Coronavirus impact extends to ASEAN+3 economies

The outbreak of the new coronavirus is a tragedy for many, but its impact is not only hurting the people who have been infected and their families, it is also hurting the Chinese economy, and inevitably, the economy of ASEAN as well.

The ASEAN+3 Macroeconomic Research Office (AMRO) said the outbreak in China, which has spread to 28 other countries, has “heightened the risk to China’s and regional growth”. They said the epidemic is affecting the regional economic activity on various fronts. 

In China, the epidemic is putting pressure on the Chinese healthcare system and has resulted in lost wages and lower productivity from sick days and work stoppages. There are also disruptions in the transport manufacturing supply chain, the provision of most services, and the closure of schools and businesses.

“Fighting an epidemic could have a significant impact on the economy,” AMRO’s latest report on the epidemic read. The regional office, which looks at the economy of ASEAN+3 (China, Japan, South Korea), expects that China’s growth rate to be lowered by as much as 0.5 per cent because of the outbreak. 

Outside China, the economic spill-over effect has been felt by the aviation industry, the tourism sector and hospitality services, as well as trade, including global supply chains. They said the avoidance of public places and measures to prevent the spread of the epidemic can also add large strains on regional economies.

The spill-over effect and the slowdown of the Chinese economy could result in a deduction of 0.2 per cent from ASEAN+3’s growth, AMRO said. They said the regional economy will be impacted by a sharp drop in Chinese outbound travel and tourism, a drop in regional travel and tourism, a decline in China’s imports through the supply chain, and the transmission of the virus to regional economies. 

“Estimates of the impact of the disease would depend on its duration, virulence and contagiousness,” the report read.

AMRO said that the SARS outbreak in 2003 could provide some guidance on the potential impact of the coronavirus. The number of coronavirus infections “far exceeds” that of SARS infections and is expected to climb higher, but the average fatality rate for SARS was almost 10 per cent, compared to 2 per cent so far for the coronavirus. 

This suggests that SARS had a much lower contagion rate, possibly because it is not contagious during its incubation period. The regional office is assuming that the coronavirus outbreak would spread for about four months, similar to SARS, but with a lower fatality rate. The current outbreak of the coronavirus will also be “much more” widespread than SARS, as the main infected areas already cover regions that are China’s main economic centres. 

AMRO is now anticipating a sharp slowdown in China’s manufacturing and services sectors in the first quarter of 2020. “The epidemic’s impact on China is projected to be short-lived but significant,” they said. They said that in the near term, the restrictions on population movements are disruptive for both production and demand.

“In the manufacturing sector, the global supply chain centred in the affected regions would experience significant disruption,” AMRO said. “Most countries in the ASEAN+3 region have already been infected by the spread of the disease, and their growth could be similarly be affected as is developing in China,” they added.

The spill-over 

The regional office said the main channel of impact from the outbreak on ASEAN’s economy has been through travel and tourism and their ancillary industries, as well as the production and export of intermediate inputs linked to the production of final goods in the highly affected areas in China. Domestic measures to contain the outbreak can disrupt production, investment and consumption, they added.

In Thailand, one of the example of the spill-over effect from the slowdown of production and demand in China was seen at the beginning of this month when a Taiwanese mining company shut down its operation in Kanchanaburi Province after the company said it had lost its access to raw materials from China. 

Another example came on Wednesday when Hana Microelectronics (Jiaxing), a subsidiary of Hana Microelectronics (HANA), announced that any employee returning to the company on February 10, 2020 from a province other than Jiaxing would have to be placed under quarantine for 14 days. As a result, the factory can only operate at a capacity of no more than 30 per cent during this period, assuming their output will increase once the quarantined employees are back at work. This means that it will take at least another four to five weeks until their output level is normalised, they added.

Kasikorn Research Center predicted that the impact from the slowdown of China’s economy will be felt in ASEAN through three main channels, including trade, investment, and tourism. The research house said that if the coronavirus outbreak is longer than three months but less than six months, China’s economy will only lose 1 per cent of its expected GDP and its growth rate 2020 could be 4.7 per cent. 

If China’s economy slows down by that much, ASEAN’s GDP could lose US$2.4 to US$3.4 billion, or around 0.07 to 0.11 per cent, of its GDP. Thailand is expected to take a moderate hit of US$500 to US$700 million, or around 0.09 to 0.13 per cent, of its GDP if that happens. The research centre’s estimation of ASEAN countries’ GDPs is based on the country’s dependency on the Chinese economy, with Vietnam, Singapore, Laos, and Cambodia being more dependent on Chinese demand than Thailand.

SCB Securities (SCBS) said the outbreak has wiped out Thailand’s high season and it is pressuring hoteliers. The situation will continue to “dim” the sector for the next three months. They said that the outbreak appears to be “abating” and there is hope that business activities will resume in China somewhere around February 10-14. This means that the outbreak would be a “short-term catalyst” so Thailand’s tourism outlook in the longer term still appears to be favourable.

“Hoteliers are trading at crisis valuations, indicating low expectations for Thai tourism and hotel operations. This means share prices are ready to move up solidly upon any positive development,” they said. “We believe a good entry point for longer-term investors will be after the release of exceptionally weak earnings in first quarter of 2020.”

The securities company said Thai tourism operators will miss its high season this year with a huge drop in tourists from China, the largest contributor to Thai tourism, contributing 28 per cent of total arrivals in 2019. In the mild case scenario, its strategy team estimates a 56 per cent year-on-year drop in tourists from China in the first quarter of this year. 

But they expect the spread of the virus to ease within this month, with the first quarter to be the worst quarter this year and the second half of the year to be “much better”. They said China is “very likely” to be aggressive in offering stimulus measures to boost its economic growth.  

The firm has revised down its 2020 assumption for Thailand’s international tourist arrivals growth, from 4 per cent down to 1.5 per cent, or 40.4 million people for this year, compared to a 4 per cent growth with 39.8 million people in 2019. They have also cut its 2020-2021 earnings forecast for hoteliers including CENTEL, ERW, and MINT, mainly because of a reduction in their revenue per available room growth.

As China plans to allow businesses to reopen once the outbreak appears to be on the wane, which could be around February 10-14, the outbreak would be seen as short-term pressure on the tourism sector in Thailand, SCBS said. 

“We see this as a short-term catalyst and expect share prices of tourism-related plays to rebound to pre-outbreak levels,” its latest report on the outbreak read. “We maintain our view that Thai tourism has a bright outlook over the long run,” they added.

SCBS cited the World Travel & Tourism Council (WTTC) that said international tourist arrivals into Thailand are forecasted to grow to 64.5 million by 2028 with an average growth of 5.4 per cent per year over 2018-2028, outpacing global tourism growth at 3.3 per cent compound annual growth rate (CAGR) in 2010-2030, according to the World Tourism Organization (UNWTO)’s Tourism Towards 2030 report.

For the longer-term, the securities firm said hotels are trading below prior crisis levels, such as during political tensions in 2008 and 2014, which is an indication of low market expectations for Thai tourism and hotel operations. 

“We see this as a support for price downside for the longer-term investors and believe shares are ready to rally as soon as there is good news,” they said. 

SCBS said a good entry point is after the release of exceptionally weak earnings in first quarter of 2020 and their top picks are ERW and MINT, with target prices of 6 baht and 40 baht respectively.

The company added that current hotelier valuations based on 2021 forecasts are below crisis valuations in the past by 0.2 per cent for ERW, 10 per cent for MINT, and 11 per cent for CENTEL. 

“In terms of the valuation discount, we prefer MINT to CENTEL because of its sound fundamentals,” they added while pointing out that CENTEL’s valuation is being affected by the Hua Hin contract renewal overhang.

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