Stronger fiscal measures likely across world as risks spread to markets

Policymakers around the world are contemplating stronger fiscal measures to limit the damage from the novel coronavirus outbreak in individual economies, as the effects are extending from production to commodity and financial markets with rising global recession risks.

Sources close to the Ministry of Finance told China Daily last week that the annual budget deficit ratio may be revised to 3 percent this year, compared with 2.8 percent in 2019, considering the huge government spending necessary to contain the spread of the virus.

The annual quota of newly issued local government special bonds, which was set to increase by 800 billion yuan ($115 billion) from last year, is likely to rise further because of the virus outbreak, the sources said. Specific fiscal targets are not released until the meeting of the National People's Congress, the nation's top legislature.

The US government had on Monday indicated that it was considering tax cuts to bolster the economy, while the Australian government had hinted at possible fiscal stimulus.

The cross-border spread of the outbreak has already hurt the global economy, from both supply and demand sides, as production and consumption dropped simultaneously, said economists.

"A sustained pullback in consumption, coupled with extended closures of businesses, would hurt earnings, drive layoffs and weigh on sentiment. Such conditions could ultimately feed self-sustaining recessionary dynamics. Heightened asset price volatility would magnify the shock," said global credit ratings agency Moody's in a research note.

In China, the official manufacturing purchasing managers' index plunged to a record low of 35.7 in February, as the COVID-19 outbreak hit both consumption and production along with travel restrictions, temporary public place closures, and quarantine measures.

Prices of globally-traded oil have fallen dramatically in recent weeks, about 30 percent below their levels at the start of the year. International Monetary Fund (IMF) Chief Economist Gita Gopinath said on Monday that countries reliant on external financing could find themselves at risk of "sudden stops and disorderly market conditions," possibly requiring foreign exchange intervention or temporary capital flow measures.

She highlighted that substantial targeted policies should be adopted, "keeping intact the web of economic and financial relationships between workers and businesses, lenders and borrowers, and suppliers and end-users for activity to recover once the outbreak fades.

"Considering that the economic fallout reflects particularly acute shocks in specific sectors, policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures to help affected households and businesses.

The goal is to prevent a temporary crisis from permanently harming people and firms through job losses and bankruptcies."

China has deployed a series of fiscal policies, such as easing the tax burden on firms in the most vulnerable regions and sectors, including transportation, tourism, and hotels. The tax authorities have also offered tax extensions to cash-strapped businesses, and allowed for a temporary suspension of social security contributions for firms.

China is one of the countries that have taken "the most effective fiscal support measures to the economy", IMF officials Vitor Gaspar and Paolo Mauro said in a recent article.

"These (measures) will prevent or limit the spread of the virus and protect the people and firms most affected," they said. As some measures would require an emergency budget that would also take stock of the overall fiscal cost, it is also important to communicate to the public how emergency action and changes to original budgets are compatible with stability and sustainability.

The IMF, which has $50 billion available for rapid disbursements of emergency financing to help countries suffering from the virus, urged governments to strengthen fiscal actions to boost health systems, contain the spread of the virus and protect the well-being of the people.