Can APAC economies withstand the impact of the coronavirus outbreak?

• Asia Pacific economies are more exposed to the impact of the outbreak because of strong tourism and trade ties with China, but tend to have strong buffers against it
• Impact of the outbreak will be muted in the Americas and Europe
• A prolonged outbreak may bring forth disruptions to supply chains, keep commodity prices low, and pose further economic effects

As the coronavirus outbreak continues, Moody’s Investors Service sees impending negative repercussions to economies all around the globe, especially to those in the Asia Pacific (APAC) region. Strong trade and tourism ties with China make APAC economies more exposed to the outbreak’s impact, according to a recent Moody’s report.

"The most immediate economic implications from the coronavirus outbreak will manifest through a fall in tourist arrivals from, and weaker exports of goods to China and other economies integrated into the Chinese supply chain," noted Moody's vice president and senior analyst Anushka Shah.

A different report from Moody’s – an international financial research provider – has already noted a reduction in traffic at APAC airports and considered it a credit negative.

Strong economic buffers provide resilience

Despite the current situation, there is an expectation for these sovereigns’ credit profiles to remain resilient. Moody’s points to strong economic buffers that may be able to keep the outbreak’s negative effects to a minimum.

“The buffers available to most sovereigns that are particularly exposed through the trade and tourism channels are relatively strong, meaning credit-negative implications will be limited," said Shah.

The report noted that the impact would not be as intense in Europe and the Americas, citing modest trade and tourism links between countries in these regions and China.

The credit rating agency currently estimates the baseline for the economic implications of the outbreak to last for several weeks, with a gradual resumption of normal activity afterwards. In this short-term scenario, Moody’s expects a significant drop in the gross domestic product (GDP) growth of Hong Kong as well as Macao.

Malaysia, Singapore, South Korea, and Taiwan are also vulnerable to a fall in Chinese demand for goods because of their supply chain linkages. Weaker demand from China will also be felt by commodity producers in some countries in APAC, Africa and the Gulf.

Growth will also see a slowdown in tourism-dependent economies such as Cambodia, the Maldives, Thailand, and, to a lesser extent, Vietnam.

There is, however, the possibility of the outbreak lasting for much longer. If that happens, Moody’s expects a second wave of significant economic effects, which may include disruptions in supply chains as well as extended periods of lowered commodity prices.

In such an event, commodity-producing economies with weak credit profiles such as the Republic of Congo, Mongolia, and Zambia will take a harder blow. The asset quality and profitability of APAC banks may end up hurting as well.

“If the outbreak intensifies and the disruptions stemming from it are not contained in the next few months, we expect negative impact on banks in Asia Pacific through various channels,” said Eugene Tarzimanov, a Moody’s vice president and senior credit officer. While it may take many quarters for macroeconomic consequences to materialise, Tarzimanov said that these may have “a rapid knock-on effect on banks”.

In a separate report, Moody’s predicted mixed credit implications for US healthcare companies if the outbreak is prolonged. Medical device and pharmaceutical companies that manufacture or source products in China would have a difficult time, whilst demand for hospital services, medical products and devices, and certain drugs would increase at the same time.

The worsening impact of coronavirus

Almost two decades ago, a similar outbreak happened in China with SARS. The difference now with coronavirus is how more vulnerable China is to the economic impact of an outbreak.

"It has much higher debt, trade tensions with a major trading partner and its growth has been steadily slowing down for a number of years, which gives a weak starting point to face such a crisis," Dutch bank Rabobank senior economist Raphie Hayat told CNN in an interview.

Additionally, at the time of SARS in 2003, China only produced about 4% of the global GDP; now in 2020, the country accounts for about 16%. China has become an invaluable part of the global supply chain whilst also being a significant source of final demand with its huge consumer market.

Figures in the financial sector are now starting to say that the situation is worse than during the SARS outbreak. "This is, from an economic perspective, already bigger than SARS and it is just too early to say the overall macroeconomic impact,” said Bank of England governor Mark Carney.

As of 13 February, the death toll from the coronavirus outbreak has surpassed 1,300 in mainland China. More than 60,000 cases of infection have been recorded worldwide, the vast majority of which are in the Chinese mainland.

To read the latest analysis of the impact of the coronavirus on Asia Pacific financial system, please click here.