A decade. That’s the frequently cited period for an average business cycle, which meant that we were overdue for a correction by 2020. With all eyes on the ongoing trade war and Brexit back in January, however, nobody guessed that a pandemic would precipitate the next global recession.
As COVID-19 continues to ravage public healthcare systems around the world, economic data is also trickling in to paint a grim picture. The unemployment rate in the US has reached Great Depression levels, while the Eurozone economy shrank by an annualised 14 per cent in the first quarter of the year. Even oil futures saw a freefall into negative prices for the first time in history. Singapore wouldn’t emerge unscathed either. The city-state is expected to enter its worst-ever recession after forecasted economic growth for 2020 was revised downwards three times in just as many months. For now, Singapore’s economy is projected to shrink between four and seven per cent.
Weathering The Storm
Although every recession is unique, things really are different this time. Global demand has suddenly stalled, and with it the flow of goods and services. Businesses aren’t bearing the brunt of this storm evenly, of course. A few rare ones like Apple will ride things out with little difficulty thanks to their massive cash reserves. At the other end of the spectrum are shuttered businesses with no means of shifting their activities online. These are the ones most badly hit, and some have it even worse due to their respective industries’ cost structures.
Singapore Airlines, for instance, has had to cut up to 96 per cent of its capacity and ground nearly its entire fleet due to severely reduced demand for air travel. As an airline with a fairly young fleet, however, some 70 per cent of its costs are fixed. Consequently, the company has had to undertake a rights issue to raise cash; the balance sheet will be shored up with an additional S$8.8 billion, with an option for another S$6.2 billion down the road.
Alas, not every firm is a publicly-traded national carrier with a stellar track record and massive brand equity. For most other businesses, the greatest support to weather this unprecedented storm comes from the state. Many governments around the world recognise this and have rolled out stimulus packages to help businesses – and workers – survive the roiling markets. The problem is where this fiscal support is being channelled and at whose expense, as well as what firms are doing with them.
Lending A Hand
Government measures around the world have focused on direct cash payouts to individuals, and a range of financial assistance schemes for businesses. The latter includes different tax waivers to reduce fixed costs, direct wage subsidies to encourage employee retention, as well as credit lines and deferrals to improve cash flows. These fiscal measures are all aimed at maintaining economic activity and arresting falling employment rates, thus reducing the pandemic’s economic impact and allowing the economy to quickly rebound once conditions are right.
Businesses on the receiving end of these stimulus packages have goals that may not align with these objectives though. Consider the case of BMW AG in Germany. At its general meeting held on 14 May, the company passed the motion to pay out US$1.8 billion in dividends at the rate of €2.50 per ordinary share. The move will of course benefit shareholders, but it comes at the expense of the company’s liquidity and, by extension, financial resilience. BMW has come under fire for this, given how it has placed thousands of employees on a furlough programme that’s partly state funded, while also asking for state-sponsored car-buying incentives to boost demand within Germany.
BMW is far from alone. Across the Atlantic, Disney has furloughed an estimated 100,000 workers in the United States and effectively put them on unemployment benefits that are funded by taxpayers. Yet, it has also maintained the massive bonus structures for its top executives (CEO Bob Iger was paid US$47.5 million in 2019). Disney expects to save US$500 million every month by doing so. The company isn’t without resources though, having raised US$20 billion over the past few months, ostensibly to ride this pandemic out.
Other examples abound, from Harvard’s acceptance of a US$9 million aid package despite sitting on an endowment worth over US$40 billion, to the US airline industry’s calls for aid – despite spending a reported 96 per cent of cash flows collectively on stock buybacks in the past to benefit shareholders at the cost of employees and business continuity. The tension here between private interests and the greater social good is inherent to capitalism, and there are no easy answers. After all, it is the fiduciary duty of a CEO to deliver returns to shareholders; employees are a cost, and not assets to be retained unnecessarily. Of course, there are also aspects of capitalism that ought to be better managed in some countries – at least according to some economists. These include excessive rent-seeking and lobbying behaviour, and the entrenchment of large corporations that are “too big to fail”. How a government navigates the waters in the months ahead will determine the balance between private and social interests.
Governments aren’t helpless though, and some have implemented measures that will make the aid they provide more equitable. Within the European Union, France, Poland and Denmark have moved to exclude companies that are headquartered in tax havens from their respective stimulus packages. According to the governments of these countries, companies that establish their tax bases in tax havens are shirking their responsibility to pay fair levels of corporate taxes, and therefore lost the right to benefit from state support. But things aren’t so cut and dried, as the list of tax havens that each country follows is non-exhaustive, and tax havens exist within Europe itself, with Luxembourg and Ireland being notable examples. Still, this measure marks a step closer toward tax justice for countries that have long suffered underfunded public services.
Government aid is also coming with other strings attached. For one, some forms of assistance are just loans that must be repaid. These are not unlike the United States’ 2008 bailouts of various firms under the Troubled Asset Relief Program (TARP) that, incidentally, made a small nominal profit by its end. The silver lining here is that the taxpayers’ burden is minimised in such cases, since these cash outflows do return to the state eventually.
Financial assistance can come with other certains conditions too. To qualify for wage subsidies in the Netherlands, for example, firms must have lost at least 20 per cent of their revenue, and commit to not laying off any workers. Elsewhere in parts of Europe, businesses may not pay their shareholders dividends or conduct share buybacks if they accept bailouts. The former is obvious: any financial aid should be channelled towards weathering through the recession instead of rewarding company shareholders. The latter, meanwhile, aims to limit corporate actions that may raise share prices and build a more attractive balance sheet at the expense of healthy cash flows and thus business resilience.
The efficacy of any government’s bailout package is clearly dependent not just on its size, but also on the intricacies that will determine where the money goes and how productively it is used. To be clear, it needn’t be a zero-sum game; a well-thought-out suite of measures will not just preserve companies’ profitability and competitiveness, but also ensure that workers are well-protected from financial hardship.
A Silver Lining
Although these are unprecedented times and many people are suffering economic hardship, we can be thankful for many things. For one, this global pandemic’s death toll has remained manageable – malaria kills more people in a year than COVID-19 has so far. Unlike a war or natural disaster, neither infrastructures nor properties have been affected either. If the recoveries of South Korea and China are indicative in any way, consumer sentiments should soar once the pandemic is under control, whether via a vaccine or negligible transmission rates. This should subsequently lead to an economic recovery, hopefully one that’s V-shaped instead of U-shaped, with “business as usual” to quickly follow.