Analyst says the impact on tourist arrivals from China and elsewhere would be enough to affect the campaign and the economy in 1H20

by DASHVEENJIT KAUR / pic by BLOOMBERG

AS CHINA battles with the deadly novel coronavirus, market analysts said the outbreak would affect the Visit Malaysia 2020 (VM2020) campaign and to a certain extent, the economy.

The spread of a deadly respiratory virus has prompted the authorities to limit travel in cities in central China, including Wuhan, where the disease was first found last month.

The death toll in China rose to 81 and nearly 2700 cases of infection were confirmed at press time.

Kenanga Investment Bank Bhd (Kenanga Research) in a report last week opined that even if coronavirus has yet to spread to Malaysia, the impact on tourist arrivals from China and elsewhere would be enough to affect VM2020 and to a certain extent the economy in at least the first half of 2020 (1H20).

“Given the pace in which the virus is spreading, especially due to heightened travelling activities during the Chinese New Year (CNY) holidays, the research arm foresees an elevated level of worries among consumers, potentially resulting in some adverse spillover to the economy.

“The World Health Organisation (WHO), however, has yet to declare the Wuhan outbreak a global emergency despite the spread of the dangerous respiratory infection from China to at least nine other countries,” it said.

Kenanga Research said the immediate concern is that the virus is spreading fast, further contributed by elevated travelling activities during CNY, as the Severe Acute Respiratory Syndrome (SARS) virus did in 2003.

The research arm said the coronavirus resembles the SARS virus, originated from Guangdong Province which saw a total of 5,327 reported cases and 349 reported deaths in China between November 2002 and July 2003.

“Like in 2003, we expect the Malaysian government to take pre-emptive fiscal and monetary measures to support tourism, as well as the retail and transport sectors. This would risk a wider fiscal deficit and a higher debt ratio to the GDP.

“Barring a full-blown epidemic or death toll increase at an alarming rate, we are maintaining our GDP forecast of 4.3% for this year,” it added.

Recap on the 2003 SARS

To recall, in 2003, South-East Asia was on high alert after the SARS virus spread to Vietnam, Singapore and the Philippines at the end of February, to Thailand in midMarch and eventually to Malaysia just a few days later.

Malaysia’s case-fatality ratio registered at 40% at the end of the outbreak, according to Kenanga Research.

The economy expanded at a softer pace, registering at a six-quarter low, purely due to the services sector, specifically a sharp fall in the wholesale and retail trade, as well as hotels and restaurants subsector.

Tourists’ activities also tapered, with tourist arrivals chartering a downtrend for two straight quarters.

“Of note, tourist arrivals from China edged down by 300,000 persons in 2003, with its share to overall tourist arrival decreased to 4% and remained on a downtrend up until 2005.

“The FTSE Bursa Malaysia KLCI (FBM KLCI) dropped by 42.19 points after the outbreak at Guangdong due to mounting fears over possible virus spreading to Malaysia. When the virus spread to Malaysia in mid of March 2003, FBM KLCI dipped 4.62% and stood at 619.22 points,” the research arm noted.

What About Now?

Based on the 2003 SARS experience, Kenanga Research said post assessment stipulates that the domestic economy was not able to fully thwart the impact of the epidemic as policy action was taken slightly late in the second quarter of 2003 (2Q03).

“Nevertheless, we expect authorities to be more proactive this time around and take necessary measures to support the economy before the coronavirus outbreak weighs on domestic demand.

“The house expects Bank Negara Malaysia (BNM) to cut the Overnight Policy Rate (OPR) by another 25 basis points to 2.5% probably at the next Monetary Policy Committee meeting in March or 2Q20,” it said.

It also expected the central bank to introduce a Special Relief Guarantee Fund for working capital to the affected companies during the outbreak.

Meanwhile, on the fiscal side, Kenanga Research said the government may want to impose similar measures it did back in 2003 as it had proven to be effective and the effect is almost immediate.

“The measures would mainly be rebates on utility bills, as well as reduction in the rate of taxes for hotels, restaurants, and taxis, typically those that are related to the tourism services sector.

“This means that it would be rather challenging for the government to maintain its fiscal deficit target of 3.2% of GDP in 2020, from an estimated 3.4% of GDP in 2019,” it said.

On the impact to the overall economy, Kenanga Research assumes the measures expected to be taken by the government would help soften the adverse spillover from the coronavirus.

In terms of credit ratings, Fitch Ratings Inc said the scale of the current Wuhan coronavirus outbreak would have to increase substantially to have a significant impact.

However, under such a scenario, the rating agency said it would expect global corporates exposed to travel and tourism to be most at risk of being affected.

“Should the Wuhan viral outbreak escalate sharply, we believe the macroeconomic effects would initially be felt the most in Asia, where the virus originated.

“On the whole, Asia-Pacific sovereigns have substantial financial buffers and room for further policy easing to offset any short term hit to economic activity from the outbreak, but their resilience to any health crisis would ultimately depend on its scale,” it said.

Fitch noted that the global airlines, gaming, lodging and leisure sectors are also vulnerable to pandemics that influence consumer behaviour.

It said service sector activity, particularly in fields associated with tourism, would be most vulnerable, which could leave economies such as Thailand, Vietnam and Singapore exposed, along with Hong Kong and Macau, both of which are already on negative outlook.

“Large-scale unpredictable events can cause immediate and severe disruptions in global travel demand that affect revenue, but are typically transitory.

“Financial implications ultimately depend on the severity and duration of the situation. Downside risks for Asian sovereigns would be mitigated by large financial buffers and easing of other macroeconomic risks,” the rating agency said.

Nevertheless, for sovereigns where medium-term fiscal consolidation is a priority, such as Malaysia and Sri Lanka, Fitch said there could be less room to relax fiscal policy in response to any downturn.