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The Covid-19 pandemic has had a profound impact on the global economy.
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Thought Leadership

How Covid-19 could transform the global economy

Four SMU faculty members look at the potential impact of the pandemic on the aviation industry, central banks, global supply chains and global value chains.

By now, dire prognostications about the economic impact of Covid-19 have been repeated so widely and often that the world is already braced for a tough road ahead.

Since the coronavirus spread was tracked beginning in late 2019, its virulence has resulted in deaths and stressed healthcare systems, and also devastated many sectors of the global economy. Travel restrictions have led to plunging fortunes for the aviation and hospitality industries; lockdowns all over the world have shuttered retail and food and beverage businesses, spurring historic highs for unemployment figures and government relief measures.

And these are just the immediate effects. Covid-19 has also starkly highlighted the vulnerabilities of companies with dispersed supply chains, and of countries with incoherent crisis response systems. This will likely have long-lasting and wide-reaching implications for the way public policy and corporate strategies are formulated in the wake of this crisis.

Here, four SMU faculty members give their assessments of Covid-19’s impact on the airline industry and global supply chains, and potential responses by the government, central banks, and business sector.

Aviation: A more cautious approach

High fixed costs, lumpy capacity (i.e., an aeroplane cut in half will not fly) and the perishable nature of its product offering make this industry extremely vulnerable to drops in demand. And with a whopping 80 per cent decline in worldwide flights as of early April, the global aviation industry is facing predicted financial losses of US$314 billion, with 25 million jobs at risk, according to the International Airline Transport Authority.

Government aid increasingly makes the difference between survival and bankruptcy for airlines. Denied such aid from the Australian government, Virgin Australia entered voluntary administration in April. At the other end of the spectrum, Singapore Airlines secured S$19 billion of funding to help see it through the coronavirus crisis.

The record-breaking bailout underlines the strategic importance of the flag carrier for Singapore’s economic recovery. Singapore’s Deputy Prime Minister and Finance Minister Heng Swee Keat noted: "Our aviation sector has significant linkages to the rest of the economy. If it collapses in a crisis, it will be very hard for the aviation industry to rebuild after the crisis is over, and the recovery of the rest of the economy will be impeded. We must therefore ensure that this temporary shock to our air hub does not become a permanent one."

“Helping Singapore Airlines through the Covid-19 crisis and be able to readily ramp up its capacity when demand recovers will better position Singapore Airlines vis-à-vis its more resource-rich competitors also plying the Europe-Australasia travel corridor,” says Terence Fan, Assistant Professor of Strategic Management (Education) and Academic Director of Accreditation at SMU’s Lee Kong Chian School of Business (LKCSB).

Indeed, Prof Fan believes that there is reason for cautious optimism in the long-term future of aviation and travel, especially in Asia. “However, growth will likely not be in a straight line,” he points out. As such, mega infrastructure projects such as Changi Airport’s Terminal 5 ought to be planned with a high degree of flexibility, “perhaps by breaking down the big project into smaller chunks, each of which could then be modified or re-scheduled based on information at different stages”.

Asian central banks: blurred lines

Fiscal policy, in the form of wage subsidies and relief schemes, have drawn much attention when it comes to the Covid-19 pandemic and its impact on economic activity. But monetary policy plays a role as well, and the crisis could raise some hard questions about the independence of central banks, particularly in Asia.

So far, the old maxim of “follow the Fed” has held true during the coronavirus crisis, says David Fernandez, Professor of Finance (Practice) at SMU’s School of Economics and the director of the university’s Sim Kee Boon Institute for Financial Economics. He is also an advisory panel member of the Asean+3 Macroeconomic Research Office.

The US Federal Reserve has cut the benchmark federal funds rate to a range of 0 per cent to 0.25 per cent, to lower the cost of borrowing on mortgages and other loans. Accordingly, policy rates have also dropped in numerous Asia-Pacific countries, including Australia, Indonesia, and South Korea. The Fed has also resumed purchases of Treasury bonds and mortgage securities and similar purchases of government bonds, equities and corporate debt have occurred in South Korea and Japan. But Asia at this stage looks unlikely to follow the Fed quickly in its latest announcement to assist households, businesses and US. sub-national governments with an estimated additional $2.3 trillion worth of support.

The emphasis on fiscal policy will likely increase as the Covid-19 crisis progresses, says Prof Fernandez. However, attention should also be paid to monetary policy. “At some point, perhaps soon, thornier questions about politicising monetary policy, central bank independence and monetising government spending will be heard more frequently,” he posits.

This could become especially relevant in Asia, where the line between the central bank and the government is not as “bright” as it has become in the US. Prof Fernandez predicts: “Unless Asia sees green shoots of recovery in the coming months, full-blown, internally coordinated national responses will be demanded, including the deployment of sovereign wealth funds that countries like the US lack. In that situation, do not be surprised to find more Asian central banks more integrated into their national teams.”

Global supply chains: Designing for risk

Covid-19 has impacted every link in global supply chains, from the availability of raw materials, intermediate components and finished goods, to the storage, delivery and sale of these items, and the movement of labour. And the pandemic’s unprecedented reach offers some interesting lessons for businesses.

For instance, most global supply chain disruptions affect suppliers in one source. Shantanu Bhattacharya, LKCSB Professor of Operations Management, Associate Dean (Post-Graduate Programmes), Academic Director, PhD in Business (General Management), cites the example of the 2011 tsunami in Japan, which disrupted the supply of automobile components from Japan. In response, manufacturers turned to suppliers in other countries.

“However, the disruption caused by Covid-19 is different,” Prof Bhattacharya notes. “Suppliers all over the world are impacted, and the availability of labour, transportation, warehousing and delivery have also been adversely impacted. Unlike local disasters, global disasters impact all suppliers, and result in a competition for resources globally. This can be seen from the competition globally for masks.”

To mitigate risks of this nature, companies need to adopt an array of strategies. For starters, they need to have strong capabilities in tracking their inventories, so that they can build reserves of necessary components. Ensuring their suppliers have adequate levels of safety stock would also be very useful. That requires clear and frequent communication down the supply chain.

Flexibility is also crucial. “Those with flexible manufacturing capabilities can move their capacities to critical components when the need arises,” says Prof Bhattacharya. Similarly, flexible supply chains can better manage changing demand patterns. For example, “in the method of mass customisation with design for postponement, products are designed with a common core that can be used in multiple products, and the customisation is postponed to the last minute. This manages risk well. As the demand for certain products decreases, the common core can then be used for those products whose demand has increased.”

Firms should also assess the financial health of their partners throughout the supply chain to ensure they are able to maintain operations during a crisis, since good cash management can minimise disruption. And finally, since a chain is only as strong as its weakest link, resource-rich governments may need to shoulder more responsibilities to ensure the smooth functioning of cross-border supply chains, particularly in a region like Asia where manufacturing is the lifeblood of many economies.

Singapore in global value chains: Responses to Covid-19

Singapore has one of the highest degrees of GVC participation in the world, and hence is highly dependent on the smooth functioning of the global production network. In particular, “a majority of Singapore’s imports are not directly absorbed in Singapore but are further processed and absorbed in foreign countries. Of these foreign contents used in Singapore’s production for exports, the US, Japan, and China are the three largest sources of imports, i.e., upstream partners.

This means Singapore is subject to significant supply-side shocks taking place in these large economies due to Covid-19”, says Chang Pao-Li, Associate Professor of Economics at SMU’s School of Economics. At the same time, “Singapore is also subject to significant demand-side shocks in the regional and global markets due to restrictions on human mobility and business shutdowns”.

Over the last 20 years, China has grown in importance as both an upstream and downstream partner for Singapore. “Thus, Singapore’s recovery from the impacts of Covid-19 depends a lot on the restarting of the Chinese economy,” Prof Chang notes.

There are limitations to different strategies to enhance resilience against global upheavals, she explains. Successfully diversifying sources of upstream partners, for instance, depends on many factors, such as product characteristics, difficulty of technology transfer and intellectual property protection.

Trying to move up the supply chain and thus reduce reliance on other economies for intermediate inputs is also of limited efficacy in the current situation. Covid-19’s impact is global, and the nations hit hardest are almost identical to the list of the world’s ten largest economies in the world.

“Even for economies that are relatively more upstream, the lack of final demand globally would still cascade to a lower demand by downstream partners for intermediate inputs,” she says. “In sum, if the shock is global in nature such as the current Covid-19 pandemic, there is really not much businesses can do to contain the negative impacts on the supply side and on the demand side. Extending a lifeline to businesses via fiscal subsidies during the economic hiatus, such that production capacities can be preserved until the world economy restarts, may be the only feasible option.”

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