How we deal with the crisis now will shape the post-Corona world. As at time of writing, near-term second and third quarter consensus global growth forecasts were pointing towards a sharp contraction in overall economic activity and a significant rise in global unemployment. Supply- side disruptions emanating from the likes of China and global lock-down are contributing to a significant demand-side contraction leading to rising deflationary risks. As long as the global infection curve does not start to flatten, longer-term forecasts are impossible to make and management across developed and emerging market companies are increasingly focusing on their abilities to withstand tail risks so as to be in a better position to rebound, once scientists get on top of the pandemic. We will eventually defeat the virus but what policymakers have globally been attempting to do is avoid a global credit crisis, which would lead towards a great depression. 

Three economic objectives stand out. The first is to prevent the dislocation in financial markets over the past weeks from developing into a severe liquidity squeeze. The second is to provide short-term assistance to those affected directly by the economic disruption caused by measures to contain the virus. And the third is to engineer a more fundamental and longer-lasting expansion of demand to counter mounting deflationary risks. We are in fact a few months away from helicopter money, should the virus not be mastered soon. Policy responses need to be large and credible and out-of-the-box-thinking remains key especially when governments are coming into this crisis with little fiscal space. 

«The longer the crisis goes on, the greater the need will be for policy-makers to look at debt securitization and restructuring.»

In the case of Mauritius, given the fiscal constraints and beyond allowing the rupee to depreciate given low mediumterm inflation risks, monetary policy has been at the forefront with demandside boosting measures, such as interest rate cuts, reduction of the cash reserve ratio requirements, Rs 5 billion in working capital relief to impacted companies, relaxation in banking guidelines and a moratorium in capital and interest payments. Fiscal policy, on its part, has made limited moves towards sustaining salaries of the lower-middle class in the formal sector, providing more funding to healthcare and funding part of this by accessing IMF emergency funds. Unless the Central bank sets up an emergency and cheap rule-based fiscal facility, however, there is not enough money to effectively deal with a longer than expected crisis. Another solution would be for the government to issue a perpetual bond to the Central bank, using the raised funds to provide more wage subsidies to a greater number of people and avert a social crisis. The last funding option would be to redirect the remaining funds of the special reserve fund transfer and/or complement this with yet another smaller transfer given rupee depreciation and a drop in BoM liabilities (SRF should have increased). Many small taxpaying businesses with BRNs should be given Government-guaranteed long-term and securitized loans by the central bank equivalent to taxes they paid last year to provide them with temporary relief, especially if they need to optimize capital structures. 

On the credit side, it must be understood that years of excess liquidity coupled with many banks chasing few big clients has led to corporate balance sheets which rely heavily on debt with little buffers to sustain even temporary shocks. Local corporate and individuals have close to a trillion rupees stashed abroad, as per the MRA, but why inject equity given the easy credit environment? The longer the crisis goes on, the greater the need will be for policy- makers to look at debt securitization and restructuring but, for larger strategic firms, it must be done on a case-by-case basis. On the fiscal side, post-crisis, Mauritian policy-makers will need to engage in structural reforms and review the current tax structure via a return to progressive taxation, property taxes and inheritance taxes on the superrich. This crisis has showcased the simple fact that both the public and private sectors lack adequate buffers to manage tail risks, when they occur. Whether the lesson is learnt, is yet another matter.

Sameer Sharma, financial expert, working in the United States.