The management consulting firm looked at financial crises that have occurred over the last 40 years to determine if an external shock like Covid-19 could trigger another crisis.
The economic impact of Covid-19 has to be managed carefully, especially in markets with chronic underperformance in the real sector, where weaknesses can cascade onto a vulnerable financial system, McKinsey & Company said in a new report on the health of the Asian financial system, published today.
According to the report, modern economies rest on four elements: the real sector, the financial intermediation system, international money and capital flows, and public finances. The likelihood of a financial crisis, therefore, is a function of the degree of imbalance that exists in each economy across the four signposts.
If several elements are imbalanced simultaneously, the risk becomes «non-trivial,» particularly in the event of a resurgence of the virus, and if governments are unable to commit adequate stimulus funds, or if the stimulus does not lead to an uplift in demand or corporate profitability.
Domino Effect
McKinsey said that a domino effect of this imbalance can already be felt in both the financial intermediation system and the balance of payments position. Staggered lockdowns of two months could result in a full-year 2020 GDP contraction of approximately 2 to 3 percent in most major Asian economies, but a resurgence of the virus and lockdown extensions to four months could result in a contraction of 9 percent or more in certain markets like Malaysia, Singapore and Thailand, the report said.
«Unfortunately, in these unprecedented times, such a scenario is definitely within the realm of the possible. Policymakers must leverage all the tools they have to avoid simultaneous imbalances occurring across multiple elements,» the firm said.
According to McKinsey, the financial services sector in Asia has already lost over $920 billion in market value this year (as of May 20), driven largely by investor concerns around increasing non-performing assets in bank portfolios as a result of Covid-19 pandemic.
