The Stimulus Transmission Network

For the past months we have observed unprecedented efforts to contain the pandemic – medically through the response of healthcare professionals, scientifically through the efforts being made to counter the virus and working on possible treatments and vaccines, and politically through the efforts to delay, contain, research and mitigate. Through those various efforts, the coming together of people and societies recognizing the need for collective and intergenerational responsibility, has been both unprecedented and heart-warming. 

The pandemic is an extraordinary event that combines health, socio-economic and financial shocks, resulting in exceptional costs and damages and requiring extraordinary thinking and solutions and an ‘anything is possible’ mindset. The immediate responses – consisting mainly of relief and stabilization measures – include the provision of forbearance measures and direct subsidies for citizens and SMEs, as a policy response for the freeze in supply and demand activities. The Philippine Government provided a swift response package primarily through Republic Act No. 11469 (“Bayanihan to Heal as One Act”), approved on 24 March 2020, with focus on the health care sector, low-income households, and small business enterprises. An economic stimulus program –the proposed Philippine Economic Recovery Act – is expected to be enacted when the House of Representatives resumes its sessions on 4 May 2020. In other jurisdictions, stimulus packages have been extended to cover interruption assistance for various businesses and rescue packages for severely hit industries.

There are references and live case studies that can provide concrete opportunities for both the private and public sectors to work together in coming up with collective responses on the economic and financial implications, which can be guided by the following objectives: 

1. Act with purpose. Be clear and consistent on the public interest objective, keep actions based on and fully aligned to this. Deftly embed stewardship of this purpose into the design of current and upcoming interventions, and in the background, begin to consider what this means when the “reboot” begins as the crisis eases.

2. Swamp the business cashflow deficit and financing chasm. Avoid major short term cashflow contraction (due to demand or financing issues); protect “good businesses” preferably outside but especially if entering formal insolvency processes.

3. Maintain employment, mitigate harm to individuals, and avoid exacerbating health system stress. In particular, minimize job losses by keeping people employed, support the vulnerable self-employed and temporary workers, mitigate self-isolation, and where possible, enable labor to redeploy to match short-term demand shortages.

4. Build business resilience and enable timely recovery. Help businesses adapt to changes in demand, regulation and supply chain; stimulate demand and leverage the role of Government as a customer.

5. Ensure the financial system remains resilient and able to support the medium-term “reboot”. Firstly, act collectively or individually as Governments to ensure more than sufficient liquidity is in place for the long-term. Secondly, while using the banking system as a transmission mechanism create transparency on risk and ensure banking and insurance markets avoid long-term impairment, act purposefully to reflect stewardship principles.

To get this done, there are several imperatives that need to be adopted, within the constraints of biosecurity, but not prevented by both the private and public sectors:

• Recognize the “Purpose” imperative – build public interest stewardship into the design upfront
• Create an evolving coherent strategic program to act widely within complementary interventions
• Ensure simple intervention design enabling rapid yet sufficient development and deployment while avoiding unnecessary execution risk
• Create multi-skilled execution teams with strong leaders, empower action and remove excessive constraints (e.g., regulation) but do build in sufficient control and compliance
• Recognize the security and cybersecurity threat

The Stimulus Transmission Framework: A 3-way stimulus…for now

Shown here is EY’s stimulus transmission framework that considers the breadth of measures, and their transmission mechanisms to the real economy, as represented by the citizens (covering both individuals and households), SMEs and corporates. The 3-way stimulus arising from the unprecedented coordination of monetary, regulatory and fiscal policies will pass through two primary channels – (1) the national and local Government authorities, and (2) the banking system – that transmit the 3-way stimulus from coordinated monetary, regulatory and fiscal policies. 

Central banks have lowered interest rates, cut reserve requirements, offered cheap funding to banks for SME credit extension, as well as funding schemes that go directly to corporates, and put in place swap lines. There is a clear message from central banks that liquidity will not be an issue and banks have a vital role in offering credit.

Governments have offered fiscal incentives to those transmitting stimulus, there are jurisdictions that have openly announced financial support on offer while making it clear that any state guarantees by national Governments, while unlikely to be needed to support banks, would not be seen as state aid. As long as sovereign finance is both resilient and the target segments clearly and immediately identified, guarantees can be an effective nudge for the banking system to extending lending. There were also jurisdictions that were more direct and deliberate with their follow-through. For instance, the UK’s HMT, BoE and FCA issued a joint letter exhorting their banks to maintain and extend lending to businesses and customers, and this was backed by a letter from their Chancellor offering support for businesses to establish certainty and confidence in the wider economic community.  

Regulators have offered several forms of regulatory forbearance, including the removal of counter-cyclical Buffers and deferral of stress tests, which will all help to provide the playing field on which banks can extend further credit. We have also seen welcome moves to scale back more routine regulatory requirements to allow firms to focus on supporting customers. In spite of this, there is still an expectation from regulators that banks will anticipate increased and new forms of fraud, as well as digital and consumer protection risks as their operating models evolve to operate in this new, remote-access environment. Further interventions from regulators, Governments and central banks are expected if they feel it necessary. For example, the PRA has already started to address concerns around the impact of IFRS 9 and its impact on the banks’ capital and ability to lend. 

For now, the continuing imperative is how to ensure that the stimulus is transmitted successfully, and quickly and effectively, to the real economy, as represented by the citizens, SMEs and corporates.

The range of stimulus measures observed for the real economy has been targeted and coordinated in such a way that the banking system plays a central role. For this reason, banks need to be resilient and strong themselves and should also be adaptive and agile enough to address current and emerging requirements, including surge aspects of lending for restarting and shortfall purposes. Shown next is the Resilience Framework with a summary of tactical and strategic planning considerations for financial institutions.  

Focus on Households and Individuals. In implementing RA No. 11469, all public and private lenders shall apply a grace period for all loans extended to MSMEs and corporate borrowers. The Philippine Government likewise provided cash and goods subsidies, and even advanced the release of certain cash bonuses. This is particularly helpful to provide relief to the significant number of daily-wage earners in the Philippines who are not able to work during the lockdown or quarantine periods. The BSP has also offered various relief measures to encourage financial institutions to actively provide safe and efficient digital banking facilities such as the suspension of fees relative to applications for providing electronic payment and financial services, and waiver of fees on interbank transactions made through the BSP. A good number of Philippine banks and non-banks have already waived fees for the use of various digital banking facilities and procedures to allow citizens to do more transactions online and avoid the need to leave their homes. Examples of relief measures for individuals include those provided by the Monetary Authority of Singapore, the Association of Banks in Singapore, and the Finance Houses Association of Singapore. The package included relief on loan commitments on mortgages and unsecured revolving credit facilities, deferred payments schemes on renovation and student loans, motor vehicle loans, and other types of loans, refinancing schemes for investment property loans, and waiver of fees for individuals that cannot meet the required average daily or monthly balances on retail bank accounts. The institutions also provided for an opt-in package wherein individuals shall balance their accumulated interest costs against the temporary relief measure.

Focus on SMEs. Measures meant to directly assist SMEs have likewise been established. The Philippine Government has allotted Php 1Bthrough the DTI for its Pondo sa Pagbabago at Pag-Asenso (P3) microfinancing package for MSMEs. The Indonesian Government, on the other hand, subsidized interest for MSMEs and micro lenders while the Government of Hong Kong earmarked subsidies for registered owners of goods vehicles and operators of mini-buses. The Government of Canada also announced that rent for small businesses shall be lowered by 75% for a certain period. The US Government likewise signed into law the Paycheck Protection Program and Health Care Enhancement Act to provide additional funding for workers and small businesses. Forbearance measures were also provided through banks such as those in Malaysia that imposed a temporary moratorium on SME installment payments, and in China for loan payments and other credit facilities for SMEs, higher tolerance for non-performing loans by epidemic-hit sectors and SMEs, and a support bond issued by financial institutions for SME lending.

Focus on Corporates. In addition to the aforementioned relief measures, stimulus packages in other jurisdictions also cover assistance for business interruption (in the form of guarantee facilities, commercial paper facilities, and wage support credit) and rescue packages for severely-hit industries. These forms of assistance require proactive action from the corporates, such as the development and presentation of a recovery plan, highlighting the retention of workers and/or minimizing reduction in pay, and no dividends until full recovery.

To be able to prepare for discussions with authorities and banks around current and potential future stimulus schemes, corporates should compile, analyze and share the following portfolio of information: 

• Historical financial track record (3-year income statement and balance sheet)
• Credit rating opinions pre-COVID
• Legal entity structure, shareholder base, and existing liability structure (seniority)
• Cash burn and any asset encumbrance
• Purpose and values statement
• Number of employees within the last three years and number of Employees retained post-ECQ
• Estimate of the total number of employees and participating enterprises within its broader supply chain, include classification into large, medium, small and micro enterprises
• Total tax contribution (VAT and corporation income tax)
• Key suppliers – list of top 10
• Key customers – list of top 10
• Examples of recent innovations and support for R&D
• Examples of contributions to Government objectives pre-COVID (Build, Build, Build), during ECQ (donations) and towards the new normal economy covering rebooting (e.g. building of hospitals to increase the country’s ICU bed capacity) and reconfiguration (e.g., agricultural production and industrialization)

The policy rationale for rescue packages is predicated on the mitigation of socio-economic damage, and this was the underlying principle for the Economic Stabilization Facility under the US Cares Act. 

The stimulus measures that have been approved and announced will not end there, as there will be rounds of further effects after the relief and restarting of the economy begins. The exceptional health, socioeconomic and financial costs requiring our responses and evolving actions may be considered similar to WARTIME EFFORTS, which will eventually cover economic rebooting and reconfiguration of structural responses.

After several months of battling the COVID pandemic, Governments, citizens and businesses are starting to see more clearly the real changes in the environment. For the business community for instance, these potentially include: 

1. An increased focus on domestic production and less on the global value chain to provide more security of supply;
2. A more off-site rather than on-site business model as physical distancing becomes a norm; and,
3. Different economic developments across industries, following the VULIW scenario planning approach, showing industry-by-industry impact signatures, its evolving yet coherent mitigating actions and stimulus responses, and systems-thinking level of changes.

While forbearance and subsidy measures are vital, all economic sectors – households, corporates, and the Government – should already begin to re-frame their thinking on how to adapt to the new environment. As such, companies need to immediate address liquidity and operational requirements and simultaneously, re-strategize approaches to align with the new type of environment that the world is already facing as “business as usual” may no longer be on the horizon.

While there will be some dislocation in economic base, growth and employment, a sound and clear plan that will significantly contribute to the country’s economic security will be heard, or at least be found interesting, to the Government. The Government is always the largest financer and customer. It is a silent customer during the pandemic and will probably become the most important and primary customer during the recovery and reconfiguration phases of the new economy.