Covid-19….A Curse or Cure?
By: Kriss Marcus, General Manager of Aspire Fund Management Company Limited (T&T) | May 6th, 2021 | Related To: Aspire Fund Management Company Limited
Into the second month of 2021, it was clear that for the foreseeable future Covid-19 was referred to as the virus that remains to be understood. That said, it has been well documented and discussed, the deleterious impact the coronavirus has had on global economies. In January, the US recorded a mere 1% GDP growth for Q4 2020, attributable to the pandemic and the life-saving measures critical to the preservation of life. Unfortunately for them, the use of masks and lockdowns to avoid further spread, morphed into a socio-political and partisan issue, wreaking further havoc on its society. At the time of writing, the USA would have recorded close to 440,000 deaths with cases surpassing 100,000,000 globally, as at the end of January 2021.
For what it is worth, it hasn’t been all doom and gloom. The USA was able to install its oldest but most experienced 46th President, its first female African-Asian-American Vice President, its first female Treasury Secretary and a host of other firsts. The new president has placed a mandate on his administration to have 100,000,000 vaccinations administered within his first 100 days in office. Additionally, before sundown on January 20, 2021, he had already signed executive orders reversing decisions to leave W.H.O. and the Paris Accord, inter alia.
The most recent development on the economic side of the discussion pertains to the stimulus package that according to S&P Global, would put the USA economy back to where it was prior to the pandemic. The recommended US$1.9 trillion package that effectively puts US$2,000.00 into the hands of the average American would effectively boost demand and economic activity. Recall, the USA’s economic structure is a consumerist and demand driven economy, so it stands to reason that incremental consumer spending power will in effect reduce inventories across sectors, while stimulating aggregate output.
The US economy, while being the largest globally at approximately US$20 trillion GDP, is in reality a simple one to understand by virtue of its demand-driven nature and with a former Monetary Policy head now in charge of US Fiscal Policy, Uncle Sam under Biden appears to be pointing in the right direction and doing the correct things thus far.
At home in sweet TnT, our reality is markedly different. From all accounts, the global pandemic will continue to pose inordinately stronger headwinds to recovery and while the global pullback arising from the emerge of Covid-19 is shared, the respective macroeconomic policy decisions and responses have been somewhat different.
We must candidly consider the following, be they be complimentary observations or otherwise:
1. We continue to maintain an over-reliance on Fossil Fuel Energy, notwithstanding the high likelihood of dwindling reserves beneath the surface.
2. The rest of the Globe appears to be departing from the aforementioned fossil fuels and toward Clean and Renewable Energy. This is directly correlated to President Biden’s decision to re-join the Paris Accord, as his administration does not hold the view that climate change is a hoax.
3. Invariably the US Central Bank and Financial Services Sector will be key to the economic recovery, considering the aforesaid stimulus and the near-zero benchmark interest rate policy aimed to create a credit friendly environment.
4. Our Financial Services sector enjoys Lenders’ Relationship with all other sectors, as opposed to an Investor Relationship.
5. The absence of asset classes and activities such as Private Equity, Venture Capital and other forms of Patient Capital will retard our domestic economic recovery.
It is no secret that our Energy Sector has been our greatest economic strength and weakness. Accordingly, we now face a gradually shrinking Energy Sector evidenced by the distinct collapse in USD earnings that is a macroeconomic reality, rather than a partisan policy decision. In no way is it being suggested to discard this key component of our economic structure; however, we are well beyond the point of a dire need for mandatory Private Sector-led innovation. The days of the Private Sector waiting for the Annual National Budget to be read, to then fashion corporate strategy in line with Government expenditure should be a practice of the past. This is underscored and exacerbated by the fact that the government has declared over the last few years, its challenged earnings capability, both domestically and internationally.
Renewable Energy is actually a low hanging fruit in the grand scheme of the Energy-way forward. Solar, wind and hydroelectricity are common sense solutions as there is a low likelihood of these energy resources dwindling in a manner similar to fossil fuels. This writer had the experience in witnessing a Hydroelectric plant in action in Costa Rica some years ago. According to the residents, it rains every day in Costa Rica and as such, Hydroelectricity was a natural port of call to reduce the reliance on traditional forms of power generation. As such, Hydro Energy is a major energy driver in that jurisdiction. We should also recall in the last budget where incentives were provided for Solar Energy, in line with departing from the ways of old.
Monetary and Fiscal Policy Economics
Taking into consideration the economic policy trends of advanced countries post 2008, its can be argued that greater emphasis has been placed on Monetary Policy and less on Fiscal Policy. The former is built on the premise of buoyant financial conditions or increased money supply with the view of this money finding the industries and activities that are in demand to ensure some element of equilibrium. One can go further to say that Monetary Policy Economics lays the foundation for innovation if presumably, credit and money supply conditions are both fertile and agnostic across all sectors. So, in consideration of the TnT reality, it can be said that Fiscal Policy will always have a pivotal role in our economic structure1, especially pertaining to Oil and Gas but Monetary Policy from a credit conditions perspective actually speaks more to the non-energy economy, diversification and innovation. The good news is that the Ministry of Finance appears to have its eye on supporting the growth of SMEs 2 when considering the incentives for listing on what we commonly refer to as the “Junior Stock Exchange.”
The Financial Services Sector
The Financial Sector is effectively the backbone of any economy. This metaphorical reference seeks to depict the sturdy, yet flexible nature of the human spine which also represents the nucleus of bodily movement in all directions. In taking to consideration the role Central Banks and Financial Institutions have played (and will continue to play) in economic recoveries for decades, it is safe to say that the role of patient financial support is of utmost importance. If we were to state this the other way, there will be no economic recovery without the financial services sector. If the policy makers and industry practitioners can agree on this, the Covid-19 phenomenon can be turned into an opportunity. As of now, we would have witnessed the closure of multiple businesses across the country since April 2020, while at the same time the financial system’s liquidity remains at heightened levels while presumably carrying lower risk assets due to the concern over borrower debt service capability in the COVID environment.
The harsh reality is that we have to recognize that the financial system does not carry an adequately large enough component of patient or investment capital at a point where this type of capital is necessary to support and strengthen businesses during this unprecedented era. There is, however, no shortage of lenders’ capital so it can be argued that we have huge sums of financial institutional liquidity perpetually on standby to lend, but not necessarily to invest. As stated, many times in the past, our domestic debt market for a small open economy is fairly active. However, outside of public companies who would have already accessed the equity markets in years gone by, there is little activity on the Private Equity side of the local financial markets.
The irony of the COVID environment is that we would have seen government doing its best to make debt capital available to support SME’s during this time. Of course, it should be noted that this new debt would ultimately have to be repaid along with debt existing prior to COVID. Furthermore, debt servicing in the face of fallen revenues makes the journey steeper as we now have more debt to be serviced with less revenue.
Private Equity Collaboration
Now for the good news…
Consider the following:
1. Assume the Government was willing to invest up to TT$375,000.00 per SME, as opposed to lending this amount to companies that qualified for such.
2. A syndicate of qualified financial institutions can co-manage the fund pool on behalf of the Government, while assessing the prospective SME’s capital structure.
3. The SME’s who qualify would have access to this capital and also intellectual expertise from the pool of institutions who are now joint minority shareholders in each company.
4. These financial institutions will introduce financial controls, enhanced corporate governance and improved business strategy to these SME’s, leading to improved and sustainable performance.
5. In 4-6 years, these companies list on the SME Stock Exchange.
You may recall when the National Budget 2020/21 was read and incentives for listing on the SME exchange were proposed, such initiatives are actually correlated to Point #5 above. On an even more positive note, the incorporation of these concepts is by no stretch of the imagination, difficult in our domestic economy.
As we bring this discussion to a close, it can be proposed that simple legislative amendments be introduced to allow for an even higher level of participation from patient capital who are at present, restricted from participating in certain asset classes.
What is an even easier fix is a departure from a culture of lending to a culture of investing, starting with the Backbone of the Economy.
1 The Public Sector at 60%, is the largest employer in Trinidad and Tobago.
2 Small and Medium Sized Enterprises
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