This article first appeared in The Edge Financial Daily on January 29, 2020

KUALA LUMPUR: The rising death toll of the 2019-nCoV Novel Coronavirus in China and the increase in confirmed cases in at least 16 countries have unnerved the world.

It raised the alarm bell that the possible heightening economic risk the world could be facing considering China, the epicentre of the coronavirus, is the world’s second largest economy. It is deemed as the global growth engine.The news has sparked global equity rout amid mounting concern that China will consume less if the virus outbreak gets worse (See accompanying story).

Japanese Economy Minister Yasutoshi Nishimura warned yesterday that corporate profits and factory production might take a hit from the coronavirus outbreak in China.

Pre-emptive measures including travel lockdown in China’s Hubei province — which houses operations for more than a third of Fortune 500 companies — and its surrounding to curb the outbreak could curtail economic activities, according to an economist.

“The pillar industries of Hubei are automotive, iron and steel, petrochemical, and electronic information to name a few. So the economic importance is quite visible,” said Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid.

“If the outbreak were to prolong, it could warrant further policy response from the authority, perhaps in the form of additional monetary easing and fiscal stimulus.

“Already, China’s central bank has reduced the Reserve Requirement Ratio (RRR) to 12.5% recently and cut the Primary Lending Rate to 4.15% in November,” he said.

Looking back at the SARS outbreak

Citibank pointed to China’s quick rebound from the 2003 Severe Acute Respiratory Syndrome (SARS) outbreak, and suggested a similar trend this time around. The 2003 SARS outbreak — also a coronavirus — started in the second half of 2002, was reported to the World Health Organization (WHO) in March 2003, and lasted until July 2003, affecting over 8,000 people and resulting in 774 deaths.

“In early 2003 [SARS outbreak], China’s GDP (gross domestic product) halved in the second quarter and doubled in the subsequent quarter. A similar but less extreme pattern can be expected this year, along with some rather modest impact on China’s trading partners,” Citibank said in a report.

“Importantly, a setback in China’s economy comes at a time when financial market optimism towards a cyclical recovery has been building. Global equities have risen 11% since the autumn, largely on the preconditions of a rebound in manufacturing activity, with a mild rebound seen in trade and transportation measures from a depressed 2019 thus far.

“Gains are merely building, but global trade and industrial activity is convincingly poised for such a return to growth,” the bank explained.

Still, while the two viruses are of similar family (coronavirus) and place of origin (China), there are different circumstances between now and 17 years ago. At the time, there was little downside risk to the global economy, which was standing on a low base following the 1998 financial crisis. This resulted in a quick rebound in economic growth and commodity prices.

China was not the world’s second largest economy in 2003. Now when China moves, it will move the world as well. Furthermore, it has been 12 years since the last global financial crisis in 2008.

Another point in mind is that global connectivity in 2020 is much more saturated. As more people travel, the risk of outbreak gets higher, although pundits view that governments have learned the lesson from past outbreaks.

‘Malaysia can adjust to potential slowdown’

For Malaysia, a potential pandemic appears to be bad news, as it has already marketed 2020 as Visit Malaysia year in hope of the tourism sector to jump-start stronger economic growth. More than 2.8 million Chinese tourists visited Malaysia annually in the past few years.

In the first 11 months of 2019, China was Malaysia’s largest export destination with exports valued at RM125.94 billion, representing 14% of Malaysia’s total exports. However, economists pointed out that the negative impact of the virus on Malaysia’s economy may be overblown.

“I do not expect the outbreak of the virus to shave off too much from the [GDP] growth rate,” said Malaysian Institute of Economic Research senior research fellow Dr Shankaran Nambiar. “Should there be a cut it might be in the order of 0.09% of growth, but not likely more than 0.15%.” The government has targeted GDP growth to be at 4.8% in 2020. Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said Malaysia still has room to adjust monetary and fiscal policies in the face of economic slowdown.

This is on top of Bank Negara Malaysia’s 25-basis-point interest rate cut that occurred just last week to its nine-year low of 2.75%. “On the fiscal side, although the government continues to emphasise the need to sustain a decent budget deficit target for 2020, spending can still be boosted especially if growth starts to weaken more than expected this year,” Nor Zahidi said.

Sunway University economist Dr Yeah Kim Leng concurs. “Admittedly the government is facing budgetary constraints but that does not preclude it from mounting a stronger fiscal stimulus should the situation warrant it.”

Yeah shares the WHO’s positive view on the “strong and unprecedented measures” taken by the Chinese government to curb further outbreak.

While the outbreak is potentially a global recession trigger if the pandemic is severe, the likelihood of it happening is low, in his opinion.

“The next few weeks will be crucial in knowing the extent of which the emergency responses taken by the Chinese have been successful in containing the spread of the virus,” he said.