In the UK this will constitute the third major crisis in the last after 1989 and 2008. This time it is very unusual: both the production and consumption sides of the economy are affected.
From the UK …
Having voted to leave the European Union, the Office for Budget Responsibility was to estimate the UK growth rate downwards. Because the points based migration scheme to be introduced, fewer migrants would lead to a smaller population and lower tax revenues.
The fall in oil price is another hit. After failure to agree a production cut amongst the OPEC+ (includes Russia), Saudi Arabia decided to raise oil production. The price war in oil that started 9th March pushed oil prices to around $30 a barrel. This led problems for UK listed companies such as Premier Oil. The FT reported that two North Sea deals worth $900m and the associated refinancing valued at $2.9bn were based on higher oil price expectations. Two of the five largest companies by market capitalisation in the FTSE100se are oil giants. Moreover, the exchequer benefits from high oil prices through the levy it imposes on North Sea crude oil.
In financial markets, rather than leading, the Bank of England appears to be following. The first Tuesday in March the US FED reduced its repo rate by 0.5% to a target range of 1.00% to 1.25%. This was the first rate cut outside of a regularly scheduled policymaker meeting since 2008. On the 11th the Bank of England cut the rate from 0.75% to 0.25%. It did more than that. It announced a new Term Funding scheme for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves. This is four-year funding at, or very close to, Bank Rate. The Bank of England suggested that, from the take-up in 2016, the TFSME could provide possibly £100 billion in term funding.
On 15th March the FED cut short-term rates again to a target range of 0% to 0.25%, and announced a purchasing scheme of at least $700 billion in Treasuries and mortgage-backed securities in the near future. The Bank of England on the 19th cut interests further to 0.1% and raised the asset purchasing limit from £435bn to £645bn.
The 16th saw a sea change in the UK virus containment strategy: it shifted from advice to advocate voluntary lockdown. The Prime Minister recommended all non-essential social activity be avoided. However, on the 23rd lockdown became less of a voluntary thing. Shops selling "non-essential goods", clothes and electronics stores as well as libraries, playgrounds, gyms and places of worship were closed.
The tightening of restrictions on physical contact meant many businesses relying on customer face-to-face interaction would collapse. Having encouraged that restaurants, gyms, pubs, clubs and schools to close their doors, the implications for face-to-face traders were highly worrisome. On the 17th, the Chancellor of the Exchequer Rishi Sunak, launched a £330bn of loan guarantees and provided a further £20bn in tax cuts, grants and other help for businesses facing the risk of collapse.
The sums were too small according the Institute of Fiscal Studies and JP Morgan. This was a producer oriented package. A loan could not address the collapse in foot-fall or deliveries of stock being unreliable. As businesses shut their doors, the spike in unemployment that will follow would discourage shoppers, even on line. Not only should businesses but individuals needed to be protected from bankruptcy.
On the 19th the Chancellor of the Exchequer Rishi Sunak announced that the government would pay up to 80% of private sector wages up to £2,500/month to discourage layoffs. A 12-month business rates holiday for all retail, hospitality, leisure and nursery businesses in England. The Retail and Hospitality Grant Scheme provides businesses in the retail, hospitality and leisure sectors with a cash grant of up to £25,000 per property. Businesses to retain £30bn of VAT that would normally pass on to tax authorities until June. For those on working tax credit and standard Universal Credit there was an increase payment of £20/week.
Again, headlines on the Coronavirus Business Interruption Loan scheme, another one for small and medium sized enterprises, were eye catching but the government would only offer this guarantee if it believed that a loan was unavailable otherwise. Firms with a turnover of up to £45m/year were eligible for an interest free loan for 12 months of up to £5m. Any loan of over £250,000 would need to be secured by company assets. The borrower was still liable for 100% of the loan. The government guaranteed the banks 80% of that loan but only maximum of 60% of a bank's total loans under the scheme.
… to Vietnam
Vietnam has been considered successful in containing the spread of virus with low-cost model. The Vietnamese government has also soon had a strategy to stimulate its economy to cope up with the effect of the pandemic, especially after the outbreak in western countries and lockdown becoming popular. With the economy increasingly open, import-export values reaching $517bn in 2019, nearly 2.5 times higher than a decade ago, Vietnam has good reason to worry about the effect of the pandemic to its economy.
On 6th March, the Prime Minister signed the Degree 11 with 7 solution groups aiming at helping domestic firms overcome this difficult time. A credit package of VND 285,000bn was announced, in which the State Bank of Vietnam would provide a credit facility of VND 250,000bn concentrating on providing new loans, refinancing old loans or lowering interest rates for the affected firms and the Ministry of Finance would offer tax reduction or postponement worth around VND 30,000bn. Noticeably, the credit facility is not subsidized by the government but by agreement among the commercial banks, subject to their individual conditions, following conditions laid out by the government.
On 16th March, the State Bank of Vietnam lowered its key policy rates, including the refinancing rate (from 6% to 5%), the discount rate (4% to 3.5%) and the repurchase (open market operation) rate (7% to 6%). Lower interest rates are expected to help firms having more access to loans for their business during the pandemic.
At the first sight, comparing what the Vietnam has done with that in the UK, we strong similarities in textbook supportive fiscal and monetary policy initiatives. Both countries have aimed at lowering interest rates, providing low cost loans and offering tax holiday to firms that are affected by the virus pandemic.
However, to some extent, there are differences in approach, reflecting the different characteristics of each economy. Although the Vietnamese government’s strategy is suitable and practical, we think handling a credit package through commitment by commercial banks is not easy as said. The lack of one consistent policy for all commercial banks would well lead to the situation where smaller packages are handled differently by different banks. If the banks were able to decide on their own, it would not be the government’s strategy anymore.
In other words, if firms are not supported in the same way, it would create unfair competition within the market for subsidized credit, resulting in many firms in urgent need for loans being left without. A lack of consistent policy among banks would lead to overinvestment risk in the future for many firms.
The difficulty that firms are facing also means the same for workers. Losing jobs would affect social security in general. Therefore, we emphasize that a credit package should comprise a component that helps paying wages to workers if the firms commit to retaining their jobs. The reason why we particularly suggest this policy is because Vietnamese banks traditionally are mostly known to specialize in making corporate loans upon business expansion proposals rather than normal business operation.
In the meantime, the Government may support firms that retain jobs for workers through corporate tax holiday. A combination of monetary and fiscal policy would help achieving the goal of supporting firms overcome the crisis while ensuring social security.
(*) Authors are associate professors and co-founders of the Vietnam – UK Policy and Economic Research (VNUK PER) at the University of Lincoln, United Kingdom. All views are of the authors.