COVID-19 – Will the Early Models Hold and the Implications for Policy Response

Note: As we finalized this document, the minister of finance for The Bahamas announced enhancements to its “phase one” initiatives, namely more funds available for MSMEs, more than doubling previous allocation. There was also a new program of tax deferral for qualified companies and commitment to work with the private sector with a view of finding solutions for medium and large companies and support for family islands.


In our last piece we undertook and analysis of the impact and development of COVID -19 and how the fight calls for effective leadership from an economic and health perspective. We outlined the vulnerabilities which exist within the region generally but primarily The Bahamas and Jamaica, giving thought about measures which the governments will be forced to employ to save economies. We now turn to an examination of the measures taken to date, together with a careful look at the scenarios driving the economic thinking. The main point of focus is whether the various modelling hold and what are the implications of any underlying weakness they may display, on assessment.


THE INITIAL RESPONSE

As it became clear that this side of the hemisphere was going to be in for a big hit, governments sprang into action. Cases in the United States started to increase with the first Caribbean confirm showing up in the Dominican Republic. It was time to move. Multiple cases discovered on cruise ships. There were evidence of infected persons having travelled on airlines. The race was actively on to save the health and economic arrangements of the Caribbean with The Bahamas and Jamaica taking very proactive steps. As we write with the benefit of hindsight, potentially a race for the very existence of the region as we know it.


THE BAHAMAS

On Wednesday March 18th, 2020, the Deputy Prime Minister and Minister of Finance of The Bahamas, following consultation with industry players and his opposition counterpart, unveiled a suite of measures designed, appropriately dubbed as “phase one”, to respond to the expected fallout from COVID -19. Paraphrasing the actual presentation, made by the Minister, these included, $16 million allocation to cover detection, isolation, treatment and other COVID-19 mitigation activities. $4 million to provide food, assistance and social support for displaced workers directly impacted by the virus. An allocation of $10 million to provide for a temporary unemployment benefit offering assistance of $200 per week, for up to eight weeks with a pledge to be adjusted as needed. The government highlighted the availability of normal sick benefit scheme available for individuals who contract COVID-19 or quarantined because of exposure or suspected exposure will be eligible for sickness benefits. Those temporarily laid off because of the economic impacts of COVID-19 being eligible for unemployment benefits, up to the regular thirteen-week period.


Further, the Government requested the water utility provider to reconnect all recently disconnected services for residential customers having regard for implications of personal hygiene in the fight against the virus. It further directed both it and the power company to defer payment of bills, for an initial period of three months, for residential customers diagnosed with the virus, who are in quarantine or laid off. Banks committed to provide mitigating measures with some eventually offering deferral of loans on a blanket basis while others committed to doing it on a case-by-case basis, $20 million in short term loan allocated to support Bahamian small businesses impacted at zero percent and no repayment for the first four months of a sixty-four month tenure. Looking for other means of creating potential stimulus the announcements also included acceleration of a Youth Apprenticeship Programme; reprioritization of capital projects to increase the number of quickly deployable small-scale capital works to boost small business activity; acceleration of approvals process for all domestic and foreign capital investments projects currently in the pipeline; and restriction of all non-essential expenses. To date there has been no mainstream monetary policy action taken.


JAMAICA

Jamaica on the other hand, having the advantage of the timing of the event relative the end of its fiscal year and budget presentation, through its Minister of Finance, has rolled up new and previously announced fiscal measures as part of its fight. Excerpts from Jamaican newspapers detail the following approach. The country launched the largest fiscal stimulus in its history at J$25 billion ($185 million). This includes the reduction in GCT (sale tax) from 16.5% to 15% which puts J$14 billion back in the hands of consumers and supports consumption. MSME tax credit to provide critical cash-flow support to MSME's together with dramatic reduction in regulatory fees for agricultural producers. The Banking sector volunteering to forgo the reduction of the asset tax previously announced, increasing their COVID Fiscal Contingency from J$7 billion to J$10 billion ($74 million).


Additionally, through the Bank of Jamaica, the country has implemented macro-prudential measures valued at some J$57 billion ($422 Million) to help deposit-taking institutions during the crisis. Based on economic strength, the central bank noted that it would not cut its reference rate at this point. The central bank is maintaining its overnight placements rates 0.5%. It will continue to support the foreign exchange needs but will halt investment transactions that require the purchase of foreign exchange and temporarily increased the limit on the foreign currency net open positions by 5 percentage points. It commenced a bond-buying programme for GOJ securities and declared that it is prepared for early redemption of its own securities. Taking into account financial stability the central bank removed the limit on the amounts that deposit-taking institutions can borrow overnight without being charged a penal rate. The bank believes these measures will help to facilitate the smooth functioning of the credit market and support inflation remaining within the inflation target of 4 per cent to 6 per cent over the ensuing eight quarters.


The COVID -19 event is a common threat but the circumstances and responses are fundamentally different up to this point. In part, this is a function of timing. As mentioned, Jamaica is at the end of its fiscal year and on the back of a relatively successful readjustment program with the IMF has been riding the wave of 20 consecutive quarters of growth, a robust stock market and fiscal measures in play, which have created fiscal headroom because of reductions in debt repayment. The Bahamas on the other hand is still a few months from its budget presentation. Generally, it has been operating under an austere program with implementation of fiscal reforms design largely to correct its debt to GDP position and structural weaknesses observed in the management of national finances, with the same intent as Jamaica, freeing resources for investment in the economy. Both countries though currently suffer from low growth.


The Bahamas while securing two years of above average growth, compared to the last ten years, missed its targeted 2%-plus growth target in 2018. The same is likely for 2019 once the numbers are crystalized. Jamaica, despite its impressive multiple quarters growth, the growth in GDP overall very anaemic and represents one of the most significant pressure point in its effort to reorganize the Jamaican economy. Notable commentators Denis Chung and the Chair of Jamaica Economic Development Committee Michael Lee Chin has recently lamented this fact. Despite cogent planning and marked successes, it is recognized that true transformation that economy demands growth that is more robust. This is critical to our examination of the impact of COVID -19. We have often echoed the sentiments of Lee Chin as it relates to the Bahamas. For the last few budget cycles we were of the view that greater focus should be placed on facilitative growth, leveraging the growth that was being experienced across the world but primarily in its most important market, the USA. Our consistent concern was that there was a closing window of opportunity and the drive for growth should have been better aligned to that opportunity. 2019 started to prove the efficacy of that thinking with the economic headwinds being created by Brexit and the US-China trade wars. We didn’t secure the growth desired and consequently COVID -19 economic impact is likely to prove a significant challenge, one which may have been easier to face with a stronger foundation on which to build a stimulus effort.


We are being careful not to minimize the depth of the risk faced by both countries and the wider Caribbean region. Neither is there any intention to pre-judge the efficacy of any response already announced and that which will come. This will undoubtedly be a hard road going forward and in many ways, a very complex set of realities. Supply side shock, coupled with demand side shock complicated by significantly disrupted value and supply chains further complicated by a global pandemic, the latter being the most significant and important factor. There is no easy or cheap way out of this. The US has passed the larger stimulus package in its history aimed at rescuing its economy, with clear signals of more to come. The early signs, however, show that this will be a very interesting time as the fundamentals at play are significantly outside the control of a single country and rests fundamentally on the effectiveness with which the health aspect of the event is managed. The US, in our opinion, is currently losing that battle or at least has not yet shown that it is in control of the effort to contain the spread of the virus. This is bad news for the Caribbean as the US represents one of its most significant tourism and export market.