all around the world.
  • Inevitably, the COVID-19 pandemic will affect the financial market and economy on a global scale, which is what our group is going to analyze with this presentation.
  • The COVID-19 pandemic has affected the global financial market negatively, such that the global economy was forced into a plunge by the side effects of the pandemic such as the halt in production of goods and services, social distancing measures imposed by the government, as well as the forced layoffs of workers to name a few.
  • These negative effects to the global economy includes global financial shock which may eventually lead to recession, disruption in supply chains of corporations, disruption of the global stock market, etc.
  • That being said, this presentation aims to analyze the impacts of the pandemic to 3 states each representing a region and how they respond to the crisis in order to maintain financial stability

Introduction

(cont.)

USA

USA: LOANS AND BUSINESSES

The US Government Responses

  • COVID-19 has forced the government to implement lock down policy across the country.
  • Consequently, people cannot travel or go outside unless it is necessary.
  • Businesses such as restaurants fear they have to fire their workers, or worse, close their doors due to the lack of customers.
  • Schools are forced to close and send their students home.

The empty streets of New York and Los Angeles

The Loan System

Economic Response

  • Government asks banks and other institutions to hand out loans.
  • Universities are asked to pardon student loans.
  • Loan requirements, such as credit rating and performance, are waived.

Evaluation: Business Loans

Pros

Cons

  • Businesses can sustain themselves
  • Employees can still receive their income
  • Consumers are still able to meet their daily needs, albeit in a much slower pace
  • The $349 billion loans cannot fulfill the 10 times more than the usual requests.
  • Economic productivity is incredibly low, making businesses unable to repay. In return, lenders cannot circulate the money to other businesses.
  • This is exacerbated by the waiving of economic prerequisites, allowing bad credit rating people to take loans. It will affect the lenders, as there will be shortage of money.

Student Loans

The United States government decided to suspend the student loan payment starting from March 13th to September 30th, 2020. This rule is written in the newly established law called the CARES Act, which regulates:

  • No federal student loan payments
  • No interest on the federal loan payments
  • No garnishment of wages, social security, and tax refunds for student loan debt collection

Additional regulations in regards to the CARES Act:

  • The CARES Act is active immediately without the requirements to send any request.
  • The suspension only covers approximately 85% of the federal student loan payments and most of the unqualified funds are the ones not owned by the US government of Education.
  • The 0% interest rate is only applied to specific loans.
  • If anyone has extra money and wishes to pay for their student loans despite the CARES Act, you can still pay them monthly without getting any penalty if you pay a lower amount.

EUROPEAN UNION

European Union

Comprehensive Economic and Financial Response

Measures taken by EU

1. Full flexibility in EU fiscal rules;

- activated the General Escape clause in the Stability and Growth Pact

2. Eases State aid rules;

- Allows states to provide various types of direct aid to the Companies and SMEs

3. Coronavirus Response Investment Initiative (CRII);

- €29 billion of co-financing from the EU budget + €8 billion of unspent EU cohesion money + the unallocated €28 billion of cohesion policy funding within the 2014-2020 cohesion policy programs + €800 Million of EU solidarity Fund

- CRII+: allows mobilization from the Structural and Cohesion Fund of the EU

4. Pandemic Emergency Purchase Program (PEPP);

- Providing additional liquidity for company by temporarily purchase assets worth of €750 billion (totaling to €1.1 trillion) to help absorb the shock.

5. European Investment Fund liquidity incentive;

- Provide up to €40 billion for to alleviate liquidity and working capitals.

SURE

SURE

SURE (Support mitigating Unemployment Risks in Emergency) as a financial aid for workers that is affected by the Covid-19 outbreak.

BACKGROUND:

- Businesses are limiting their employees activity

- Short-time work schemes may result in increase of public expenditures.

IMPLEMENTATION:

- EU members request to the Commission for a loan in financing this sudden increase in expenditure

- A proposal is made by the Commission that will be handed to the Council

- Acceptance of loan for the member state.

FUNCTIONS:

- Cover the cost of short-time work schemes during the crisis.

- Sustaining the income of households and maintaining the economy productivity.

Evaluation

Pros

  • cushion the blow to people’s livelihoods and the economy
  • help corporations and SMEs survive the economic slowdown
  • restore market confidence in the EU

Cons

  • CRII and CRII+ lack of funding for services that provide care and support for persons with disabilities.
  • Greater national freedom is needed to mitigate the problems
  • SURE loans is short-term

China

CHINA

  • Amidst the Corona virus pandemic, economic activity has sharply declined due to the lockdown policy imposed by the government.
  • People’s Bank of China has made several monetary policy adjustment
  • Cut one-year loan prime rate from 4.15% to 4.05%
  • Cut five-year rate from 4.80% to 4.75%
  • Cut one-year medium-term lending facility from 3.25% to 3.15%
  • Lowering the Reserve Requirement Ratio for big state-owned banks, joint-stock banks, city and rural commercial banks, and rural credit union.
  • Delaying loan payments for small and medium enterprise

EVALUATION

EVALUATION

Benefit

Help companies to weather the damage from coronavirus as they have better access to funding

Drawbacks

  • May put China’s large banks at risk as the adjustment may lead to non-performing loan and profit hit
  • Agricultural Bank of China, that experienced a net interest margin decrease from 2.33% to 2.17%

  • Reducing interest rates takes time to have an effect hence it is ineffective to overcome immediate drop during the pandemic

Economic shrank greater than Global financial crisis

Economic shrank greater than Global financial crisis

Chinese financial authorities claim that the Coronavirus pandemic has caused a cut on China’s growth in half during the first quarter. The shrank following number:

  • Industrial output fell 13.5% in January-February, compared with 2019,
  • Fixed asset investment fell 24.5%
  • Private sector investment fell 26.4%
  • Retail sales shrank 20.5%.
  • By April 16 2020, approximately 50 countries restrict travel from/to China
  • Tourism drop of 52.7%

As part of the solution, China's Central Bank sets a monetary policy (shown on the ppt) with $14.3bn injection into the financial system

Conclusion

CONCLUSION

To sum up, the COVID-19 pandemic has had negative impacts on the economy of states all across the world including China, USA, and the EU, with some speculating that this may lead to a long term recession or even depression. The sheer impact to the economy is due to the fact that this pandemic has spread across all regions of the world, which forces governments to ‘stall’ their economy for the sake of their people’s health and well-being through measures such as restricting working outside of home, etc. Furthermore, as China is deemed the ‘factory of the world’ as many products are manufactured in China, the shutdown of Chinese manufacturing industry has created a supply chain disruption that leads to low supply domestically & abroad, whilst also paired with the low demands.

Conclusion

Measures that governments across the world takes varies, but it revolves around cutting down of interest rates, handing out loans, pardons of loans, waiving credits, financial injections, and giving bailouts to major companies. These measures mainly aims to sustain the population's livelihood, and protect corporations from going bankrupt to prevent further decline in the economic system. However, such measures raises questionable issues such as the effectiveness of the loans, the ability of businesses to pay their debts amidst low income, and the effectiveness of capital injections as the period of the pandemic cannot be predicted.

References

REFERENCES

  • China could see decade-high bad loan ratio as virus slams businesses: DBS. (2020). South China Morning Post. Retrieved 11 April 2020, from https://www.scmp.com/business/banking-finance/article/3065284/china-could-face-decade-high-bad-loan-ratio-coronavirus
  • China offers virus-hit firms temporary lifeline by delaying loan payments. (2020). South China Morning Post. Retrieved 11 April 2020, from https://www.scmp.com/economy/china-economy/article/3064584/coronavirus-china-offers-under-pressure-small-medium-sized
  • China cuts rates, injects liquidity amid coronavirus epidemic as markets sink. (2020). The Straits Times. Retrieved 11 April 2020, from https://www.straitstimes.com/business/economy/china-central-bank-unexpectedly-cuts-reverse-repo-rates-to-help-economy-as-wuhan
  • Coronavirus deals China's economy a 'bigger blow than global financial crisis' (2020). The Guardian. Retrieved on 10 April 2020 https://www.theguardian.com/world/2020/mar/16/coronavirus-deals-chinas-economy-a-bigger-blow-than-gfc
  • ECB announces €750 billion Pandemic Emergency Purchase Programme (PEPP). European Central Bank. (2020). Retrieved 11 April 2020, from https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200318_1~3949d6f266.en.html.
  • EASPD: 45 MEPs: Coronavirus Response Investment Initiative must fund support services for persons with disabilities. AfriQ. (2020). Retrieved 11 April 2020, from https://www.afrik.biz/feed-item/easpd-45-meps-coronavirus-response-investment-initiative-must-fund-support-services.China’s big four banks face coronavirus profit hit. (2020). Ft.com. Retrieved 11 April 2020, from https://www.ft.com/content/606e5e25-f537-4c57-8376-c8343a69c73f
  • Friedman, Z. (2020). Here’s How To Get Coronavirus Student Loan Relief. Forbes. Retrieved 5 April 2020, from http://www.forbes.com/sites/zackfriedman/2020/04/04/how-to-get-coronavirus-student-loan-relief/.
  • Lee, Y. (2020). China cuts benchmark lending rates amid coronavirus outbreak. CNBC. Retrieved 11 April 2020, from https://www.cnbc.com/2020/02/20/coronavirus-chinas-pboc-cuts-benchmark-lending-rate-loan-prime-rate.html
  • Briançon, P. (2020). ECB Launches Mammoth, Open-Ended Bond-Buying Package. Here’s Why It Might Work.. Barrons.com. Retrieved 11 April 2020, from https://www.barrons.com/articles/ecb-launches-mammoth-open-ended-bond-buying-package-heres-why-it-might-work-51584616365.
  • What is Coronavirus Response Investment Initiative? How does it work?. Www-eudebates-tv.cdn.ampproject.org. (2020). Retrieved 11 April 2020, from https://www.eudebates.tv/debates/eu-policies/economy/what-is-coronavirus-response-investment-initiative-how-does-it-work
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