Our Capital Market system and ongoing economic shutdown; Does stock market closure really hold a long-term value?

Thu, Jun 25, 2020 7:36 AM on Economy, Exclusive,
Our Capita...

I would like to start by breaking the glass and making us clear that we are not having a financial shutdown but an economic shutdown in our country and around the world due to the Covid19 pandemic. Throughout the history of mankind, we have known that a financial shutdown is caused due to the counter party risk which can be easily solved by using the banking system’s balance sheet. Time and again, our NRB has been solving these problems through its monetary policies. However, when we see an economic shutdown as that of the Covid19 crisis, we cannot be sure about how deep the system has been penetrated by the breakdown. It is especially difficult for an economy such as ours which lacks a minimum standard of data collection; let along the qualitative ones. Coming out of these crises is difficult especially because it requires synchronization between various forces of the economy. It may be within and between private sectors, the public ones, and the government ones. Just the directives, circulars, and policies coming out of NRB may not be enough in a very young federal system of governance such as ours. In this regard, closing the capital market on the hopes of monetary policy solving this economic crisis may be a bad move from the regulator’s side.

One of the major functions of any capital market is to allocate the resources, i.e. matching the sources of funds with their uses for effective outcomes. The effective outcomes are only possible when the prices are effective. When a capital market operation is intervened, in our case by closing the market, we destroy the price signal and its efficiency. When the market finally opens after a long haul, people will no longer care about the fundamentals. They won’t care about the accuracy of the price of the underlying assets (i.e. the company) in the short run. The prices would hugely be based upon interest rates, inflation, and liquidity in the economy. As we have more retail investors in our capital market whose major source of income is elsewhere, they might even trigger an unknown chain of actions in order to secure cash as their safety nets in these uncertain times. Cash because it is liquid. Cash because their faith in the market system being liquid is faded now that the market has been closed for a long period of time. Cash because their major source of income, their salary has either gotten smaller or have not made to their bank accounts yet. Cash because few of them have lost their employment in these desperate times.

There is another side to this as well. We all know that the revenue runs the government. The more spending from a government, the more robust the national economy becomes. Tax revenues form a major part of government spending. Closing capital market of the country where hundreds and thousands of transactions take place every day is creating tax obligations and the government’s coffer unsurprisingly dries up again. This, in turn, is making the economy week.    

Finally, for adding a brick to the economic recovery, we should open our Capital market not fearing the short-run downturn but looking at the long-run stability, the economic growth, the inclusion, and overall capital formation in the economy along with a stable source of tax revenues to the government. This is only possible when the stakeholders, the participants have faith in this market. The faith can only be achieved and maintained when the market system operates according to the law with ethics and constantly evolves itself befriending technology. Shutting down the market is not a solution.

Astitwa Sharma

(The writer is an investor in the capital markets of Nepal for the past 10 years with a brief trading history in Indian Capital Markets)