Coronavirus fears lie at the intersection of health and economics

As fears grow, the economic impacts of coronavirus on Southeast Asia could be significant.  

By Zachary Frye

The threat of novel coronavirus, a strain of viruses closely related to those that caused the  SARS and MERS outbreaks in 2002 and 2012 shows no signs of abating. 

Emerging in Wuhan, China in late December 2019, the virus has since killed over 1,000 Chinese citizens, mostly in Hubei Province, where Wuhan is located.

Although deaths, at least so far, have been limited to central China, the virus has spread globally. To date, 43,000 people from 26 countries have been infected.

Just over 400 of these cases were confirmed outside of China.

In response, many countries put warnings on travel to mainland China, complicating business and trade. China’s status as a regional economic hub has prompted Southeast Asian nations to brace for long-term economic disruption.

For ASEAN nations, a reduction in Chinese tourism, coupled with a general slowdown in economic exchange and output with Chinese partners, will dent growth predictions.

Chinese tourism figures are already taking a hit. China is by far the largest single contributor to regional tourism. In 2015, the most recent year of published numbers, Chinese tourism accounted for over 17% of the total tourism share in ASEAN.

Thailand, the most popular ASEAN nation for Chinese holidaymakers, saw over 10 million Chinese tourists in 2019. As the outbreak drags on, however, Thailand is set to lose some 109 billion baht ($US 3.5 billion), representing a 15% reduction in Chinese arrivals in 2020.

The same story is playing out across the region. Singapore estimates it is losing 20,000 Chinese visitors a day due to the outbreak. The Singapore Tourism Board has tentatively predicted a 30% drop in tourism revenues this year.

Global institutions brace for losses

According to Khoon Goh, head of Asia research at ANZ, an international banking company headquartered in Australia, the virus will have a wide impact on local economies.

“There is a huge exposure of the Thai economy to a downturn in outbound travel from China. The baht has weakened in reaction, along with currencies in the rest of the region,” he said.

In a conversation with ASEAN Today, Chris Rogers, a Research Analyst at Panjiva, S&P Global Market Intelligence, warned that the threats posed by the virus to global supply chains are significant.

“One risk from coronavirus disruptions is that China might not meet its 2020 purchasing commitments resulting from the Phase One US-China trade deal,” he said.

As part of the deal signed in January, China is obliged to purchase US$200 billion worth of US good and services in 2020 and 2021. With a huge of amount of uncertainty in Hubei province, those promises could become a liability.  

“With over 450 US importers exposed to the Hubei region, the breadth of potential supply chain risks is clear,” Rogers added.

China’s backtracking on the Phase One deal could lead to a return of US-Chinese tensions. However, the limited scope of the Phase One deal means that even if US-China trade tensions resume, most Southeast Asian companies wouldn’t see their circumstances changed. Most of the tariffs between the two countries remain in place.

Impacts on regional banks could be especially high

The coronavirus will have impacts on the health of regional banks.

According to research by S&P Global Rankings, banks in Singapore, a global financial hub, will “suffer weaker loan growth and more volatile earnings as the coronavirus outbreak slows economic activity.”

Singaporean banks are equipped with “good capital buffers” to withstand the immediate threat, but if the virus spreads and deaths escalate, threats to the financial sector could become more pronounced.

“Retail and tourism are particularly vulnerable,” says S&P credit analyst Ivan Tan.

According to S&P, banks in Thailand could suffer the worst in the region. The Thai economy is already in the grip of an economic slowdown due to weak external demand. The coronavirus only makes things worse.

“We believe the outbreak will have a greater impact on Thai banks than on any other banking system in the Association of Southeast Asian Nations (ASEAN), given the country’s high credit risk and high linkages with China for tourism and trade,” said S&P Global Ratings analyst Deepali Seth-Chhabria.

Proper outbreak responses will be necessary to mitigate further losses

Regional economic threats posed by the spread of novel coronavirus aren’t just limited to Thailand and Singapore.

Beijing’s economic rise over the past several decades led to deep integration with Southeast Asian economies. Many ASEAN countries aren’t just linked with China’s economic growth – oftentimes they rely on it.

As such, the spread of coronavirus, and especially the concern of runaway transmission on the mainland, weigh heavy on all regional partners.

Even before the virus took hold, Indonesia was fighting economic slowdown. Interest rates had been cut four times by the Indonesian Central Bank. Fears of further slowdown caused by the outbreak are fueling speculation over further rate cuts.

Chinese tourists account for some 13% of the total visitors to Indonesia. China is also Indonesia’s biggest export customer, with over $25 billion worth of goods flowing into the country in 2017. Any supply chain disruption will be acutely felt.

Similar economic realities can be found throughout the region. In the Philippines, projections indicate that a prolonged outbreak could knock 0.7% off of GDP projections.

China is the Philippines biggest supplier of imported goods, accounting for as much as $22.6 billion of trade between the two nations from January to November 2019.

It will be imperative that local governments take as many preventative steps as possible to prevent transmission within their borders. While China’s domestic response has been strong, some ASEAN nations don’t have the public health infrastructure to withstand a large-scale outbreak.

As such, only rigorous quarantine and prevention efforts can properly reduce transmission risks in Southeast Asia. In addition to stopping the spread of the deadly virus, this would also mitigate regional economic losses.

ASEAN nations should keep in mind that their financial livelihoods are too intertwined with Beijing to come out of the coronavirus debacle unscathed. At this point, the most practical offence may be a good defence.