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Economists present options for footing COVID-19 bailout bill - Daily News Egypt

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Economists present options for footing COVID-19 bailout bill

Pandemic fallout may see greater digitisation and resilience of healthcare, less globalisation and higher debts

The global coronavirus (COVID-19) crisis is an unprecedented disaster that has caught the global economy off guard.

The business community, economists and politicians around the world have been left counting the costs of the pandemic and pondering post-coronavirus scenarios. Debate on balancing the costs of the crisis and the aspirations to safeguard public health have only just begun.

In this report, Daily News Egypt will review two studies focusing on solutions and procedures that should be taken as the coronavirus pandemic comes to an end, to foster and accelerate economic growth.

A Julius Baer Research report, entitled “The World after the Corona Crisis”, provides possible measures for overcoming the pandemic’s effects on the global economy.

The report believes the currnet crisis will accelerate existing structural trends rather than create new ones.

As a consequence of the economic shock, and to fight the fallout from the crisis, Modern Monetary Theory will move more into focus in the next few years. It vindicates the monetisation of public debt to achieve full employment, and provides a permissive attitude towards inflation, the report highlighted.

“To foot the bill of the coronavirus crisis bailout, policymakers have three options at their disposal: increasing taxation, renewed borrowing from the private sector and monetisation,” the report said. “Higher taxation corresponds to short-term financial repression for those concerned, but borrowing could also bring financial repression, if governments cap public borrowing costs, in an effort to service high debt burdens.”

The report added, “Monetisation of debt…raises the risk of inflation in the medium to longer term, eventually creating financially repressive effects for everybody. However, the last decade has impressively shown that debt monetisation, with a central bank buying public debt, does not have to be necessarily inflationary, as it depends crucially on the incentives to use the newly created central bank money in the economy. The inflation outlook therefore depends on the readiness to reduce well-received state support and balance public budgets, once the emergency that triggered the fiscal stimuli is over.”

It explained that reluctance to stop the expansion of public debt to guard swift economic growth and prosperity, would foster inflation with some form of supply bottlenecks. It would also mean that insufficient private investment and de-globalisation could eventually become catalysts for sharply rising inflation.

“[The coronavirus crisis] should serve as a wake-up call to further foster the long-term transformation of healthcare, rendering it more resilient and more efficient…for humankind” the report read.

The second report, entitled “After COVID-19” published by UBS, recommends investors consider potential structural transformations driven by COVID-19.

It anticipates the market will focus on a speedy easing of lockdown measures and a recovery in corporate profits. However, investors will also need to consider the potential structural transformations being driven by this public health crisis.

The report believes that post-crisis, the world will be more in debt, less globalised, and more digital. Investors will face higher taxation, financial repression, and moderately higher inflation, along with populism and protectionism.

Investors should also seek exposure to those in long-term trends that have been boosted by the crisis, including companies in Automation and Robotics, Digital Transformation, Fintech, E-Commerce, HealthTech, and Genetic Therapies.

The report said, “The precise fiscal spending picture is still unclear, but, given our current estimates, government debt as a percentage of GDP will be 15–25ppt higher by the end of 2021 than it was at the end of 2019 across much of Europe and in the US. This is broadly comparable with the scale of increase seen between 2007 and 2010 as a result of the global financial crisis.”

The report anticipates that governments would impose higher taxes, particularly on the wealthy and large, transnational companies, as they seek to finance debt.

The report projected that governments are likely to focus again on the risks of international technology transfer, as they are to face pressures to boost healthcare services while also facing elevated debt levels.

“We expect the US dollar to depreciate over the long term, given both its high valuation and the fact that US interest rates are now only marginally higher than other developed economies,” the report said. “We think gold is likely to increase its relevance in portfolios over the longer term, due to heightened sensitivities to US dollar devaluation, high levels of public debt, financial repression, and geopolitical risks. Meanwhile, we expect oil prices to stay volatile due to significant supply-demand uncertainty.”

The report sees that the pandemic will likely accelerate the shift toward fintech-based digital solutions as the lockdown experience is encouraging consumers to adopt or increase digital services use. This includes e-commerce, video streaming, food delivery, and online education, which are usually paid for using fintech solutions via mobile or online payments.

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