Due to the new coronavirus (COVID-19) outbreak, the world is witnessing a serious challenge of keeping the global economy on track. There has been a forecast of global growth being halved to 1.5 percent, but secretary-general of the Organisation for Economic Cooperation and Development, Angel Gurría warns that this figure could be too optimistic. He argues that due to this pandemic, the global economy will suffer for years to come. Most economic activities have already come to a standstill and a falling growth forecast for all the economies has become the new normal. The Indo-Pacific region too is largely affected given its resource-rich geographies, assertive geopolitical character, and an unparalleled socio-economic vibrancy. The pandemic has already led to a disruption of international trade and global mobility thus creating unprecedented challenges for people of the world. Some of the key economic constraints facing the Indo-Pacific region include supply and value chain disruptions, the fragility of Small and Medium Enterprises (SME), and challenges in trade finance and banking. These challenges and a pragmatic approach to deal with them are discussed in this article.
Supply and Value Chain Disruptions
The Indo-Pacific region has become a hub of supply chains and global value chains (GVCs) in various sectors owing to rapid globalisation in the last few decades. Some disruptions, however, occurred due to the trade war between the United States and China that led to some firms shifting their production bases from China and Taiwan to Southeast Asian countries. Most of the East Asian economies including Hong Kong, Taiwan, South Korea and Japan are export-led and manage a robust GVC of electronic goods components and semi-conductor devices. Also, GVCs in other sectors including apparel, processed food, and even oil and gas, have suffered due to the trade war. Later, the United States and China entered into a trade deal Phase-I, in which China agreed to buy an additional $200 billion of American goods and services by 2021. Even before this deal could bring about the much solicited, though not assured, gains for the supply chains and GVCs, the COVID-19 crisis has brought in large-scale miseries.
COVID-19 too excludes no nation! In terms of the supply chain participation and continuity of essential goods, the most affected countries include the least developed countries viz. Afghanistan, Bangladesh, Cambodia, Laos, Myanmar, Nepal and others like Vanuatu, Kiribati etc. that constitute the small islands of the South Pacific. The developing and the developed countries too are no exception. With the epicentre i.e. China to the countries like India, Vietnam, South Africa, Russia, and the United States, they all have seen unprecedented disruptions in their supply chains of even essential consumer goods, medical equipment, and pharmaceuticals. India, for instance, also has huge imports from China which constitutes intermediate goods which later become the import content of the country’s exports. This has largely been affected and so is the domestic production due to the nation-wide lockdown – a step necessary to restrict the community transmission of COVID-19. China, which has now recovered by from the COVID-19 crisis has begun focussing on its manufacturing sector.
Fragility of the SME Sector
The World Bank statistics suggest that SMEs represent about 90 percent of businesses and employ more than 50 percent of the global workforce. The covid-19 outbreak has brought unprecedented challenges for the SMEs. In fact, these SMEs are the focal points of a country’s participation in the GVCs. SMEs are in fact picked up by the lead firms, generally, a large multinational company, to be a part of their GVC spread across two or more countries. A research, which is also backed by Alibaba, suggests that 96.4 percent of the Chinese SMEs have suffered loss and more than 40 percent say that it will be difficult for them to operate. In India too, the pandemic has taken its toll on the Micro, Small and Medium Enterprises (MSME) sector. The Reserve Bank of India (RBI), India’s central bank has recently introduced regulatory measures to promote credit flows to the MSME sector. In China, for instance, the government has also taken measures to provide financial relief to SMEs by allowing delay of loan payments and by supporting bond issuance by the financial sector to finance SME lending. COVID-19 comes at a time when the SME sector across the Indo-Pacific region was already struggling to increase internationalization, export participation and value chain upgradation. With limited resources and comparatively low risk-taking capacities, SME exporters lack the tools to overcome supply-side constraints and to deal with the declining global demand. Moreover, there has been a lot of cancellation and postponement of orders from overseas buyers. For instance, the Apparel Export Promotion Council of India reveals that about 65 percent of the payments from foreign buyers to be received by apparel exporters amounting to at least $2 billion is still pending.
Challenges in Trade Finance and Banking
According to the World Trade Organisation, 80 to 90 percent of the global trade is supported by trade finance, which is mainly short term credit instruments. One of the critical problems has been the issue of liquidity which is very much prevalent in developing countries. These countries continue to face challenges related to trade finance offerings e.g. documentary credits, letters of credit, and collections, among others. COVID-19 outbreak and the consequent lockdown of cities have posed a serious challenge for trade finance instruments. In fact, the paucity of trade finance can accelerate the slowdown of global trade and disrupt supply chains, especially in developing countries.
Also, in the absence of adequate banking services, the businesses struggle to conduct transactions, complete documentation, receive credit or to fulfil other financial obligations. Therefore, a fully functional banking sector of an economy can enable all other sectors on a trajectory to conduct international business transactions. Banks need to play a key role in fighting the expected liquidity crunch in the market. In the last week of March this year, RBI tried to combat liquidity crisis with 75 basis points cut in the repo rate, bringing it down from 5.15 percent to 4.4 percent. This level is below the previous lowest level of 4.74 percent hit in April 2009 during the global financial crisis. Also, the People’s Bank of China, that is China’s central bank, will boost credit and lower funding costs for SMEs. Also, it cut down on the reserve requirement ratio again.
In Lieu of a Conclusion
In a post-pandemic scenario, the Indo-Pacific region must rely on a good-mix of national-level as well as sub-regional level programs and strategies to benefit from mutual cooperation. Primarily, to restore supply chains, a concerted effort is needed. The current need of the SME sector would be a stimulus package in successive phases to gradually enhance its competitiveness and integration with lead firms, which are however also struggling with their own economies of scale. Also, it is imperative for the respective governments to provide tax exemptions and to ensure adequate credit facilities to avoid a short-term liquidity crisis. The governments need to play a pivotal role in reaching out to these businesses and in helping them mend the existing supply chains and establish newer ones quickly and effectively.
Indo-Pacific is facing immense supply chain disruptions and a declining production curve. China, which has now recovered from the COVID-19 crisis has begun focussing on its manufacturing sector. The supply chain disruptions are also witnessed in East Africa – the western coast of Indo-Pacific, where it is even more critical than those in East Asia. Finally, it is pertinent to give the utmost impetus to banking services which form the core of the economic revival. A large variety of functions ranging from banking operations and credit functions will provide the much-needed support for strengthening trade finance and also for ensuring robust policy preparedness and implementation.