The Global Travel Industry Will Not Fly

From its onset in late-2019 to the current full-blown pandemic, the burgeoning novel coronavirus has now infected close to 3,000,000 people as it makes its way from Wuhan to other parts of the world. In response to the pandemic, policymakers around the globe have restricted travels, essentially shutting their national borders. Having made multiple headlines, the coronavirus’s impact on the global aviation sector has been nothing short of catastrophic.

 

As domestic and international travels are being clamped down, airlines suddenly found themselves deprived of demand. Struggling to keep their heads above the water, many carriers began reducing their capacity or grounding all flights immediately. To name a few, Qantas and Jetstar have halted all international flights, while EasyJet, Cathay and Singapore Airlines have stopped virtually all flights. In the absence of demand, IATA and Bloomberg noted that a typical airline only had cash reserves to last for 1.5 months. As it is, the downward pressure on revenues has already obliterated some airlines, with the most notable one being Virgin Australia which declared bankruptcy in April. Meanwhile, the IATA estimates that Malaysia’s airline industry could face up to $3.32 billion revenue losses, putting some 169,700 jobs at risk. In particular, the country’s flagship carrier, Malaysian Airlines reported a 94% drop in revenues. In light of that, there are perhaps no words better suited for the circumstance than Warren Buffett’s quote – “Only when the tide goes out do you discover who’s been swimming naked.”

 

The travel industry accounts for 10.3% of global GDP or 330 million jobs. In the aviation sector, 98% of passenger revenues come from major countries already in severe travel restrictions with a total forecasted revenue loss of $314 billion. While some optimists have turned to affordable fuel as a silver lining for the aviation industry, it is somewhat a double edge argument as aviation demand accounts for the largest demand of fuel. Firstly, in order to capitalize on what would be a lower cost of sales, aviation companies first need to be able to have flights. Second, due to the general volatility of prices, airlines tend to engage in hedging activities for their jet fuel consumption in the coming months. In other words, even if oil price fell drastically, majority of carriers will still be paying the hedged price for months. Recognizing the elephant in the room, governments in different countries have provided financial support or bailouts to carriers in their homeland – including the $58 billion loan and grant from the US government, and Singapore Airlines’s $15 billion support from state fund Temasek Holdings. Despite that, various airlines around the world have appealed that it would take much more ammunition to save the whole aviation sector.

 

By the same token, the global economic downturn and widespread imposition of social distancing has presented a double whammy to the hospitality industry. Occupancy rate, available daily rate (ADR) and revenue per available room (RevPAR) have all fallen substantially. In Prague, Paris, and Barcelona, RevPAR fell more than 95% in March, whereas hotel occupancies in China plummeted by 89% in January. The American Hotel and Lodging Association (AHLA) reported that an estimated $3.5 billion in revenue is vanishing each week. In Malaysia, survey by the Malaysian Association of Hotels (MAH) indicated that 50% of hotels are considering to cease their operations, while another 35% would temporarily halt their businesses. Owing to the disruptions, the association predicted that the local hospitality sector could see a potential loss of up to RM3.3 billion in room revenue. As rooms remain largely vacant and cancellations come pouring in, major hotel chains like Marriott, and Hilton began cutting down on staff costs, either through furloughs or layoffs to weather the storm.

 

Notwithstanding that, it is worth mentioning that compared to their peers in the aviation sector, the hospitality sector is in a much better position to withstand a temporary paucity of demand. For one thing, leading hoteliers, including Marriott, InterContinental Hotel Group (IHG), Wyndham Hotels, etc. have relatively healthy balance sheet. Average EBITDA margin for most hotel groups are above 50%, a far cry from the majority of airlines operating at margins of 15% or lower. On top of that, the sector has also proven itself to be extremely resilient. To elaborate, after the SARS epidemic subsided in 2003, hotel occupancy in affected regions was able to bounce back to normal levels in mere months, with ADR and RevPAR following closely. In fact, in China where COVID-19 is allegedly under control currently, 87% of hotels have already resumed their operations as of the end of March, with occupancy climbing from below 10% in February to above 30% in March.

 

By and large, while the hotel sector appears to be relatively stable at the moment, the aviation industry seems to be headed towards a debacle. As a result of airlines’ internal mismanagement from bad hedging practices to obscure pricing and lavish sponsorship policies, policymakers may find themselves in a conflicted position. In that case, are we going to spend money to bail out the aviation sector or to let free markets take its course and allow a merger and acquisition between the airlines groups?

Which way do stimulus cheque cut?

On 27 March 2020, President Trump signed into law the CARES Act, a historic $2 trillion economic stimulus package aimed as a fiscal response to the nation’s economic slowdown triggered by the COVID-19 pandemic. While the announcement of a stimulus package in times like this does not come as a surprise, the sheer size of the package itself has caught the world’s attention. At $2 trillion, America’s stimulus is one of the largest fiscal response in the world announced to-date, eclipsing its very own stimulus package during the Great Recession caused by the 2008 Global Financial Crisis by more than double the amount.

 

Out of the $2 trillion allocation, the component that draws the most headlines recently is the $1,200 direct cheque payments to Americans. Direct reliefs to individuals and households are in fact a common inclusion for almost every economic stimulus package across the globe. For instance, the Malaysian government has set aside RM10 billion of its stimulus package for direct one-off payments to the nation’s lower and middle class. Thailand, Vietnam and the Philippines are among nations that have also adopted similar measures, mainly targeted at the nation’s financially vulnerable communities which are at risk during times of crisis. America’s cash handouts in comparison are more far-reaching, with stimulus cheques only phasing out completely for individuals earning more than $99,000 a year. The objective in mind certainly extends beyond just addressing financial difficulty – i.e. to spur consumer spending as America braces itself for a sharp decline in economic activity given the nationwide quarantine.

 

However, the effectiveness of direct cash handouts in spurring consumer spending has long been debated. Critics argue that stimulus cheque recipients do not put money back into the economy – a 2009 study on the effectiveness of President Bush’s tax rebates in 2008 reveals that less than 20% of recipients spent the money, while one-thirds of recipients put the money back into savings and almost half of the recipients use the money to pay off existing debts. Consumer spending largely depends on the confidence level of future outlook, wherein current indicators are not pointing to a positive outlook at all. According to The Conference Board, the consumer confidence index slid to 120.0 in March from 132.6 in February, with an estimated sharp decline in consumer spending of 40% and GDP contraction of 33.3% for the second quarter of the year. Other analysts are predicting up to a 40% contraction in America’s economy for the current quarter.

 

Regardless of the economic objectives, the stimulus cheques are certainly a welcome sight for most Americans as the cheques arrive at a time when unemployment is rising at an alarming rate in the US – although the official unemployment rate stands at only 4.4% as at March, a staggering 22 million unemployment claim applications were filed between mid-March to mid-April, putting approximately 13.5% of America’s workforce out of job in just 4 weeks. This also comes at a backdrop of household debts reaching an all-time high of $14.15 trillion as at the fourth quarter of 2019. It is also estimated that 11% of Americans can only afford their household expenses for up to a week under quarantine, and another 15% can only afford those expenses up to 3 weeks.

 

Whichever way the stimulus cheques cut, it is without a doubt a populist move by the incumbent government. The lasting effect of alleviating one’s financial difficulty in times of crisis can’t be any more profound than having a cheque appear directly in one’s mailbox. More so when President Trump cheekily inscribed his own name and signature onto every stimulus cheque that Americans will be receiving this month, despite the stimulus payments being a bipartisan Congressional response to the current crisis.

 

In any case, the stimulus payments – and the overall stimulus package – is expected to be a costly endeavour to the US government, with the Congressional Budget Office estimating that the overall stimulus to add over $1.8 trillion to the federal deficit over the next decade, at a time when the US government is already over $24 trillion in debt. Notwithstanding that the stimulus payments don’t necessarily guarantee an improvement to overall consumer spending, the stimulus cheques are certainly expected given the upcoming presidential election in November – neither party would want to be caught denying Americans of a cash handout in times of crisis. Regardless of the government’s ability to afford it, Americans can certainly expect more populist fiscal responses to the COVID-19 pandemic to come in the coming months under the leadership of President Trump as he scrambles to cover his recent missteps in a bid to secure his re-election in November.

There Will Be A New Normal For Malaysia

As of 13th May of 2020, worldwide cases of coronavirus have soared to more than 4.26 million with confirm deaths of more than 297,000. Malaysia has registered 6,742 cases with 109 confirmed deaths so far. Suffice to say, this is a global pandemic on a scale we have never seen before, countries all around the world are scrambling to make sure they are equipped to handle the pandemic. Malaysia has been one of the few countries that have been successful at containing the virus at more manageable levels. This has been recognised on a worldwide level – CGTN named Datuk Dr Noor Hisham our health director-general as one of the top doctors in the world for his approach in handling the Covid-19 pandemic.

 

Unlike many other countries, the Malaysian government announced a Movement Control Order (MCO) on the 16th March that has since been extended to 9th June. However as of May 4, the government has implemented a Conditional Movement Control Order (CMCO) which allows certain segments of the economy to begin business operations once again but with strict SOPs that need to be adhered to. The reopening of the economy was much needed as Malaysia had incurred an estimated economic loss of RM63 billion from the MCO, as announced by the prime minister. The impact was further punctuated by Malaysia’s economic growth slowing to 0.7% in Q1 of 2020, the lowest seen since Q3 of 2009 when the economy contracted by 1.1%.

 

Due to this MCO, businesses have seen a huge reduction in revenues, and some even having no revenues in this period. This has caused many companies to have no choice but to layoff their employees or reduce salaries for the time-being. Large companies such as AirAsia were forced to cut 75% of their employees’ salaries, as the travel sector are some of the most impacted during this time. Furthermore, supply chains have been disrupted as borders lockdown and factories cease operations, causing businesses who are able to operate to even suffer.

 

The government has since issued a RM260 billion stimulus package – the largest ever stimulus package in Malaysian history (approximately 17% of the country’s GDP) to help combat all the effects of the coronavirus. Some highlights from the stimulus package include one-off payments for individuals, wage subsidies for employees whose employers are seeing a reduction in revenue, deferment of loan and tax payments among many others. All these initiatives should allow businesses and individuals to keep their head above water for the time being while evaluating their potential options and creating contingencies for different scenarios.

 

Cases have been decreasing since the MCO started and with many sectors reopening once again for business, the situation will slowly start to return back to normal once again, however the question is – what is the new normal? Undoubtedly, there will be significant changes to how we live our everyday lives. Individuals are most likely going to be more health and safety conscious until a vaccine is found and this could result in straying away from handshakes to moving out of urban areas to areas outside the city where it is less dense. Individuals are also more likely to be more open to e-commerce or food delivery, this MCO has introduced many individuals to the idea of these services and the increased demand of these services are expected to sustain after the pandemic slows down.

 

Businesses are also expected to change the way they operate. For one, retailers who were slow to adopt an online approach will be forced to innovate themselves rapidly in order to stay relevant. Therefore, in the future, it will be not be surprising to see more retailers adopt a more omnichannel approach to sales. As more employees are working from home during this period, remote working will most likely see increased adoption as the benefits show. A study done by Stanford on NASDAQ listed company Ctrip showed there was an increase performance of 13% while at the same time saving the company almost $2,000 per employee by reducing on rent. Complementing this would be the increased adoption of collaborative tools such as Zoom and Microsoft teams that will force companies to digitalise themselves more rapidly.

 

There is no doubt Malaysia will be able to rebound quickly after this crisis as evidenced by previous crisis such as Asian Financial Crisis in 1998 where GDP contracted by -7.3% in 1998 only to rebound to 6.1% a year later or in 2009 global financial crisis where Malaysia’s GDP contracted by -1.5% only to be followed by a 7.4% growth a year later. There has already been estimates that Malaysia is predicted to grow by as high as 9% in 2021. If everyone does their part in containing the coronavirus, there is no reason to believe Malaysia will not be able to return stronger than ever.

Corporates in the Philippines Can’t Save the Country

Ever since the Philippines identified its first COVID-19 patient within its national border, the number of cases in the country has shown nothing but a relentless surge. To curb the spread of coronavirus, the federal government has aptly declared an enhanced community quarantine on the Luzon region, a place where 50 million Filipinos call home. What followed was the immediate suspension of public transportation, closure of non-essential businesses, and a curfew, among other things.

 

Accountable for 73% of the country’s economic output, the Luzon region’s lockdown could possibly push the Philippines into a negative territory of 0.8% GDP contraction this year. Note that its most recent contraction dates way back to the Asian Financial Crisis when its economy shrank by 0.58%. Even in the aftermath of the financial crisis in 2009, the country had posted a modest growth of 1.15%. The current situation, therefore, is extremely dire in comparison. With that in mind, in an economy bolstered by huge conglomerates, is the corporate sector doing anything to relieve the country of its pressure?

 

Fortunately, the Philippines appears to be living up to its good name as a community-based country as numerous corporates have stepped up. For starters, under the instruction from the Department of Finance, most (if not all) lenders have granted payment extensions on different types of borrowing, including personal and housing loans, so as to alleviate Filipinos’ financial burden in the absence of income. To provide support for medical front-liners, SM Investments and Gokongwei Group have each forked out P100 million ($1.98 million) to acquire personal protective equipment and testing kits. In an equally heroic gesture, Universal Robina Corporation and San Miguel Corporation also donated food products to medical workers and starving daily wage earners.

 

Meanwhile, two of the country’s biggest telecommunication companies, Globe and PLDT, are also supplying mobile phones with preloaded call and text credits to relevant parties, such as healthcare workers, police forces, and the military. Among all corporate efforts, the most sizable one is perhaps Ayala’s P2.4 billion ($47.60 million) response package, which encompassed wages, bonuses, leave conversions, loan deferments, rent coverage for Ayala partners, and financial support for all Ayala employees under its subsidiaries. Thus, it is evident that local companies are striving to sustain the economy within their means in the face of adversity. Admittedly, despite various efforts from the private sector, it is downright unrealistic to expect that they can keep it going for any longer. This is because as business activities dry up, companies draw down on their cash reserves and eventually face the need to save up in the wake of a downturn. For that reason, support from the government is needed.

 

As with many other countries, the Philippine government has shown its commitment to stimulate the struggling economy. To elaborate, a stimulus package worth P27.1 billion ($530 million) was launched, of which more than half (P14 billion) is reserved for the tourism industry, the most affected sector. The program also provides financial support for acquisition of testing kits, workers and business affected by COVID-19, farmers and fishermen, free courses for upskilling and reskilling of displaced workers, as well as microfinancing and loans for MSMEs. Besides, the government has introduced a cash handout program of P200 billion ($3.9 billion) to support 18 million low-income households who have lost their sources of income amid the pandemic. In its most recent stimulus package announcement, the government brought to light a P51 billion ($1 billion) wage subsidy to employees of small businesses

 

Notably, this is not the first time that the Philippine government has taken matter into its own hands. During the 2008 financial crisis, the Philippine government rolled out a ‘bazooka’ that was called the Economic Resiliency Plan. At a size of P330 billion ($6.5 billion), the fiscal package mainly provided funding for government employment, social protection programs such as scholarship and food product subsidies, agriculture support, individual and corporate tax cuts, as well as large infrastructure projects. Owing to that, the country managed to sidestep a recession with GDP growth of just over 1% in 2009.

 

All things considered, seeing that the COVID-19 outbreak is expected to have greater implications on the Philippines’ economy than the global financial crisis, bigger stimulus packages might be needed to avoid a recession – ones that pack a stronger punch than the Economic Resiliency Plan. However, it should be mentioned that the country’s fiscal deficit is under great stress as the NEDA suggests that it might balloon to 5.4% of GDP, a level not seen before. In that case, would the Duterte administration risk ballooning the fiscal deficit to an unprecedented size or to let the economy go into free fall?

Indonesia Well Poised to Weather Extended Market Downturn

Indonesia’s struggle against COVID-19 has pit its economy and policymakers to their greatest challenge yet. In response to the outbreak, the Indonesian government has announced a comprehensive stimulus package amounting to IDR 405.1 trillion (USD 26 billion) targeting the underprivileged bottom 40 and sectors of the economy that are at highest risk from the recession.

 

The country’s manufacturing industry is at the center of various tax breaks and incentives; the industry contributes to 20.5% of Indonesia’s GDP, and the fact that up to 50% of its raw materials are imported from China has put it at a risky position. Cash transfers and other non-cash initiatives such as providing free electricity to the disadvantaged and giving out staple goods are also aplenty. But will these be enough to get the country back on its feet and inspire confidence in the markets?

 

If investors were impressed, then market was not reflecting it; one week after the announcement of the package, the Rupiah reached levels that were last seen in 1998.  The Jakarta Stock Index (JKSE) also saw 37% of its value wiped out since the beginning of the year. These were spurred by massive foreign capital outflow that amounted to at least USD 4 billion in rupiah denominated bonds, and USD 600 million in Indonesian equities. The Ministry of Finance has also mentioned that they are anticipating the currency to drop to as low as IDR 20,000 per USD, a level unseen in the nation’s history.

 

Global institutions seem to share a similar sentiment, as evident from their revisions of the country’s GDP expectations for 2020: The World Bank’s revision places it at 2.1% from 5.1%, and the IMF recently posted a somber revision of only 0.5% from 5%. Indeed, Indonesia’s own Ministry of Finance is anticipating a worst-case scenario of a 0.4% contraction. These estimates present the archipelago’s worst GDP growth since the Asian Financial Crisis (AFC) – is the specter of the 1998 crisis hanging over Indonesia once more?

 

Our view is otherwise; though it is indeed true that economic activity has slowed down to a crawl, the country’s fiscal posture is healthy, and fundamentals are solid – nothing like it was during the AFC. The years before the crisis, Indonesia’s short-term external debts amounted to almost 90% of the Central Bank’s reserve levels at the time – as the currency went into freefall, the debts overwhelmed corporations and sent the economy over the edge. This time around, Indonesia is much more conservative with short-term debt, and is armed to the teeth with foreign currency reserves.

 

The capital flight and JKSE crash can arguably be attributed towards portfolio reallocations, rather than due to a real shift in fundamentals. Although foreign ownership of rupiah bonds dropped by 7%, Indonesia is still the Asian country with the highest foreign proportion of bond ownership. Furthermore, the government’s very recent issuance of “Pandemic Bonds” was met with abundant demand – the bond issuance was two times oversubscribed in the Singapore and Frankfurt Stock Exchanges, indicating positive market sentiment.

 

The government is also taking steps to make sure they can continue their support if the outbreak persists for a long period. President Joko Widodo recently signed an executive order to overturn a budget deficit cap, giving the government more breathing room for outlaying continued stimulus. The Indonesian Central Bank was also one of the few that was able to secure a repo facility with The Fed worth USD 60 billion, ensuring dollar denominated liquidity when and where needed.

 

The trauma from the AFC has taught policymakers the best way to deal with crisis. The 2008 Global Financial Crisis barely left a dent on Indonesia due to astute fiscal policy and post-AFC policy reform; the country’s current Covid-19 response appears to be taking pages from that playbook, and – if history serves us right – could see the archipelago emerging victorious from the virus outbreak.

 

Political unrests, floods, droughts, what’s next for Thailand?

As the COVID-19 pandemic spreads across the globe, many have been speculating the potential economic implications on different countries. Being troubled by its internal factors, Thailand’s economy has been slowing down and appeared to be stagnant prior to the emergence of the novel coronavirus. This is potentially attributable by the long-lasting political unrest which led to a coup in 2014 and several large firms dominating the economy, which led to lack of innovation and competition driving the economy growth.

 

In 2019, it merely grew by 2.4%, representing its weakest pace in 5 years. The Thai economy has been severely impacted by the strong Thai Baht and recent US-China trade war, as it is strongly dependent on exports. Throughout the last decade, the economic growth of has not been too appealing either. The country’s growth rate from 2009 to 2019 is around 3.6% on average, lagging behind its neighbouring countries namely Vietnam, Philippines and Malaysia that registered an average growth of 6.5%, 6.3% and 5.3% respectively.

 

On March 25th, Thailand’s Prime Minister Prayut-Chan-o-cha has declared a state of emergency in Thailand in efforts to contain the virus outbreak that would last until the end of April. While the country is already experiencing one of its worst drought in possibly 4 decades, the Thai economy is on the verge of collapsing as the widespread pandemic hits the critical tourism industry which employs about 7% of the total workforce and accounting for 12% of overall GDP with an estimated 40 million tourist arrivals last year. It is unlikely that consumers will resume travelling, at least in the next 6 months due to fears of further waves of virus outbreaks.

 

From deploying ‘ninja robots’ in hospitals, banning alcohol sales to curb social gatherings, to providing free COVID-19 tests, various measures have been taken in the country to contain the spread of coronavirus. Thailand corporates are also offering great help. Central Group has provided rental waivers and discounts as well as free accommodation to support medical staffs, while CP Group has invested around $3 million to build a mask factory to produce surgical face masks for free distribution to medical staffs and the general public.

 

The government has indeed spurred a larger amount in the economy in efforts to prevent further spillover effects of COVID-19 in its economy. Comparing stimulus packages in the past and the current coronavirus crisis, the amount of stimulus package unveiled by the current government has almost tripled from the 1997 Asian Financial Crisis rescue package from IMF. To date, the COVID-19 stimulus packages totalled up to nearly $74.15 billion. However, the question remains – can the temporary increase of government spending and tax cuts stimulate actual economic growth in the country when people are locked down at home?

 

Despite the economic stimulus packages introduced to the economy, an economy contraction is inevitable. Out of Thailand’s 38 million workforce, an estimated 7 million people in Thailand have lost their jobs to date. It is forecasted that the figure would go up to 10 million if the crisis drags on for another 2-3 months – putting Thailand’s unemployment rate at extremely high levels which would lead to a series of social issues. Even more recently, Thailand has been busy battling its forest fire in the northern parts of the country on top of the widespread coronavirus crisis. IMF has downgraded Thailand’s growth projections in 2020, making it the worst performer among Southeast Asian countries at a 6.7% contraction.

 

While Thailand has already been through many crises, we wonder if the country is ready to take the hit from COVID-19.

 

 

The Rippling Effect of the Oil Crisis

The current oil crisis affects every corner of the world in more ways than one. While Saudi Arabia and Russia may be pursuing their own respective agendas in the ongoing price war, the shockwaves that the crisis has created are certainly felt across the entire oil and gas industry, chief amongst them being the American shale gas industry which has been struggling to stay afloat at current crude oil prices which are well below the required levels for sustainable shale gas production. Other nations are also feeling the pressure, particularly oil-producing nations that rely heavily on petroleum-derived revenue to fund its national budget – case in point: Malaysia.

 

The Malaysian federal government has long relied on petroleum revenue to fund its national budget annually. Despite efforts by the government to reduce its reliance on petroleum-derived revenue over the years, in 2019, Petronas’ total dividend contribution to the nation’s coffers alone amounted to RM54 billion, representing 20.3% of Malaysia’s federal government revenue for 2019. While the total share of petroleum-derived revenue has reduced substantially from 41.3% seen in 2009, the 30.7% share 10 years later still represents quite a significant portion, putting the nation’s coffers at risk particularly during a slump in oil prices.

 

On 11 October 2019, the Pakatan Harapan government unveiled a national budget amounting to RM297 billion. At that time, the national budget was formulated based on a base projection of $62 per barrel for crude oil prices, a far cry from the $28 average price traded over the past month. It is estimated that for every $1 per barrel drop in crude oil prices, Malaysia’s petroleum revenue will reduce by RM300 million. To add further pressure to the strain, the Malaysian federal government has announced a string of economic stimulus packages worth more than RM260 billion over the past month in light of the recent nationwide shutdown. This certainly begs an important question – does Malaysia have enough funds to fulfil its latest fiscal measures?

 

Prior to the slump in oil prices, Petronas had in February announced that it would distribute a regular dividend amounting to RM24 billion to the Malaysian federal government this year. With the amount of economic stimulus packages announced by the federal government ballooning by the day with no clear end in sight on the recovery from the current COVID-19 pandemic, calls for Petronas to declare another special dividend on top of its initial RM24 billion commitment are greater than before. A glance at Petronas’ financial statements will reveal that as at the end of last year, the national oil and gas company had a healthy cash pile amounting to RM141.6 billion. However, Petronas, in its latest statement on 3 April 2020 stated that it will now reassess its ability to fund its ongoing operations, service debts and other obligations in considering its declaration of any special dividend over and above its initial commitment, acknowledging the pressure it is facing and effectively depriving the government of a funding channel for its additional stimulus measures.

 

The effect of the current oil crisis is felt beyond just Petronas and the Malaysian federal government. It is estimated that Malaysia is home to over 2,000 Petronas-licensed oil and gas services and equipment (OGSE) companies, of which more than 40 of them are public listed companies on Bursa Malaysia. If crude oil prices continue to remain suppressed below the threshold required for sustainable oil production in the region, there is a strong likelihood of Petronas slashing its capital expenditure for the year. With the nation’s top 10 OGSE companies’ gearing averaging over 1.09x, the effects of a sudden cut in capital expenditure by the national oil company will certainly send strong ripples across the entire oil and gas sector, putting more than 36,000 jobs and estimated RM17.4 billion of petroleum income tax revenue for the Malaysian federal government for the year at risk. Moreover, the collapse of certain corners of the oil and gas sector will undoubtedly cause spill-over disruptions to the entire supply chain and other related industries in the country.

 

In the wake of WTI prices treading into negative territory recently and Brent dipping below $20, alarms have been raised louder than ever within the federal government – the Finance Minister in a recent statement conceded that the government will resort to adjust its spending if oil prices remain suppressed. The downturn in oil prices have already dealt a significant blow to the government’s coffers, which will only get worse unless the oil crisis recovers. As this is contingent on quelling the pandemic, the harsh reality we face is that 4 months into the outbreak, we are still dealing with virus that we do not fully understand, and the world is still not equipped with a reliable vaccine or treatment to defeat this virus. At this rate, the federal government will continue to bleed petroleum revenue beyond a level that it is able to sustain its national budget and stimulus measures. The pandemic certainly compels the government to look beyond its usual stash within Petronas and instead towards other state-owned enterprises. Who knew that the pandemic will be the event that ultimately breaks the government’s reliance on petroleum revenue, just as the pandemic is forcing every other industry to reshape and redefine its business during times of crisis?

Should the US shale gas industry be bailed out?

America’s shale gas industry has experienced a boom in recent years, catapulting America to become the largest oil and gas producer in the world in 2018. The rise of the American shale revolution has largely hinged upon several key factors. Apart from a blip in 2014 to 2016, crude oil prices have soared well above the required levels for sustainable shale gas production in America since the aftermath of the global financial crisis.

The capital-intensive nature of the shale gas drilling business has also been heavily supported by debt. With a 2016 estimate placing American potential shale resources at 6 trillion barrels, it is no surprise that lenders have shown strong resilience in its ability and desire to fund shale gas production – it is estimated that over $430 billion have already been poured by funders into the industry. This is further supported by federal government subsidies for fossil fuels production – between 2015 to 2016, the US federal government provided $14.7 billion a year of incentives to the industry (excluding consumption subsidies).

The recent global COVID-19 pandemic has certainly rocked the very foundations that the American shale gas industry has been built upon. Declining oil demand due to economic slowdown from quarantine measures across the world further exacerbated by the OPEC+ collapse and ongoing standoff between Saudi Arabia and Russia are among the factors that thrusted crude oil prices to unprecedented levels – as May futures contract approached expiry, WTI crude oil prices plunged to negative $37.63 a barrel on 20 April 2020.

As a result, the recent oil crisis places the American shale gas industry in the crosshairs of Saudi Arabia and Russia. With Saudi Aramco’s average cost of oil production at $2.80 a barrel and Russia’s Rosneft reportedly at only $2.50 a barrel, both countries are certainly well-armed to collapse the American shale gas industry once and for all, getting rid of the thorn in the flesh which has caused severe erosion to their respective market shares in recent years.

Despite the cost of shale gas production decreasing substantially over the years due to improvements in efficiencies, experts still estimate current cost of shale gas production to be between $40 to $50 a barrel, making most, if not all, American producers economically unviable to continue drilling at current oil prices. With massive oversupply flooding the market and oil storages already approaching critical levels, rapid production shut-ins are taking place right now – over the course of 1 week, 44 rigs in the US have shut down.

In fact, some areas in the US are already seeing negative prices for certain crude grades, given the cost and complexity of shut-ins preventing wells from closing overnight. While the world has about 1 billion barrels of available storage capacity now, the reality is most of these storages are inaccessible given that majority of American producers are landlocked and transportation networks being breached by the current demand shock.

On 1 April 2020, Whiting Petroleum became the first American shale casualty in the wake of the current oil crisis, filing for bankruptcy as it faced $262 million debt maturing. Chesapeake Energy, one of the upstarts that spearheaded the American shale revolution, has reportedly hired a restructuring adviser as it sits on $9 billion debt in its books with $192 million due in August 2020. With an estimated $40 billion debt coming due this year for American oil and gas producers, the collapse of the American shale gas industry is certainly imminent. The grim outlook for the industry begs an important question – is a bailout in the cards now?

America is certainly no stranger to government bailouts in times of crisis. Since taking office in November 2016, President Trump has allied closely with fossil fuel producers. With Trump’s presidential re-election due in November 2020, one can certainly expect the shale gas industry to be rescued by the Trump administration.

Efforts have already been made, with the Trump administration ordering the US Department of Energy to grant immediate access to 30 million barrels of Strategic Petroleum Reserve storage capacity to American producers (another 47 million barrels capacity to follow suit) following rejection by the US Congress of a $3 billion proposal to purchase oil from American producers.

Just as the COVID-19 outbreak is reshaping every other industry, the pandemic has set the stage for the energy sector to react to the current downturn with a revolution of its own. In a world where climate change is taken more seriously by the day, America ought to accelerate its investments into clean and renewable energy instead of pouring money into bailing out the harmful and obsolete fossil fuels industry.

With a $23 trillion national debt weighing down its pockets and growing amount of government aid needed to combat the ongoing pandemic, the call has never been greater for America to rethink its priorities and focus its efforts on developing the energy of the future. However, given Trump’s nonchalance towards climate change and sustainable energy – the recent spat with 17-year old Greta Thunberg comes to mind – one can certainly expect the clean energy revolution to be kicked down the road even further.

How The Pandemic Will Make Vietnam Rise

Possibly unfamiliar by many before the outbreak of COVID-19, Vietnam being a small country just south of coastal China with a population size of 97 million has now earned its stripes as a winner against the invisible enemy that is causing a turmoil in the world. Just as how it managed to keep the SARS outbreak under control back in year 2003, the country once again has been praised by the World Health Organization (WHO) on the efficiency of its response measures in fighting the deadly virus. As of 14th April 2020, Vietnam has kept the total number of cases at only 266 with a fatality rate of zero.

Following the footsteps of countries like Philippines and Malaysia, the Prime Minister of Vietnam has mandated a strict social distancing throughout the country for 22 days. Restriction of such in multiple countries undeniably will leave a long-lasting impact on the prospects of the country.

While most industries are adversely impacted by the pandemic, it is apparent that the big winners are businesses that revolve around E-commerce, particularly those fulfilling the basic necessities of people, for instance food retail, food service and delivery businesses. A change in consumer behaviour can be observed when the switch to online grocery shopping from the typical wet markets or traditional retail stores is happening at an accelerated rate – 57% of Vietnamese consumers has proclaimed the switch to online shopping according to a March survey by Ipsos MORI. Apart from that, E-wallet services are also starting to gain momentum in this cash-based country following the advice of State Bank of Vietnam (SBV) to limit cash usage, in order to reduce the risk of infection.

This shift from offline to online could be expected to stay even after the virus subsides. The reason is simple and straightforward – the number of phone subscribers have reached 129.5 million, and more than half of the country has access to internet. While the state of digital economy in the country poses a low-hanging fruit, the current pandemic acts as a trigger to push for higher adoption. Consumers having a taste of making purchases online during the period of strict social distancing are likely to value the convenience they could enjoy, forming a new habit of filling the carts with clicks. The growth in the E-commerce sector would in turn flourish the E-wallet sector, as this would be the only digital payment option for the unbanked population, which constitutes about 37% of Vietnamese adults.

Looking at the macroeconomic level, Vietnam is a rising star as a manufacturing hub in Asia due to its low labour costs, attractive tax regime, geographical advantages and open trade policies. Even before the virus outbreak, many Vietnamese manufacturers have skillfully integrated themselves into the supply chain of Chinese firms that are relocating due to rising wages at home, particularly in industries which China wants to exit, in order to focus on higher-end products.

The supply chain disruptions caused by the pandemic have hit the world hard, noticing the over-reliance on China for production. Businesses could be expected to consider diversifying and relocating their supply chains out of China as they learn the importance of not to put all eggs in the same basket. This could eventually result in a shift in the global supply chains and investments. As such, Vietnam undoubtedly would be a big beneficiary, winning over foreign direct investments (FDI) in the foreseeable future. The accelerated movement of production facilities from China to Vietnam during the breakout of US-China trade war would serve as great precedence.

Apart from the above, there are also other notable impacts or trends that are likely to remain after the situation returns to normalcy, for example remote working, remote healthcare, digital community and others. Having these online practices transitioned into a new norm would help Vietnam in upping the game of digitalization, while a surge in FDI for manufacturing would also boost the GDP growth of the country. All in all, despite the temporary damage to its economy, Vietnam will soon be back on the rise, moving a step nearer to the other more developed countries.