WHEN China catches a cold, the rest of the world shudders. The global panic caused by Wuhan’s coronavirus outbreak is a classic case that is not to be taken lightly.
The World Health Organisation (WHO) has declared that the new coronavirus (nCoV) that originated largely from the China city is a global public health emergency.
The declaration calls for greater preventive measures and stringent screening at all check points, as well as adoption of quarantine procedures to minimise the spread to contain the virus outbreak.
While the global economy was showing signs of stabilisation recently, the unexpected outbreak last month has created havoc and posed downside risk to the global economy and China, already experiencing weaker growth trajectory.
While China has imposed a lockdown in several cities led by Wuhan, Hubei and Wenzhou, it is facing rising isolation as countries worldwide have imposed travel restrictions, suspended flights and repatriated their citizens.These reactions could worsen slowdown in the world’s second-largest economy, as well as its trading partners, due to rising globalisation of the world economy.In 2018, China contributed 15.8% of world’s GDP; 11.7% of total trade. Chinese outbound travellers made up 9.1% of international tourists; and Chinese tourists’ expenditure abroad accounted for 17.8% of global tourist expenditure.
While China and other governments are more prepared to manage the new virus compared with the SARs outbreak in 2003, a temporary disruption to China and world economy in is inevitable and is happening.Hopefully we can see a post-epidemic stabilisation and rebound in the second half of this year.
With Wuhan – the hub of transport, logistic, auto and technology manufacturing for central China – being the epicentre of coronavirus outbreak, the first and second order economic impact of the virus will shave off between 1.0 and 1.5 percentage points from China’s gross domestic product (GDP) in the first half, with the impact felt most severely in transport, tourism and retail sales.Cautious consumer sentiment and avoidance of crowded places would dent consumer spending. And factory production would be disrupted by the lockdown and extended Chinese New Year holiday break in China.
The spill-over economic effects on the Asia-Pacific region will depend on the extent to which the coronavirus crawls outside China.
And many of the countries in Asean are feeling the heat.
Asean grew to be China’s second-largest trading group in the first half of 2019, after China became its largest trading partner for nine consecutive years.China’s market share of Asean exports is at 14% in 2018 compared with 6.5% in 2003. Within the same period, Chinese tourists in Asean had grown almost 10 times, from 2.9 million in 2003 to 27 million in 2018.
This means that Asean’s trade and services will be hit if the virus outbreak cripples China’s economic growth and slows consumer spending.
China’s move to ban its outbound group tours, along with entry restrictions imposed by some countries, will hurt Asean tourism and related services.Countries with a weak health system will be more vulnerable to the virus. Travel restrictions to China and its outbound travelling, suspended flights, cancelled tours would have knock-on effects on the services sector in regional economies.Manufacturing and industrial activities will be dampened via the supply chains disruption in China and lower demand from China. And some Asean countries such as Vietnam are feeling the impact on the export of its fruits.
For Malaysia, China remains an important trade and economic partner: > China is Malaysia’s largest trading partner (17.2% of Malaysia’s total external trade); largest exporter (14.2% of total exports) and largest importer (20.7% of total imports).
> China is ranked as the tenth largest foreign investor in Malaysia. As at end-September 2019, China’s accumulated FDI stood at RM18.3bil or 2.7% of Malaysia’s total FDI.
> Malaysia’s direct investment stock in China amounted to RM9.9bil or 1.9% of China’s total. China was ranked as the 11th largest Malaysia’s outward direct investment destination.
> China’s share of Malaysia’s tourism receipts stood at RM12.3bil or 14.6% of total receipts in 2018. Chinese tourists of about three million made up 11.4% of total tourists in Malaysia.Without a doubt, the coronavirus outbreak will be a bane to Malaysia’s services and tourism-related sectors as 2020 is Visit Malaysia Year.
The government’s target is to attract 30 million tourists and get RM100bil foreign exchange earnings (or 6.2% of GDP). We are setting a target to bring in 3.48 million Chinese tourists in 2020.From January to September 2019, Chinese tourists increased by 5.7% year-on-year to 2.4 million or 12.0% of total tourist arrivals.
The country is now ranked as Malaysia’s third largest source of tourist arrivals.Reduced travel, if prolonged, would have severe effect on transportation that is linked to airline, travel, tourism, and hospitality sectors.
The wholesale, retail, hotel and restaurants as well as transport and communications will be the main casualties. These services have a combined share of 22.3% of GDP.
During the SARS outbreak, Malaysia’s overall services sector suffered two consecutive quarters of a sharp slowdown.
In 2003, the number of Chinese tourists also dropped sharply.
This time around, the drag on Malaysia’s economy – resulting from the anticipated slowdown in services sector – will be more pronounced due to a higher share of services to GDP (56.7% in 2018 vs 50.5% in 2003) and moderate growth in manufacturing, mining and agriculture sectors as well as slow recovery in exports.
The domestic economy is largely depending on private consumption (57.0% of GDP) amid still-sluggish private investment and public spending.Overall, it is estimated that a 1% lower in China’s economic growth and 1% decline in Malaysia’s tourism receipts (which accounted for 5.8% of total GDP) could shave off between 0.5 and 1.0 percentage points off Socio-Economic Research Centre’s (SERC) GDP growth estimate of 4.5% for 2020.
Another spillover could be felt in the financial markets. Equity markets’ volatility across the region has edged higher while the ringgit has depreciated against the US dollar, which is not surprising given the tendency to co-move with the Chinese yuan.
It must be cautioned that a prolonged volatility in equity markets could lead to broader risk aversion, and could lead to a tightening of financial conditions.
Bank Negara’s 50 basis points reduction in interest rates in May last year and January this year to 2.75% would provide insurance to protect economic growth.
But the government must expedite the implementation of projects and programmes, identify some quick-gain projects for fast-track implementation.In view of the latest development in China, Malaysia must be prepared to brace for economic fallout from the outbreak. If the epidemic prolongs, there will be notable impact on the economy, business activities and consumer sentiment.We at the SERC propose the following measures to mitigate the impact of coronavirus on domestic tourism-related sectors:
> Government should give full, accurate and timely information to build public awareness of the infection and prevent of the spread of disease.
> Full screening of all arriving passengers from areas with recent transmission of coronavirus to ensure effective control of virus transmission, and put in place quarantine procedure.> Set up a tourism relief fund.
> Provide tax relief and allowance for the hospitality sector, including for tour operators and agencies.
> Banks to provide three to six months debt servicing relief to the hospitality sector, including tour operators and agencies.
> Allow one-year tourism tax exemption.
> The government to partner with the malls and tour operators to encourage inbound tourism, family outing and shopping on weekends and public holidays. This can be done by giving out tourism voucher or group discounts.
> Top-up e-wallets to encourage e-payment spending.
> Voluntary 2% reduction in employee contribution to the Employees Provident Fund.
Lee Heng Guie is the executive director of SERC, a private think tank set up by the Associated Chinese Chambers of Commerce and Industry of Malaysia. The views expressed here are the writer’s own.
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