Covid-19 has emerged as one of the greatest Black Swan of recent times.
Black Swan theory was developed by Nassim Nicholas Taleb in the 2000s in his books Fooled By Randomness and The Black Swan. This theory talks about hard-to-predict events, rare events and those that are beyond the realm of normal expectations.
The global financial market was completely unprepared and no one predicted that this pandemic would end the long-running bull market in the United States, where the S&P 500 took only 16 days to reach market loss of 30 per cent of its value. The enormity of the current crisis can be judged from the fact that it took 38 days for the S&P to reach the bear market during the October 1987 crash and 188 days during the recent global financial crisis.
Since the World Health Organisation declared a global emergency on Feb 20, major stock indices have dropped an average of more than nine per cent. The Dow Jones Industrial Average suffered its largest single-day drop in history on Feb 27. The equities in Singapore, Indonesia, Malaysia and the Philippines also reached the bear market territory, where the FTSE Bursa Malaysia KLCI index touched its lowest since 2011, bottoming at 1,207 points.
The Malaysian economy further worsened by a sharp decline in Brent crude oil price, bottoming at US$20.83 (RM90.6) per barrel, which impacted its currency valuation. The sharp decline in oil price has already devalued the ringgit, which has lost five per cent of its value in the last month and has been trading at RM4.40 as of March 19. This is causing anxiety among foreign investors who are offloading their investment in Malaysian equities.
For instance, for the week ending March 13, international investors took out RM1.91 billion net of local equities. While the outflow slowed down in the week ending March 19, Malaysia still lost RM1.79 billion net of local equities, including RM520.4 million in foreign net outflow on March 16.
The pandemic is bringing the world closer to another recession. Goldman Sachs downgraded its 2020 global growth forecast to 1.25 per cent, while IHS Markit revised down its forecast for world real gross domestic product growth in 2020 to 0.7 per cent.
It can be noted that any growth below 2.0 per cent is economically labelled as a global recession. The US’ real GDP is expected to fall by 0.2 per cent, the euro area by 1.5 per cent and Japan by 0.8 per cent, while China, where the coronavirus originated, is projected to slow from 6.1 to 3.9 per cent.
To increase the liquidity in the market, Bank Negara Malaysia cut its statutory reserve ratio (SRR) on March 18 by 100 basis points to 2.00 per cent, thus releasing RM30 billion into the banking system, which is the lowest since the global financial crisis in 2009, when it was at one per cent. The SRR cut came along with the Federal Reserve emergency cut to interest rates by 1.00 per cent to a range of zero to 0.25 per cent, the largest emergency reduction in the Federal Reserve’s more than 100-year history.
Many countries have launched economic stimulus packages to face this pandemic, but monetary stimulus alone is not enough to fight this virus-led crisis which has never been seen before. More proactive and direct intervention by the Central Bank is needed to attract foreign direct investment and target a rate of growth of the overall stock market index as a way of stabilising expectations.
The government can look to cut the income tax rate so that households will have more disposable income, as well as provide income maintenance to individuals who lost their jobs during these trying times. The measures need to be topical and immediate, otherwise, loan defaults, increased unemployment, ringgit devaluation and stock market crashes can trigger another prolonged recession.
The writer is Professor of Finance and Head of School (Accounting and Finance) at Asia Pacific University Malaysia and a research affiliate of Cambridge Centre for Alternative Finance at Judge Business School, University of Cambridge. He holds a PhD in banking and finance from Monash University
The views expressed in this article are the author’s own and do not necessarily reflect those of the New Straits Times