Revisiting the impact of the coronavirus
■ The number of coronavirus patients is still on the rise, with the latest data showing 76,778 confirmed cases, 2,247 deaths and 18,418 recoveries. Although the number of new cases has begun to decline, it remains uncertain when the peak will be reached. Moreover, the outbreak has exacted heavy tolls on many economies. In response, many central banks in EM Asia have aggressively eased monetary policies to mitigate the downside risks.
■ The People’s Bank of China, for example, slashed its one-year interbank rate on Feb 17 by 10 basis points to 3.15%, a second rate cut since November 2019. The central bank has also introduced the 1Y Medium Lending Facility (MLF) of 200 billion yuan and reduced its short-term reverse repo rate by the same amount earlier this month. Following the MLF cut, the one-year Loan Prime Rate (LPR) dropped last week to 4.05% from 4.15%, while the five-year rate declined to 4.75% from 4.80%.
■ For the rest of Asia, the epidemic is threatening tourism industry in various countries. Japan, for example, has already cancelled the Tokyo Marathon, with the possibility of cancelling this year’s Tokyo Olympics scheduled for July 24 to Aug 9 should the coronavirus epidemic worsen. On the brink of a recession, a cancellation of the Olympics is likely to shave another 0.2% off Japan’s GDP this year.
■ Also, factory shutdowns in China are leading to a sharp drop in the demand for the region’s intermediate goods exports, as well as reducing the available supply of Chinese inputs for businesses. Adjusting supply chains, especially in emerging Asia, might be difficult because Chinese goods make up a large share of imported inputs in numerous sectors in the region. For instance, Chinese products make up at least 40% of many of Vietnam’s imported inputs. Although the magnitude of business disruption depends on the size of companies’ inventories, the popularity of just-in-time delivery across the region may imply that most companies are unlikely to have large inventories to meet prolonged disruptions.
■ With the current outbreak, the Thai economy could contract further this quarter through a sharp drop in tourist arrivals, especially from China (accounting for around 0.2% of Thailand’s GDP). If Chinese economy slows significantly, Thailand’s exports, in which exports to China account for approximately 5% of the GDP, will likely take a hit too. These factors prompted the NESDC to revise down the 2020 growth projection to 1.5-2.5% from 2.7-3.7%. The baht, along with the SET index, has fallen sharply, reflecting further deterioration in the economic activity and outlook.
■ Given these backdrops, the Bank of Thailand and numerous other central banks in the region have reduced their policy rates (Malaysia, China, the Philippines, Indonesia), while some are maintaining their dovish monetary stance (Singapore). Several countries are also turning towards fiscal easing to support their economies. Singapore, for example, has decided to spend S$6.4 billion (around 1% of its GDP) to counteract the slowdown.
■ In contrast to Asia, the US economy appears to be holding up well with the S&P500 continuing to make new highs and the US dollar at a three-year high while the EM Asia outlook has darkened. We think European and US markets appear to disregard the impact of the coronavirus outbreak. Global decoupling has proved many times to be a myth. Quite soon we expect risk assets in the advanced economies to correct sharply while safe-haven assets outperform, especially in the first half of 2020.