The Covid-19 Impact on the Financial System and the Stock Market

Introduction

Since the end of 2019, an unexpected illness referred to as coronavirus disease, or simply COVID-19, has spread across the globe. The first case was registered in December 2019 in Wuhan, which is China’s central city. The Wuhan Health Committee confirmed more than 40 cases of viral pneumonia at the beginning of January¹. Because of the large number of people traveling during the Chinese New Year, the virus has spread rather quickly/ In addition, Wuhan’s position as one of the major Chinese transshipment hubs contributed to high COVID-19 infection rates. Once more people started getting ill, the disease spread to other provinces, soon affecting the whole country and various neighboring areas. Despite China’s quick response to the threat of the virus, other countries were not as effective² in battling COVID-19. As a result, the World Health Organization proclaimed the state of global emergency to the highly infectious virus. Thus, governments forced businesses to move their operations online or close down completely, while billions of people were forced to follow quarantine measures. Stock markets suffered trillions of dollars of losses in a matter of weeks. This paper aims to examine the impact of the pandemic on the financial system and the stock market in the context of global economic activity.

Market Disruptions Associated With COVID-19

The global financial system as we know it has originated from an initial period of immense economic stress. This explains why after a short decline in the stock markets, stock incentives have rebounded and remained stable ever since. Such a response to the effects of the pandemic from the financial system is partly due to the fact that the government puts a lot of effort into stimulating the economy and supporting the market during various crises. In addition, central banks act as contributors to the recovery of the stock markets as they speed up the process of addressing the disruptions. Moreover, the resilience of institutions in the finance industry leads to the efficient response from the stock markets mentioned earlier. The volatility of the markets increased at the end of February, which a strayed a risk-off phase³. The sell off speed of the weeks that followed exceeded that reported during the financial crisis of 2007-2009⁴. As equity markets started to decline rather quickly, funding markets began to show the first signs of stress.

At the beginning of March, the most liquid market (the U.S. Treasury market) started to demonstrate signs of illiquidity, which meant that credit markets suffered a lot. Thus, it was extremely hard, if not impossible, for companies from both the public and private sectors to borrow money no matter the tenure. Despite the apparent similarities between the implications of the COVID-19 pandemic on the financial system and the 2008-2009 crisis, they are not quite the same. Most evidently, the role banks played in both scenarios was rather different. Unlike the events of 2008, the pandemic is primarily a global health emergency, which has resulted in an economic decline due to the measures⁵ governments were forced to undertake in order to stop the spread of the virus. Therefore, banks, which were ones the contributors, of not the creators, of the issues, are now an efficient part of the solutions.

The regulatory environment after the first wave of COVID-19 has been perfect for the increase in capitals of large banks as well as the emergence of new stable sources of funding⁶. Having more liquid assets in addition to the aforementioned shifts led to the overall balance as banks became relatively stable. It is also important to mention that banks serve as some of the primary contributors to a variety of support mechanisms set up within the governments’ fiscal packaged. Thus, it is evident that the stock market has somewhat rebounded due to the support of large advanced economy banks and the government provided to investors and other key financial players. The world economies, however, remain rather destabilized and cannot fully recover from the impact of the COVID-19 pandemic.

The Disconnect Between Stock Incentives and the Real Economy

In order to understand the impact of the pandemic on the stock markets on a deeper level, it is important to examine the unprecedented disconnect between markets and the real economy. While the economic indicators continued to deteriorate, the stock market rebounded rather quickly, which stood in contrast with the basic economic theory. The expansion of COVID-19 prompted a response from the stock markets around the world. In the last week of February, they crashed and faced what some might have agreed was really the biggest crisis in the financial industry since 2008⁷. However, after such an unexpected drop, came an even more surprising rebound of stock indices throughout Europe and North America. At the same time, economic indicators remained catastrophically low, particularly in the United States, which registered thousands of new coronavirus cases every single day. This disconnect occurred simultaneously with some extraordinary monetary policy actions.

There are a number of potential explanations for the rebound. Some argue that the disconnect has resulted from the fact that a few firms essentially dominate the stock market, which meant that they could drive the rapid change⁸. Another hypothesis is that the firms listed on the stock market for less affected by the pandemic than the broader economy⁹. Moreover, it could be argued that the reason for the disconnect was the unequal distribution of assistance provided by policy packages targeted towards large companies and small/medium enterprises (SMEs). Although the United States government supported SMEs by distributing over $700 billion dollars¹⁰, large corporations ended up benefitting from these funds. First, there were much more government programs exclusively meant for big companies. Second, corporations received much of the support intended not for them but for SMEs. Despite the abundance of possible hypotheses, the one, which is most likely to explain the disconnect is this: monetary policy announcements dating back to March 2020 resulted in asset valuations being lifted because of the decline in discount rates¹¹. Thus, a withdrawal of such policy actions would lead to a shift in asset valuations yet again since both the risk-free and premium rates would most definitely spike. Therefore, it is evident that monetary policy actions directly impact inequality and bank accountability. On the one hand, monetary policy supports investors, while, on the other, it cannot revive any real economic activity.

The Financial Crisis Faced by Emerging Economies

Another important aspect, which is crucial to acknowledge when discussing the impact of COVID-19 on the financial systems worldwide is the differences between the crisis in advanced and emerging economies. Developing countries have numerous weaknesses in terms of their ability to respond efficiently to financial downturns. Since such countries are more likely to fail at managing the spread of the deadly virus, human lives take center stage in a discussion about the efficiency of the response to COVID-19 offered by developing countries. Some states in sub-Saharan Africa, Asia, and Latin America express their concern¹² over their domestic economic conditions, which would most definitely contribute to the spread of the disease. This, in addition to a poor system of public health and limited infrastructure, means that the needs of local populations are less likely to be addressed properly.

Some may argue that the affects of the pandemic on the financial system are rather short-lived. However, research demonstrated that the stock markets in countries such as Uganda, South Africa, and Cote D’Ivoire are the only ones that started to recover quickly¹³, while other African countries dealt with the chaos created by economic downturns as a result of COVID-19. Developing nations’ failure to offer an efficient economic response undoubtedly affects the world economy. Investors and lenders have already experienced massive losses due to their reliance on emerging markets, which negatively impacted global balance sheets. These concerns call for a well-organized and properly planned response from the inter-governmental financial institutions. The International Monetary Fund had to expand its breadth of support initiatives in order to ensure developing nations receive emergency programs¹⁴. Nevertheless, the international community remains largely negligent of the impact of COVID-19 on emerging economies, which means that the existing system of global economic governance fails a lot of developing countries.

Addressing the Issue Using the Christian Worldview

As a Christian, it is important for me to look at the economic and political events through the prism of my faith. The economic and financial crises associated with the pandemic should not be regarded only in terms of statistics, percentages, and reports. It is crucial to acknowledge that the impact of the economic downturns has been immense on billions of people, particularly those, who lost their jobs or were denied certain life-saving opportunities. Quite frankly, most of the humanitarian programs were paused due to the pandemic, which means that millions of less fortunate people ended up with very limited resources to survive. Regarding the financial crisis in the context of global governance, it is great that a lot of countries cooperated in order to ensure members of the international community unite and battle the effects of the pandemic together. Despite that, developing countries with emerging economies were often left on their own¹⁵ to deal with the economic aftermath of COVID-19. As Christians, we should not ignore the suffering of others and make an effort to help as much as we can.

The Bible states that God is the primary governing authority although all of the man-made governments are instituted by God and should be regarded as instruments of following God’s will. However, Christianity does not teach us to blindly follow the scripture. Instead, we should interpret God’s word and apply these insights¹⁶. Therefore, once it is apparent that the response of the global inter-governmental institutions is lackluster, Christians must become proactive. They should unite and engage their communities to directly help those in need or pressure local governments to do so.

Conclusion

In conclusion, the impact of COVID-19 on the financial system and the stock market has been massive if short-lived. However, the disconnect between the stock incentives and the real economy is apparent, which means that the only people, who are protected, are investors and key financial players. Common people, particularly those from developing countries, suffer greatly from the economic instability caused by the pandemic. In the light of the overall lack of effort from the global intergovernmental organizations to provide much-needed support to emerging economies, it would be great to use the power of faith and unite Christians with the goal of urging the governments to cooperate and assist those in need.

Bibliography

Goodman, Bryan. “Faith in a Time of Crisis.” 2020.

He, Qing, Junyi Liu, Sizhu Wang, and Jishuang Yu. “The Impact of COVID-19 on Stock Markets.” Economic and Political Studies 8, no. 3 (2020): 275-288.

International Monetary Fund. The Disconnect between Financial Markets and the Real Economy, by Deniz Igan, Divya Kirti, and Soledad Martinez Peria. Washington, DC. IMF Research, 2020.

Obeid, Hassan. “The Impact of Coronavirus on the Financial Markets.” The Conversation, 2020.

Takyi, Paul Owusu, and Isaac Bentum-Ennin. “The Impact of COVID-19 on Stock Market Performance in Africa: A Bayesian Structural Time Series Approach.” Journal of Economics and Business 105968, (2020): 1-10.

Statista. “Impact of COVID-19 on the Global Financial Markets – Statistics & Facts.” 2021.

World Economic Forum. Impact of COVID-19 on the Global Financial System, by Matthew Blake and Ben Weisman. Geneva. WEF, 2020.

Footnotes

1. Statista, “Impact of COVID-19 on the Global Financial Markets – Statistics & Facts,” 2021. Web.
2. Qing He, Junyi Liu, Sizhu Wang, and Jishuang Yu, “The Impact of COVID-19 on Stock Markets,” Economic and Political Studies 8, no. 3 (2020). Web.
3. World Economic Forum, Impact of COVID-19 on the Global Financial System, by Matthew Blake and Ben Weisman, Geneva, WEF, 2020. Web.
4. Ibid.
5. Ibid.
6. Ibid.
7. Hassan Obeid, “The Impact of Coronavirus on the Financial Markets,” The Conversation, 2020. Web.
8. International Monetary Fund, The Disconnect between Financial Markets and the Real Economy, by Deniz Igan, Divya Kirti, and Soledad Martinez Peria, Washington, DC, IMF Research, 2020. Web.
9. International Monetary Fund, The Disconnect between Financial Markets and the Real Economy.
10. Ibid.
11. Ibid.
12. World Economic Forum, Impact of COVID-19 on the Global Financial System.
13. Paul Owusu Takyi and Isaac Bentum-Ennin, “The Impact of COVID-19 on Stock Market Performance in Africa: A Bayesian Structural Time Series Approach,” Journal of Economics and Business 105968, (2020). Web.
14. World Economic Forum, Impact of COVID-19 on the Global Financial System.
15. World Economic Forum, Impact of COVID-19 on the Global Financial System.
16. Bryan Goodman, “Faith in a Time of Crisis,”2020. Web.