The novel coronavirus outbreak is likely to cause a sharp but temporary interruption to first-quarter economic growth in Asian emerging markets, but the Philippines is among those that are less likely to bear the brunt, investment house Morgan Stanley said.
The exact macroeconomic impact on the region will depend on the severity and duration of the coronavirus episode and will likely come through via first-round impact such as tourism/travel, retail sales and disruption/reorientation of production activities given capacity closures, Morgan Stanley said in a Feb. 3 research note.
The second-round impact will be felt in the form of weaker sentiment arising from uncertainty and the spillover effects from China’s slowdown, the research said. It noted that travel statistics in some economies in emerging Asia during the Lunar New Year turnover already turned out to be weak, if not weaker than the 2003 Severe Acute Respiratory Syndrome (SARS) contagion.
“The higher trade/travel linkages versus SARS and strict containment efforts mean that the growth impact is likely to be sharp but temporary. Outside of China in the rest of AxJ (Asia excluding Japan), Hong Kong, Singapore, Thailand, Malaysia, Taiwan and Korea are more exposed to growth implications. India, Indonesia and the Philippines are less so,” the research said.
But more fiscal and monetary support are seen likely if the virus would take two months to peak. “Beyond the sharp but temporary growth interruption, we expect growth to normalize and a gradual recovery to resume on the back of easing trade tensions and continued policy support,” the research added.
Morgan Stanley recalled that during the 2003 SARS episode, macroeconomic indicators such as tourist arrivals, retail sales and industrial production had shown material deceleration. It took four months from the onset of the contagion for these indicators to bottom before showing improvement at that time.
But compared to the SARS episode, Morgan Stanley noted that emerging Asia’s exposure to the macro impact from a public health threat now seemed bigger, given the region’s mostly higher tourism revenue-to-gross domestic product (GDP), higher share of Chinese tourist arrival and higher trade linkages with China in terms of integrated supply chains and catering to China’s domestic demand to date.
In addition, the starting point for emerging Asia’s growth is seen lower today. Together with the strict travel curbs and containment efforts that have come in earlier compared to the SARS episode, the investment house suggested that the macro impact would likely be sharp in the near-term.
“The macro impact would to a certain extent depend on how the incidence of infected cases in each specific economy evolve. Nonetheless all else equal, outside of China where the public health threat first emerged, we think AxJ economies which are more exposed to sharp but temporary macro impact from 2019-nCoV are those with high tourism and trade linkages (with China and overall) These include Hong Kong, Singapore, Thailand, Malaysia, Taiwan and Korea. In comparison, economies such as India, Indonesia and the Philippines are likely less exposed,” the research noted.
On the tourism front, Morgan Stanley noted that Hong Kong, Thailand, China, Malaysia and Singapore had some of the highest tourism revenue-to-GDP ratio in the region.
On trade linkages, the research said capacity closure in China would mean a rundown in inventories and possibly disruption of production supply lines in emerging Asia. For instance, the extension of the Lunar New Year weeklong holiday by three days, which included one weekend and one working day, could affect China’s January-to-February industrial production by at least 1.5 to 2 percentage points to as high as 5 to 8 percentage points.
Economies which have relatively high trade linkage with China and high export orientation are the likes of Hong Kong, Singapore, Malaysia, Taiwan and Korea, the research said. INQ