China was the epicentre of both virus outbreaks that soon became deadly global pandemics.
In a span of just six months, SARS killed 774 people worldwide, with 349 deaths in China alone. The country was the worst affected as its economic growth was slashed by over 1 percentage point and local industries such as tourism were severely impacted.
To put it into perspective, a research published in 2004 by China’s Peking University estimated that China’s losses from the impact of SARS on tourism alone in 2003 could have been as high as US$16.8bil.
The market now fears a repeat of a similar episode with the spread of the novel coronavirus, which could turn out uglier than before.
The reason is simple – today’s China is a different animal altogether than what it was back in late 2002 when SARS broke out.
China is currently the world’s largest economy on a purchasing power parity basis and it controlled almost 20% of global gross domestic product (GDP) in 2019, according to the International Monetary Fund.
The United States, on the other hand, represents 15% of global GDP share.
Back in 2003, China’s economy was only less than 9% of the global economy while the US controlled over 19%.
Meanwhile, based on World Trade Organisation data, China is the biggest exporter to the world and controlled about US$2.49 trillion or 12.8% of global merchandise exports in 2018.
The US is the second largest exporter, with a US$1.66 trillion share of global merchandise exports.
In terms of merchandise imports, China is the world’s biggest. In 2018, it imported US$2.14 trillion worth of merchandise, which represents 10.75% of global merchandise imports.
China ranks just below the US, which imported US$2.61 trillion or 13.16% of global share.
The figures show the sheer size of China’s economy and how it is intertwined to the global economy.
Any disruption to China’s growth due to the ongoing virus outbreak will be a major hit to the global supply chain, at a time when the country’s economy is already growing at the lowest rate in decades.
Malaysia, too, has its reasons to worry about the impact of novel coronavirus on China.
Today, the Malaysian economy is more correlated and integrated to the Chinese economy as compared to 18 years ago. Local industries such as electrical and electronics, tourism, aviation and plantation, among others, rely heavily on Chinese demand.
Jayant Menon, lead economist of Asian Development Bank, says that even a less pernicious outcome with the Wuhan virus could have a significant impact on Malaysia, since the country’s economic ties with China are significantly stronger than they were during the SARS outbreak
“Malaysia’s exports to and imports from China are mostly related to the regional and global supply chains. These flows will be impacted not directly by the virus but indirectly by the impact that the virus is having on growth prospects of China, the region and the world,” he says.
Back in 2003, China ranked as Malaysia’s fourth largest trading partner, with exports to China only worth RM25.8bil or 6.5% of total exports.
Imports by Malaysia from China were valued at RM27.63bil or 8.7% of Malaysia’s total imports in 2003.
However, by 2018, the narratives have changed. China is the country’s largest trading partner and Malaysia exported items worth RM138.9bil or 13.9% of total exports to China.
In 2018, imports from China were worth RM174.9bil, representing 19.9% of total imports.
Demand from China is also instrumental to the Malaysian palm oil palm, as the former is the second largest palm oil buyer in 2019.
Foreign investment-wise, China was not even in the top five investors’ list back in 2003, but by 2018, it is the largest investor by country in Malaysia, according to the Malaysian Investment Development Authority.
The SARS outbreak shaved off about 0.15% of Malaysia’s GDP in 2003. This time around, experts predict a bigger impact on the Malaysian economy.
In a reply to StarBizWeek, Moody’s Analytics economist Denise Cheok says the novel coronavirus could lower Malaysia’s GDP growth in a “reasonable range of between 0.1% and 0.2%”.
Alliance Bank Malaysia Bhd chief economist Manokaran Mottain expects a 0.2% to 0.3% cut in GDP.
“We are looking to revise our 2020 GDP forecast lower, from 4.5% to 4.2%, in view of the impact of the outbreak on the global economy via trade and investment flows, falling commodity prices and shortfall in tourist arrival this year,” he says.
Meanwhile, AmBank Group chief economist Anthony Dass says if the full-blown impact from coronavirus is felt in the second quarter of this year and ease off thereafter, it could reduce Malaysia’s GDP growth by 0.6% to 1.0% for the quarter.
“This is the base case. We expect a 1.2% to 1.6% cut as the worst case for the quarter.
“Irrespective of falling into our base or worst-case scenario, it will be strenuous on the economy under the current conditions, unlike in 2003. Much depends on how fast and effective the policies are rolled out as containment measures. Such policy measures can result in a higher cost on the economy in the near term,” he says.
Maybank Kim Eng Research says in a note that Malaysia will see “a small impact” from the Wuhan virus, while countries like Singapore and Thailand are likely to be most impacted and could see some growth downgrades.
On the other hand, Indonesia and the Philippines will probably be the least impacted.
Impact on sectors
Moody’s Analytics’ Denise says the most impacted sectors in Malaysia would be the services-related sectors such as tourism and hospitality as tourist numbers fall.
“This might not be limited to Chinese tourists but also includes tourists from other regions who might limit their travel into Asia,” she says.
This year, Malaysia expects to receive 30 million tourists from across the world under the Visit Malaysia Year 2020 campaign. About 10% or 3.2 million tourists are expected to come from China.
Manokaran of Alliance Bank says the target may not be achieved if the Wuhan virus continues to worsen.
“Since the Malaysian government has halted all immigration facilities including issuing visas for Chinese citizens from the affected areas, a significant drop in the total tourist receipts can be seen during the first half of 2020, assuming the outbreak could persist at least until mid-2020.
“Direct impact can be seen on airlines, wholesale and retail as well as hotel and restaurants,” he says.
Malaysia’s tourism industry is currently the country’s third-biggest foreign income earner behind manufacturing and palm oil. In 2018, Chinese tourist receipts accounted for about 15% of Malaysia’s total tourist receipts.
Denise points out that Malaysia’s key export sectors such as technology products would be hit if China’s manufacturing sector remains down for an extended period.
Malaysia is known for its substantial exports of electrical and electronics products such as semiconductors to China.
As China’s industrial productions are expected to slow down on the back of the Wuhan virus outbreak, concerns are high on whether it will result in reduced crude oil demand and lower oil prices.
Denise says that as a net exporter of oil, falling oil prices would affect Malaysia’s exports.
Continued low crude oil price is a threat to the government’s coffers, given the significant reliance on petroleum-related revenue. For context, in 2018, about 23% of the government’s revenue are petroleum related.
The Wuhan virus escalation will also be negative to Malaysia’s palm oil sales if demand from China takes a hit. It is worth noting that China is the second biggest buyer of Malaysian palm oil in 2019.
Given that India - Malaysia’s biggest palm oil buyer – has been slashing its purchase at an alarming rate post-controversial statement by Prime Minister Tun Dr Mahathir Mohamad on the Kashmir crisis, lower palm oil purchase by China would be a double whammy for plantation players, especially the smallholders.
Currently, the market jittery is already reflected in the crude palm oil prices as futures prices have dropped by about 14.5% in January 2020 alone and traded slightly above the US$2,600-mark on Jan 31.
Moving forward, FXTM market analyst Han Tan tells StarBizWeek that a worsening novel coronavirus outbreak would threaten the still-fragile narrative surrounding a global economic recovery in 2020.
“Should health authorities struggle to contain the virus’ spread for an extended period, the pessimistic sentiment may trigger a prolonged pullback in riskier assets and real economic activity, while weighing on global GDP for the year,” he says.
On the potential impact on the ringgit, Tan says that as long as the virus outbreak persists, riskier assets such as Asian currencies including the ringgit are expected to maintain a bias towards the downside.
“However, it is important to note that policymakers in China and Malaysia have sufficient policy buffers to offset an economic slowdown that could stem from this viral outbreak,” Tan adds.
AmBank’s Dass believes that if the virus outbreak becomes more widespread, the demand for defensive assets such as the Japanese yen and Swiss franc will rise.
Investor interest will also focus more on assets with high liquidity such as the US Treasuries, allowing the US dollar to gain some support.
A stronger US dollar could exert downward pressure on the ringgit, causing the local note to weaken.
“As for emerging markets, the worry will be on the lack of liquidity and that could undermine their currencies. Affected countries’ currencies risk more upside against the dollar. Focus will be on the South Korean won and Chinese yuan.
“If infections become more widespread and region-wide, the rest of Asia would likely suffer, especially the Singapore dollar and Thai baht. The ringgit will depend on the direction of yuan and oil price, besides the domestic policy measures instituted,” he says.
For now, the market remains cautious on the Wuhan virus’ potential impact on Malaysia and the economy.
Amid the concerns, Dass believes the country still has some room for monetary policy adjustments and fiscal stimulus, albeit limited.
“Bank Negara could still reduce rates by another 25 basis point (bps) to 50bps, if the external risk continues to be the main concern, from the current 2.75% level,” he adds.
Despite the mounting concerns, it is believed that China has the novel coronavirus under a better control as compared to the 2002-2003 SARS outbreak.
The World Health Organisation’s director-general Tedros Adhanom Ghebreyesus has said that the international body “continues to have confidence in China’s capacity to control the outbreak.”
AmBank’s Dass is positive that the outbreak could be solved globally by the end of the first quarter of 2020 or by early second quarter.
In contrast, the SARS lasted for about six months. The sooner the outbreak is solved, the minimal the impact would be on global economy. Alliance Bank’s Manokaran points out that there are chances for Chinese consumption to be impacted lesser than expected, considering the existence of online delivery services and banking services, among others, through the advancement of technology and e-commerce.
“This will support local economic activities.
“Big firms in Wuhan had also informed their employees to work from home. This, in a way, ensures the production line won’t be totally compromised,” he says.
On the bright side, the novel coronavirus outbreak has opened up more opportunities for certain Malaysian businesses, particularly in the medical-related sectors such as glove manufacturing.
Local glove makers, who are among the world’s leading manufacturers, would be the key beneficiaries of the higher demand for medical gloves from China and other affected countries.
The fact that the Finance Minister Lim Guan Eng has said on Jan 30 that the government is considering to inject an economic stimulus package to handle the impact of the novel coronavirus, creates optimism.
The stimulus, if introduced, would help to minimise the impact on sectors that have been affected by the Wuhan virus and support the overall economic growth.
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