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The state as insurer of last resort

Joseph Cherian and Bernard Yeung
Joseph Cherian and Bernard Yeung • 8 min read
The state as insurer of last resort
The world is now facing a pandemic of catastrophic health and economic consequences.
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SINGAPORE (May 8): The world is now facing a pandemic of catastrophic health and economic consequences. To break the chain of the coronavirus transmission and mitigate the attendant public health threat — known as “flattening the curve” — almost all countries are imposing lockdowns to reduce human mobility and face-to-face interactions. Yet, many economic activities rely on that.

The measures generate a huge negative supply and demand shock, and greatly disrupt global production value-chains and trade. The consequence is a significant decline in output, surges in unemployment, bankruptcy, and worries over financial stability. Many have remarked that the current economic setback is more serious than the Global Financial Crisis, while a few have postulated it could be as bad as the Great Depression of the 1930s.

During periods when financial markets and products cannot provide safety — a condition known as “market incompleteness” in financial economics — the state has to undertake the responsibility to insure its members against exogenous systemic negative shocks. Rescue plans are plentiful, and Singapore’s has the hallmarks of most rescue plans. We use Singapore’s actions to date to illustrate. In addition to bolstering the resources available to the healthcare system given that this is a pandemic, Singapore’s actions include these essential features:


  • Addressing individuals’ immediate hardships and covering their basic needs;

  • Mitigating job-market disruptions and preventing permanent damage to businesses’ organisational capital, particularly those in the hard-hit industries like transportation, tourism, retail and restaurants;

  • Maintaining market-wide financial stability and individual financial security, mostly via forbearance programmes, interest and principal payment deferrals, and contractual obligation temporary relief.

Cash, and hurry!

First, there is the express delivery of cash into Singaporeans’ accounts starting in April 2020, with more help given to those with lower income. This is because a carefully calibrated and targeted cash scheme would be advantageous for both individuals and the economy, besides bringing help to the most needy. Research shows students, lower-income households, and retirees on fixed incomes spend cash gifts more quickly. This is because they need cash the most, especially during a sudden exigency. In addition, the expeditious manner of their spending helps stabilise the economy the quickest. This double-happiness effect stems from such a policy.

To this point, the Singapore government in its recent Budget 2020 introduced a series of carefully targeted cash payouts, workfare special payments, grocery and sales vouchers, and rebates on service and conservancy charges (a form of homeowners’ association fee), particularly for the lower-income households and self-employed. Put money expediently to where it is immediately needed and will be fruitfully used, period.

Flatteners, forbearance and force majeure

Second, various governments also offered mortgage and interest payment relief as part of the Covid-19 financial support programme for individuals and households. This was done through the suspension of mortgage payments itself or refinancing opportunities from interest rate cuts and tax holidays.

In Singapore, the central bank announced that qualifying individuals can apply to defer both principal and interest repayment of residential property loans, while SMEs can defer principal payments on secured term loans up until year-end. They can also apply to defer payments on health and life insurance programmes for up to six months, and tax payments by three months.

Singapore’s Ministry of Law is also proposing a law that provides “temporary relief from legal action — on a just and equitable basis — to individuals and businesses who are unable to fulfil their contractual obligations due to Covid-19”. This relief would be for a period of up to six months, and extendable for another six. Such a state-led measure dominates a scenario where companies independently declare force majeure during this pandemic period.

Any extra spending money in an individual’s pocket from the package is not going to be a game-changer for household savings and investments. It is intended to tide people over this difficult and turbulent period. That said, having various private and state-provisioned “insurance” policies, be it for health, unemployment, disability, death, stock market crashes or pandemics, is always important, in both normal and turbulent times.

Save the post and organisational capital

Third, saving jobs is important. As a quick-sighted New York Times editorial pointed out on March 26: “Preserving jobs is important because a job isn’t merely about the money. Compensated labor provides a sense of independence, identity and purpose; an unemployment check does not replace any of those things. Additionally, a substantial body of research on earlier economic downturns documents that people who lose jobs, even if they eventually find new ones, suffer lasting damage to their earnings potential, health and even the prospects of their children.”

Singapore has stepped up to the plate on the employment front by asking employers not to resort to layoffs and putting their employees on no-pay leave. To motivate employers to retain their staff, the government pays out 75% of all local employees’ wages for the local lockdown month of April, with 25% coverage for another eight months after that, and with much higher subsidies — up to 75% — for the sectors most affected by this pandemic. This includes employers’ contributions to the mandatory social security savings scheme.

This programme, essentially a temporary subsidy, incentivises companies to not break up their human capital or work teams, and possibly cleverly redeploy them for other meaningful activities such as problem-
solving the company’s operational stresses due to lockdown measures.

Stabilisation and support extend beyond mitigating job losses. It includes economy-wide measures to help businesses survive the undue pressures on cash flows arising from an exogenous systemic shock; this is like insuring investment on building organisational capital. Singapore’s package offers property tax and corporate income tax rebates, waiver of government rental charges, and bridge loans to cover short-term cash shortfalls.

Respect and tech for elders

Fourth, the impact of the pandemic is particularly severe on senior care and retirees’ savings.

The death rate of the infected is disproportionately high for seniors. Asia in general, and Singapore in particular, face an ageing population. Eldercare, housing, nursing homes and retirement facilities have been gaining popularity in ageing Asia regions. The deadly experience of the Seattle-area nursing homes to Covid-19 may change the rules for eldercare.

To mitigate the risk of exposing the elderly to Covid-19, serving them requires less reliance on human mobility, where caregivers, entertainers, volunteers and healthcare workers deploy in multiple locations. Instead, there should be more dependence on dedicated teams, technology and faster response times during crises. The Singapore government suspended seniors’ social activities and encouraged institutions involved in eldercare to replace physical visits with technologies such as teleconferencing via smartphones to help them become digitally-savvy, as well as lead more independent and empowered lives.

The trend has to be sustained. Transforming eldercare habits, systems and infrastructure to the new world order requires asset owners’ patient capital and participation. Pension plans and sovereign funds with socially responsible investment motivations may be the natural long-term capital provider or partner for this transformation.

Last but not least, the pandemic-induced global economic stress greatly erodes the principal and earnings of seniors’ savings. The Singapore government took bold steps to raise the “silver support” scheme for retirees by 20%.

Post-pandemonium coordination

Financial economics is an applied science that deals with the intertemporal allocation of scarce resources under conditions of uncertainty and unexpected shocks. While a well-endowed state can come to the rescue when financial markets and products cannot, it could also cause serious problems if central banks and government funds are all rushing for the door at the same time raising funds to finance their massive stimulus packages. It would be a fire-sale of the most liquid — and probably most highly correlated — assets of unimaginable proportions.

Which brings us to our concluding thought. Since the Covid-19 disease is a global problem, some form of multilateral policy coordination is necessary for humanity to succeed in curing us of this pandemic as well as for economies to recover. While there are reports of the International Monetary Fund (IMF) providing credit lines for poorer nations, or a few central banks arranging for bilateral currency swap lines to ease the virus-related strains on credit markets and provide US dollar liquidity to financial institutions, there is an urgent call-to-action for right-minded political leaders to do much more — systematically and on the global coordination front. At this juncture, it is paramount that the two most powerful nations on earth join hands to promote international cooperation, a wish we harbour for humanity’s sake.

On the bright side, every global crisis presents opportunities for our collective learning, to alleviate suffering among the lower-income groups and SMEs, and to generally improve financial economic outcomes while maximising social welfare.

Joseph Cherian is Practice Professor of Finance, while Bernard Yeung is the President of the Asian Bureau of Finance and Economic Research (ABFER) and the Stephen Riady Distinguished Professor in Finance and Strategic Management; both are from National University of Singapore (NUS) Business School. The opinions expressed are those of the writers and do not represent the views and opinions of NUS.

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