Since its initial detection in China last year, the world’s newest strain of coronavirus has spread quickly, infecting more than 90,000 people and causing thousands of deaths globally as of March 3. Responding to economic fears associated with the virus, the Federal Reserve that day cut interest rates by half a percentage point in a move to help shield the U.S. from a potential downturn.
But the virus isn’t the only factor pressuring the recent run of economic prosperity experienced in the U.S. and elsewhere. In today’s global economy, central bankers setting economic policy have to consider all types of threats, such as technological developments, climate change, and business disruptions caused by geopolitical conflicts.
Yaseen Anwar W72 C72—a seasoned banker who, among other high-level positions around the world, previously led Pakistan’s central bank as its governor—recently shared his thoughts on these issues, along with some fond memories of his time on campus, with Wharton Magazine. Anwar will also offer his economic insights as a panelist at the upcoming Wharton Global Forum in Singapore, June 12–13.
Wharton Magazine: What effect is the coronavirus outbreak having on banking and the global economy?
Yaseen Anwar: Risks and shocks to the global economy are not new. Cataclysmic events such as disease or a global war in the Middle East that shuts the Straits of Hormuz have long created major dislocations impacting most countries. The difference with coronavirus is that its epicenter is in China, which conducts a large slice of world trade as the second largest economy in the world. The virus has disrupted global supply chains, with no end in sight. While the manufacturing sector in China will adapt relatively quickly, the services sector will probably be more adversely impacted, as China has shifted from being a factory to the world toward a more services-oriented economy over the past decade. As such, China’s growth rates—and those in many other countries—will be lower in 2020 and possibly beyond.
Banks will face an increase in nonperforming loans and will need to conduct appropriate stress testing to cope with future uncertainty, especially in relation to sectors linked to supply chains. The key dangers are stigma and fear associated with the virus that are likely to prolong the economic impact on some sectors, like travel and leisure, where airlines and cruise lines will be affected. Going forward, continued uncertainty surrounding the epidemic will shake both supply and demand and likely lead to a long-awaited recession.
WM: Given developments like the emergence of cryptocurrency and Facebook’s decision to create its own digital currency, how are central banks adapting to major technological change in today’s society?
YA: Trust between central banks and the public is the hallmark to maintaining price and financial stability. Public trust in the international monetary system was shaken during the financial crisis when venerable Wall Street institutions collapsed and left the world with years of slow growth. Unforeseen and misunderstood risks left central banks in a reactive mode to mend the fences and prevent a repeat.
Treasury and finance professionals believe cybersecurity risks are among the most challenging risks to manage today. Technological innovation in the payments space is good for consumers, and central banks must keep pace with the risk landscape without compromising financial inclusion. To manage it, they must devote attention first to their domestic markets and establish appropriate regulations and national payments councils that many emerging markets don’t have.
The challenges in regulating cryptocurrency and other similar payments need to be carefully assessed before we are forced to confront unintended consequences. Cash in circulation has been regulated in a controlled environment by central banks. Digital currencies, meanwhile, may not necessarily be completely under the control of central banks. National payments councils that include all stakeholders aside from the central banks need to be all-encompassing in assessing the inherent risks with clear regulations before they launch cryptocurrencies and potentially weaken our trust in the international monetary system again.
WM: What other global developments should central bankers be watching carefully this year?
YA: Given the shocks to the global economy that we are facing—and will continue to face—in 2020, it is incumbent on central banks to ensure inclusive and sustainable growth isn’t stifled. We must take proactive measures to provide sorely needed capital and appropriate macro-prudential regulations to stimulate growth that will spur employment and urbanization in emerging markets. Two areas that need attention are infrastructure financing and green finance.
Wharton alum Michael Milken WG70 created the “junk bond” market in the 1980s to enable smaller nonrated companies to access capital. Besides triggering new opportunities for investors, this stimulated overall economic growth through new jobs and increased consumer purchasing power. Like Milken’s strategy, China’s multitrillion-dollar Belt and Road Initiative for infrastructure financing gives access to capital to certain emerging-market economies that haven’t been able to tap international bond markets. These economies have never had the opportunity to attract offshore investors who require ratings dictated by their corporate policies. The four largest recipient countries are Pakistan, with about $62 billion, and, Bangladesh, Malaysia, and the Philippines, each with over $30 billion. Because of the prevailing uncertainty from the coronavirus, severe supply dislocations, and the market correction at the end of February, Belt and Road’s importance has been elevated. Infrastructure financing under the initiative focuses on areas such as power, roads, bridges, transportation, and alternative energy and is supported by green finance.
The second area of concern is the seriousness of climate change and the danger central banks face of falling into complacency in assessing risk. Central banks traditionally managed conventional risks, but today—with the diversity of financial products—they are also assessing factors like climate-related risks that hadn’t manifested themselves earlier. BlackRock, one of the world’s largest asset managers, has already announced investment in ESG standards under the United Nations guidelines. The U.K. and China have launched the Green Investment Principles to support Belt and Road-related projects in support of environmentally friendly projects. This is supported by the OECD countries as well. Without being responsible for this function, central banks may need to initiate mandatory disclosure by the financial sector to elevate the pace of Belt and Road investments that ensure openness, cleanliness, and green financing with sustainability.
WM: What moments or experiences during your time at Wharton have stuck with you most over the years?
YA: While my Wharton experience left me with many memories and opportunities, a few have left indelible marks.
My class of ’72 was the last at Penn that was required to have dinner together at the Freshman Commons (Houston Hall), with jackets and ties and being served by waiters. This daily event gave us the opportunity to meet with classmates from around the country and the world, an experience I would have never had otherwise.
The extreme brightness and diversity of our class also helped me form staunch friendships in the men’s dorms. Shared values, principles, and trust converged with two: Dick Leech W70 and Charlie Schliebs W72. Both extremely bright, Leech became a top bank analyst on Wall Street and Charlie one of the top corporate lawyers with Jones Day, and both helped me immensely in developing my own skill set, another byproduct of Wharton’s long permanent reach. I should add that I reciprocated with my own contribution, teaching Charlie from Kansas the difference between a tennis racquet and a squash racquet! Dick, on the other hand, managed to travel to places he might not have, visiting me in Cairo when I worked there for a couple years with Bank of America, and he learned how to ride with the trainer who had starred in Lawrence of Arabia. A few years later, he flew all the way to Pakistan from New York to attend my wedding. I believe he even took a little time out to visit parts of the country that I’ve never seen! Through our continuous interactions, we are much more knowledgeable and on the pulse of geopolitical events unfolding today.
