People and businesses are coming out of the shock phase of the coronavirus and introducing coping mechanisms to sustain their operations. The financial sector has the possibility of enacting measures to minimize the fallout from the virus. Banks will have delayed loan repayments which will reduce the market for further borrowing, new channels arising as banks are providing loans to businesses at risk. Many of these businesses will need temporary and urgent solutions which will increase the market for small and medium term loans.
Banks and Insurance companies already big in the Fintech and Regtech sectors are the winners in the world today. Customers’ technology adoption has skyrocketed in no time and so has digital services, be it Fintech, digital meeting platforms of smart logistics. The truth of the matter is that every country and every business is effected, it’s only the aftermath of recovery that matters. Some businesses are well positioned to rebound and the investment and financial sector is one of them.
Short Term Banking Measures
Banks have huge rule in assisting the economy through these troubled time and in getting it back on track. Many countries have proposed a stimulus package for the economy, which includes cash guarantees for most deserving families. There is still a large sector that lives paycheck to paycheck which are not covered by the government relief packages. Banks need to provide flexible credit facility to their clients and customers by doing segmentation of their client base, this method is being used by Italy to maximize the effectiveness of banking sector. By segregating customers based on their geographical location, types of loan and payment schedules, banks are providing the most assistance to customers in most vulnerable state.
Bank of Japan has provided monetary support by purchasing government bonds, ETFs, and real estate investment trusts, while the ECS has relaxed the liquidity buffers, allowing banks to operate below the defined capital requirement. Regulators in the United States have also shown affirmations to firms choosing to use their liquidity by relaxing the capital buffers.
How can Investment Enable Growth Post COVID-9?
The current bear market surrounding global equity has some of the biggest investment managers wary. The IMF has predicted a recession as great as the great depression. And the virus has similar effect on global bond markets. The Financial Times reports that major government bond holders are going to be central banks. It is time to revisit the combined extraordinary measure taken by central banks and governments in the aftermath of the 2008 economic crisis.
- Monetary Policy; Asset purchases, Liquidity support to credit markets, negative interest rates
- Fiscal Stimulus; capital injections, bank balance sheet stress tests, guarantees of banking sector liabilities, purchases of toxic assets, mortgage-backed securities, and corporate bond
The United States has proposed $2 trillion has a stimulus package for the US economy. While Japan has proposed $ 1 trillion for its economy. The IMF and World Bank and other major financial institutions have proposed similar relief packages for developing and emerging economies. Most of this capital will be used to provide immediate relief to needy families, and stimulate the capital markets. However, in the long term, more and more investment will be required from both public and private sectors.
Impact on the Financing Goals of SDGs.
The International Financing Organization projected an annual financing gap of $2.2 trillion for achieving the Sustainable Development Goals. During the time of the study, the looming recession from the coronavirus was not a concern. The global pandemic has put a halt on businesses striving to achieve the Sustainable Development Goals. Although there is no official statement from the United Nations about the additional costs for recovering global growth levels along with achieving the SDGs. Sustainable finance has been adopted by many in the investor community as the way to go in creating a sustainable world. From 2014-2018 the global investments in clean energy exceeded USD 300 billion annually, United Nations. The Global Future Council of World Economic Forum proposes the extensive use of new financing mechanisms to align investments with infrastructure, energy and social projects in developing countries which have shown the highest return on infrastructure investments. Tata clean tech partnered with IFC and AIB to fund renewable energy and energy efficiency in India. Tata’s in country expertise allowed them to use IFC’s funding for renewable projects with smaller ticket sizes and pursue more innovative deals. Here are a list of new financial products that can be utilized by governments and investors in investing in sustainable projects.
- Blended Finance:It is a strategic blend of philanthropic funds and development finance mobilized towards infrastructure and energy projects in emerging and developing economies. As per Convergence, blended finance has mobilized $131billion in capital towards sustainable Development Goals in developing countries and 33 percent of blended finance deals in 2018 were for SDG 7.
- Sustainable Financing Funds and Green Bonds are another impactful mechanism founded by financial institutions worldwide. Governments and institutions have introduced bonds that can be targeted towards specific goals.
- Grant Financing has been one of the major source of funding in developing and low income countries until recently. The transition towards sustainable financing is not a difficult one for institutions already involved in grant funding.
- Tax Credits is going to be a major enabler of mobilizing investments in all sectors of the economy. This will ensure greater mobilization in the economy that is currently stagnant.
Investors need to play a proactive role in mobilizing the global economy instead of waiting for the right market conditions for investments. More and more investment will be required from corporation, private, and institutional investors to reduce the impact of the looming recession.