Virus scare to cut Asia’s growth

Economies across Asia would likely grow at a slower pace during the first quarter due to the spread of the novel coronavirus (2019-nCoV) such that some countries, including the Philippines, are expected to cut interest rates as soon as possible to soften the landing, London-based Capital Economics said.

“Before the coronavirus hit, the latest data suggested the region’s economies had turned a corner. However, the spread of the virus is likely to lead to a sharp slowdown in growth this quarter,” Capital Economics said in Jan. 30 report titled “Coronavirus to prompt further rate cuts.”

“At least initially, the main channel through which the region will be affected is by a decline in tourism. Hong Kong, Cambodia and Thailand looks most vulnerable to a sharp drop in Chinese tourist arrivals,” Capital Economics said.

“The impact will be much greater if the virus spreads further across the rest of Asia [so far, the vast majority of cases have been in China]. This would cause a slump in domestic spending as people stay away from shops and restaurants for fear of infection. The impact will also depend on how much disruption is caused to the industrial sector. The decision by China to extend factory closures following the new year holiday will soon start to disrupt regional supply chains,” Capital Economics added.

Capital Economics noted that monetary authorities across the region were already moving to ease policy rates.

On Thursday, Sri Lanka cut its interest rates “in part due to fears over the spread of the virus,” Capital Economics said.

“We expect the central banks of Thailand and the Philippines to cut rates at their scheduled meetings next week,” Capital Economics said. The Monetary Board, the Bangko Sentral ng Pilipinas’ (BSP) highest policy-making body, will meet to tackle its monetary policy stance on Feb. 6.

In the case of the Philippines, Capital Economics said that while headline inflation picked up last December, the rate “should drop back a little in the next couple of months as the impact of bad weather on food prices fades.”

It was in December when the Philippines was battered by two strong typhoons, “Tisoy” and “Ursula,” which pushed food prices higher.

“Provided inflation doesn’t rise further, we expect the central bank to cut its main policy rate to 3.75 percent at its first meeting of the year. It’s a close call, but given the potential impact of the coronavirus on the tourism industry, we think the [BSP] will opt to ease sooner rather than later,” Capital Economics said.

Last Thursday night, Socioeconomic Planning Secretary Ernesto M. Pernia said 2019-nCoV would have a “short-term effect” on the country’s growing tourism sector as China was the Philippines’ second-largest source of inbound visitors.

The Chinese government already banned outbound travel of its citizens to prevent the spread of the disease.