Private Profits, Social Costs(?)

August Man SG|Issue 159

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Private Profits, Social Costs(?)
As they navigate a global recession, governments must balance between private interests and the greater good
Jamie Tan

A DECADE. That’s the frequently cited period for an average business cycle, which meant that we were overdue for a correction by 2020. With all eyes on the ongoing trade war and Brexit back in January, however, nobody guessed that a pandemic would precipitate the next global recession.

As COVID-19 continues to ravage public healthcare systems around the world, economic data is also trickling in to paint a grim picture. The unemployment rate in the US has reached Great Depression levels, while the Eurozone economy shrank by an annualised 14 per cent in the first quarter of the year. Even oil futures saw a freefall into negative prices for the first time in history. Singapore wouldn’t emerge unscathed either. The city state is expected to enter its worst-ever recession after forecasted economic growth for 2020 was revised downwards three times in just as many months. For now, Singapore’s economy is projected to shrink between four and seven per cent.

Weathering The Storm

Although every recession is unique, things really are different this time. Global demand has suddenly stalled, and with it the flow of goods and services. Businesses aren’t bearing the brunt of this storm evenly, of course. A few rare ones like Apple will ride things out with little difficulty thanks to their massive cash reserves. At the other end of the spectrum are shuttered businesses with no means of shifting their activities online. These are the ones most badly hit, and some have it even worse due to their respective industries’ cost structures.

Singapore Airlines, for instance, has had to cut up to 96 per cent of its capacity and ground nearly its entire fleet due to severely reduced demand for air travel. As an airline with a fairly young fleet, however, some 70 per cent of its costs are fixed. Consequently, the company has had to undertake a rights issue to raise cash; the balance sheet will be shored up with an additional S$8.8 billion, with an option for another S$6.2 billion down the road.

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Issue 159