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Soldiers in protective suits disinfect the area outside a Shincheonji church in Daegu, South Korea, on March 1, as Covid-19 cases outside China surge. Photo: AP
Opinion
Sylvia Sheng
Sylvia Sheng

Asia must brace for short-term volatility as Covid-19 hits China and South Korea harder than expected

  • The surge in infections in South Korea is dampening economic activity even as China struggles to return to work, hurting demand for exports from the rest of Asia
  • Governments are rolling out accommodative measures but if Covid-19 continues to spread, expect uncertainty to remain in the near term
Sylvia Sheng
Sylvia Sheng
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As the number of new Covid-19 cases in China slows, the fast spread of the coronavirus elsewhere has become a major worry. South Korea has the largest Covid-19 outbreak outside China, while infections in Italy and Iran have jumped in recent weeks, with reports of community spread in Europe and the United States.

Concerns of a looming Covid-19 pandemic has triggered a sharp response from investors in the past few weeks. The sell-off in global equity markets deepened, while the yield on the benchmark US 10-year Treasury bond fell to a record low.

Equity markets in Asia have also corrected sharply since mid-February, in part reflecting a repricing of the larger and more prolonged negative impact of the coronavirus on the region, given two recent developments.

First, the short-term disruptions to economic activity in China and South Korea are likely to be more significant than previously thought.

In China, while the number of new infections has declined, it is taking time to get people back to work. Reports suggest that around 79 per cent of large enterprises and some 30 per cent of small and medium-sized enterprises had resumed work by the end of February.
Companies where workers have gone back are unlikely to be operating at full capacity, as the return rate has also been low due to travel restrictions and quarantine measures. While there is likely to be some improvement in March, a full resumption by the end of the first quarter may still prove difficult. This means some production weakness will linger early in the second quarter.
For South Korea, the surge in the number of confirmed coronavirus cases in the past two weeks suggests the outbreak is unlikely to be contained within the first quarter. That is likely to lead to significant pressure on domestic economic activity in the short term as the epidemic dampens consumer and business sentiment and disrupts production.

There is already some evidence of this. In February, the consumer sentiment index slumped by the most in five years on concerns about the virus outbreak. And that survey was taken before the recent sharp increase in cases, pointing to further weakness to come.

Second, emerging Asia’s exports are looking shaky in the short term. Weaker domestic economic growth in China and South Korea is likely to weigh on their import demand and, in turn, put pressure on exports in the rest of the region.

In addition, as infections increase outside the region, import demand is likely to be depressed in other virus-hit economies, posing further challenges to exporters in emerging Asia.

That said, more accommodative monetary and fiscal policies are likely be rolled out to counter the growth shocks, providing a floor for regional growth.
Several central banks in the region, include in China, Indonesia, Thailand and the Philippines, have already lowered their policy rates in response to the outbreak. With the 50 basis-points cut by the US Federal Reserve, there is room for further easing by regional central banks.
The problems caused by the coronavirus outbreak are likely to be unevenly distributed throughout the economy, with a greater impact on service sectors such as travel and leisure activities, and on smaller enterprises. As a result, there have also been targeted liquidity measures.

Both the People’s Bank of China and Bank of Korea have extended lending support for small and medium-sized enterprises, while Malaysia’s central bank has introduced various special lending facilities to affected businesses.

Fiscal stimulus is also increasingly being used for support, although this is likely to be different across the region. China announced temporary reductions in social security contributions and value-added taxes for businesses in affected regions.

Malaysia has also unveiled a larger-than-expected stimulus package to boost disposable income and accelerate small infrastructure projects. Both Singapore and Hong Kong delivered a meaningful economic package in their latest budgets and an exceptional supplementary budget is likely to be approved in South Korea in the first quarter with significant fiscal spending this year.

Despite the larger short-term impact, the experience of previous epidemics suggests the hit to economic growth will be transitory. Economic growth in emerging Asia is expected to gradually recover in the subsequent quarters following a sharp slowdown in the first quarter.

If the virus becomes a pandemic that drags on into the second quarter, more-severe declines in external demand can be expected, along with significant disruptions to global supply chains. Uncertainty about the duration and severity of the outbreak means market volatility is likely to remain high in the near term.

Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management

This article appeared in the South China Morning Post print edition as: Volatility to rule markets as countries respond to outbreak
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