For the second time in a month central banks across Asia have slashed benchmark interest rates in the hope of spurring domestic borrowing, as the COVID-19 pandemic brings global trade to a standstill and leaves many countries in the region on the verge of recession.
Indonesia cut its interest rates by a quarter of a percentage point in late February and then by the same amount again on March 19, bringing it down to 4.50%.
The Philippines, in two separate cuts, has now brought interest rates down by 0.75 percentage points to 3.25%. Two days before its latest cut, on March 17 the Philippines become the first country in the world to temporarily close its equity market, a closure for two days. Sri Lanka did the same afterwards.
On March 16, South Korea slashed its interest rates by half a percentage point down to just 0.75%. Three days later, Taiwan’s central bank cuts interest rates by 0.25 percentage points, to 1.125%, the first time it slashed rates in more than three years.
Vietnam has, so far, kept interest rates the same, though significantly reduced refinancing and discount rates, while Japan and China have also been hesitant about using lower interest rates as the way out of this increasingly fraught economic crisis.
Across Asia, central banks have not only cut benchmark interest rates but also relaxed some reserve requirements for financial institutions, allowing them to lend more freely.
The Bank of Japan, its central bank, has created new one-year, zero-rate loans for financial institutions, while it also busy buying up exchange-traded funds and other hazardous assets of those institutions.
Through such measures, it is hoped that banks and microfinance institutions (MFIs), which are vital for small businesses in some of the poorer nations, like Cambodia and Myanmar, will now be able to borrow more freely, providing them with the necessary capital to accept delayed payments from customers, such as for mortgages and outstanding loans.
This is necessary for small businesses and households to not only avoid bankruptcy, but for them to also continue spending and investing.
At the same time, more liquidity within financial institutions ought to allow them to lend more freely to businesses, which will try to remain solvent for several months in the hope that global trade picks up in the second or third quarter of the year.
Instead of cutting interest rates, despite what some analysts predicted, China’s central bank reduced the reserve ratio for lending banks, down to 10 percent, freeing up an estimated 550 billion yuan (US$77 billion) of funds for additional credit.
Officials from the central bank have said reserve ratios could again but cut again in the coming months. Analysts suggest that a one percentage point cut in the reserve ratio could release around US$280 billion into the market.
“Market-friendly policies mean Covid-19 could yet have a silver lining for China. Beijing is poised to ramp up investment one last time to revive growth, as the [Chinese Communist Party] demands a strong economy for the centenary of its founding next year,” said analyst Diana Choyleva, of Enodo Economics.
For much of Asia, economic fortunes turn on the fate of what happens in China, as a top-three largest trading partners of almost all Asian economies.
A Well-Needed Stimulus
But cutting interest rates will achieve little if businesses and households feel panicked by domestic market volatility, and now avoid even more attractive new loans for the sake of securing their current exposure.
“Whatever central banks now do, global markets will not regain solid ground until investors can see plausible scenarios for recovery and a path out of the Covid-19 pandemic and its economic fallout,” Shigeto Nagai, chief Japan economist at Oxford Economics and a former director-general at the Bank of Japan, wrote last weekend in the Financial Times.
As such, almost all Asia governments have now worked out stimulus packages to aid the economy through this crisis. The majority involves tax holidays and cuts for firms in vital sectors, as well as guaranteed financial assistance for some workers who are set to face temporary layoffs as supply chains grind to a halt.
Japan has set aside US$276 billion as part of a package that will be detailed next month, for instance, while Singapore and Indonesia are expected to soon launch their second stimulus package for this year, as previous attempts to pump billions of dollars into the economy largely failed.
It is now thought that across Asia state bailout funds will pump at least two trillion dollars into economies, while most government are predicting decades-high fiscal deficits this year.
This even includes cash handouts. Hong Kong will distribute about $1,000 to each permanent resident, with Japan is also reportedly considering such a move.