More than a decade after the Global Financial Crisis that affected the banking industry around the world, another crisis is threatening to do much worse. The Global Pandemic caused by the novel coronavirus COVID-19 has already caused significant economic damage and brought about much more meaningful government and central bank stimulus programs than those implemented during the Global Financial Crisis. Check out the insights of some international financial experts.
How do you see the future of global finance in the context of the coronavirus crisis?
“The coronavirus crisis was exacerbated by other crises that were taking place at the same time such as the globalization crisis (the commercial fight between China and the US, Brexit, the polarization between West and East) and the developed world corruption crisis (corruption amongst the highest ranked officials in China, Russia and the US) that led to a political credibility crisis, the unbalanced participation of countries or regions in the problems of the world (climate change, hunger, gender, immigration, credit access etc.). It will take time for the world to go back to as it was before. I foresee more participation by other newcomers or parties compared with the ones that previously led the global finance scene.”
“The Coronavirus has struck the global economy at a time when the public sector debt in the developed world is still at elevated levels after the global financial crisis a decade ago. On top of that, even before the coronavirus struck, global trends indicated a halt in globalization and foreign direct investments into emerging markets was clearly on a downward trend, global FDI plummeted to 1.8% of world GDP in 2018 from about 3.5% a decade ago. Global trends also point to shorter global supply chains and a focus on resilience rather than finding new markets and trading partners. The coronavirus came on top of these adverse trends for developing markets and it will likely exacerbate the situation especially in the short term. Starting in 2021, the global economy is expected to bounce back and the liquidity provided by the world’s major central banks is likely to continue in the near future and this will feed the search for yield by investors and financiers. However, a repeat of the post global financial crisis portfolio inflows to emerging markets is less likely this time due to worsening economic prospects and credit quality. Only the top tier of developing economies should expect a quick return of investor appetite while the others will benefit to a much less extent from private sector financing and investments.”
How will the global financial crisis affect development aid assistance?
“First of all, the US and the EU will direct their aid to attend to their own problems before going abroad. Secondly their aid will be conditional on more participation from the beneficiaries. The main themes of aid attendance will change as well, the priorities will be shuffled again. I think that some themes such as gender, minorities participation, immigration assistance will have to make some room for other main themes such as corruption, the strengthening of political institutions and economic balance which will be more important. A lot of local NGOs in beneficiary countries will be controlled and audited, in order not to disturb their independence and autonomy. China has already started to appear as a main player in local infrastructure (ports, roads, airports) which is basic to development. The US and the EU have to move their aid to more infrastructure, instead of major programs. The role of UNDP, the World Bank, IIC, IFC, etc. will be less and the role of the countries offering assistance will be more direct.”
“It would be a big mistake for donors to resign from aid assistance, as this would lead to an even deeper increase in poverty in third world countries. However, it is understandable that we cannot expect the financial volumes of this aid to increase in the coming year, but rather to decrease. It is important that this decline does not fall below the level at which the countries supported find themselves in an economic situation that causes social unrest and negative trends in strengthening democracy, citizens’ freedom and the decline in their standard of living, and in even greater poverty.”
“True, development aid is likely to decline. Drawing from past experience, development aid can be more effectively earmarked to implement social and health interventions and reviving industry. Aid should also be directed to improve emergency and disaster preparedness measures in all sectors in order to mitigate the negative spillover effects across all industries as experienced in the current pandemic whose overall implications had such global reach.”
“In the post coronavirus crisis world, with globalization and private capital flows into emerging markets already in retreat, the potential role of public finance and development aid assistance will increase, especially for the frontier emerging markets. With the already stretched fiscal situation in developed economies and key donor countries, the global development and assistance budget is likely to decrease in 2020 and 2021, as was the case during the global financial crisis in 2009. Therefore, donors might be focused on causes directly related to their national agenda such as their coronavirus response and the alleviation of refugee crisis through assistance for fragile states.”
“There are likely to be two opposing forces at play. First, as governments and international institutions tighten their belts in the face of the economic recession, they are likely to reduce discretionary spending. Secondly, however, most players will recognize that they have a role to play in relaunching the world economy and that it makes sense to allocate funds to development aid programs targeted to the specific sectors and geographies most affected by the current crisis.”
What should the international community do to address the situation?
“The coordinated efforts of all the multilateral institutions of the world community are very important. From the level of the United Nations, through the World Bank, International Monetary Fund, and European Union to regional international banking support institutions, there is a need for these communities to prepare and implement economic support programs for member countries, and these should be further supported by third world countries through donor organizations. Without a coordinated effort by all on a global basis, it will be very difficult and uncertain to overcome the negative economic impacts of coronavirus.”
“My biggest concerns would be the need for foreign investors to divert their investments from affected developing countries and an increase in protectionist policies in their “advanced” economies. Such policies will negate the advances made thus far through globalization and free markets. If the international community feels a responsibility toward LDCs, then I would initially suggest that interventions are in place so that LDCs still achieve gains through the support of their commodity and export markets (agriculture, tourism, for example). I would also propose that foreign investment goes towards resuscitating industries which will lead to increased employment and support any fiscal policies to improve overall income. This will contribute to the formalization of the economy which tends to be informal in LDCs. It is important that LDCs do not land themselves in a spiral of further debt to address the financial crisis.”
“There is no magic bullet that will completely avoid a level of economic pain with all the unpleasant consequences that follow. In my view, the international community, including governments and international institutions, should be ready to step in and act to alleviate the economic and social damage in the most badly hit sectors. This can be in many forms such as grants/financial assistance programs, taxation relief, alteration to existing bankruptcy protection legislation as well as the provision of expertise in different jurisdictions to help prevent a downward economic spiral of bankruptcies and unemployment. There is of course a role for the private sector too, particularly regarding the banks (and their shareholders) that need to take some of the pain, via significant debt forgiveness/forbearance, dividend cancellation, etc. Banking regulators in many countries have already signaled their willingness to provide assistance to banks that take actions to help mitigate the economic effects of the current crisis. For other groups, such as NGOs, they have a role in continuing to lobby for direct action to support those which were hardest hit and to offer technical assistance where needed.”
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