Just as clouds of uncertainties were clearing up for the global economy and market sentiments begin to improve at the start of this year, 2020 threw another curveball in the form of the fast-spreading 2019 Novel coronavirus (Covid-19).
The outbreak, which was first discovered late last year in the capital of Hubei province in China, has rapidly spread across the globe, raising fears on its spillover effects on the health of both the global economy and markets.
Several major countries have taken measures such as banning arrivals from China while several airlines have temporarily halted flights to and from the country.
China, which is still reeling in from the effects of the US-China trade rift, has already begun to show signs of a slowdown as several of it takes steps to curb the spread of the virus.
“The risk of the world economy heading for another shock and offsetting the benefits of the trade pact and the geopolitical easing has dented both business and consumer sentiments.
“The current shock from the coronavirus is unlikely to have a significant impact had the world economy grew more vigorously prior to the outbreak,” AmBank (M) Bhd’s research team (AmBank Research) chief economist Dr Anthony Dass said in the research house’s thematic report ‘Global Markets: Coronavirus – Its biting impact on the economy’.
“Unfortunately, after a three per cent growth outlook for 2019 that was underpinned by uncertainties, the effect from the coronavirus is not just concentrated on Asia – long the fastest-growing region in the world and the one area that had basically been keeping the global economy afloat – but has spread across the globe.”
As of time of writing, there are 60,336 confirmed cases across 25 countries, claiming over 1,396 lives.
These cases and casualties occur mainly in China.
For Malaysia, with the outbreak of the coronavirus, it is likely to have some dampening impact on its economic performance, Dass said.
“How serious the impact depends on the duration, seriousness of this virus and the structure of the economy.
“For now, it is tough to ascertain the severity given that there is no clear clue on the development and nature of coronavirus. Hence, it complicates our impact analysis for now,” he said.
In its fourth quarter of 2019 (4Q19), Malaysia’s economic performance was already affected by global uncertainties such as the US-China trade war.
With the current Covid-19 outbreak, analysts generally believe that its impact on Malaysia’s economy as well as on tourism and production, would likely lead to moderate growth in the near term.
“The effect of the coronavirus outbreak or also known as Covid-19, is expected to weigh on 1Q20 growth and possibly to spillover into 2Q20 through demand and confidence channel.
“The services sector, specifically the tourism-related industry and transportation would be affected the most, thus making the Visit Malaysia 2020 campaign incredibly challenging.
“Besides, the impact of the outbreak is seeping into the manufacturing sector, disrupting the global supply chain, evidenced by factory shutdowns in China,” Kenanga Investment Bank Bhd’s research house (Kenanga Research) said in its 4Q19 economic viewpoint report.
It also highlighted that the prolonged trade feud between the US and China would continue to exert pressure on global trade amid positive progress of the phase-one agreement.
“Though both countries have announced a tariff cut, which may provide a little relief to the global trade tension, existing tariff remains on the bulk of the products for and from both countries,” it said, adding that other geopolitical unrest such as the Brexit and US-Iran conflict may continue to effect the global economy.
“Nonetheless, the immediate weaker outlook is expected to be partially weathered by the potential uptick in domestic activities in the 2H20, mainly through a substantial contribution from government fiscal measures and the lagged impact of further monetary easing.
“The federal government is expected to announce the stimulus package soon in a bid to boost the economy following the fast-spreading outbreak,” it said.
Preparing for the worst
The government is looking to launch an economic stimulus package to boost the local economy due to the challenges following the fast spreading the Covid-19.
Bank Negara Malaysia’s (BNM) Governor Datuk Nor Shamsiah Mohd Yunus also said BNM has suggested several measures that would be introduced in the Covid-19 stimulus package, which is expected to be unveiled in early March at the latest.
Elaborating further, Nor Shamsiah said the outbreak could affect Malaysia’s growth through the lower arrival of foreign tourists and a decline in spending on hotels, retail outlets, transport and restaurants.
Demand and production disruptions in China would also affect Malaysia’s exports, especially manufactured and commodities exports, she said.
“The stimulus package will help the affected groups and to better secure our growth. But you need to balance the growth stimulus… All these will be taken into account in the stimulus package,” she was quoted as saying by Bernama during a press conference on Malaysia’s 4Q19 GDP.
For now, she said Malaysia’s GDP growth would continue to be supported by firmed private spending and investments along with modest improvement of global trade activities.
As the situation continues to develop, it is still difficult to assess the full impact of Covid-19 on economies worldwide. Nevertheless, several sectors have begun to feel its effects. BizHive Weekly takes a look at these sectors:
Tourism sector takes a hit
Chinese tourists constitute a huge fraction of the global tourist market. In Malaysia, tourists from China remains one of its top 10 tourists arrivals next to Singapore and Indonesia.
With efforts to temporarily suspend immigration facilities for arrivals from certain countries including China, the tourism industry is expected to be affected their absence due to the outbreak.
From 2010 to 2018, according to the Malaysian Rating Corporation Bhd (MARC), tourist arrivals from China (including Hong Kong and Macao) in Malaysia rose by 160 per cent, vastly outpacing the five per cent growth pace of total tourist arrivals.
The jump in number of Chinese tourists was also driven by the introduction of easier immigration processes into the country including the introduction of Electronic Travel Registration and Information (eNTRI), visa-free entries, visa on arrival, and e-visas.
According to Malaysia Tourism Promotion Board, for the first half of 2019, tourist arrivals from China to Malaysia registered a total of 1.55 million tourists while in 2018, Malaysia saw 2.94 inbound tourists from China.
In its third quarter of 2019 (3Q19) statistics, it reported that tourists from China were also one of the biggest spenders in Malaysia, contributing about RM12.79 billion in total spending by tourists in Malaysia.
“The government expects the Visit Malaysia Year 2020 (VMY2020) campaign to attract 30 million tourist arrivals and tourist receipts to reach RM100 billion.
“With 10.6 per cent of the target being Chinese nationals, it will be challenging for the government to achieve its VMY2020 campaign targets if the outbreak persists for longer-than-expected,” economists at MARC said in a statement.
Based on past experience with the SARS outbreak, tourist arrivals in Malaysia from China fell by 37 per cent while tourist arrivals generally fell 21 per cent, leading to a decline of 39 per cent and 17 per cent in tourist spending.
“Given the scale of the current outbreak, these figures could be eclipsed in 2020,” it warned.
It added, “Given that the Covid-19 outbreak is decidedly larger in scale, it is not unreasonable to suggest that it will be more than nine months before monthly international passenger traffic returns to pre-Covid-2019 outbreak level.
“That is, it is possible that we could be in the new calendar year by the time monthly international passenger traffic returns to normal.”
Malaysia’s tourism industry are already taking steps to buffer the impact of the outbreak on the industry.
The government through the Ministry of Tourism, Arts and Culture (MoTAC) has taken steps by establishing a Tourism Recovery Committee to monitor current developments for this issue.
In a statement, the Minister of Tourism, Arts and Culture, Malaysia, Mohamaddin Ketapi, said, “This committee is responsible for providing advises and clarifications to all tourists including the steps to be taken to safeguard their personal health as advised by the Ministry of Health Malaysia to prevent them from being infected with the virus while in the country.”
The committee is also responsible for safeguarding the safety of tourists and ensuring that all visitors are in a good condition and confident with the control steps taken by the government in addressing this issue. This includes supporting the efforts of the Ministry of Health Malaysia to conduct health screening for all tourists, whom using air, sea and land routes at all entrances to the country.
In addition, this committee also plays an important role in planning and devising actions to search new markets to replace the tourism sector especially from China which have been affected with the virus.
Source: Tourism Malaysia
Harder hit for long-haul airlines
For the aviation industry, with measures taken to contain the virus, long-haul flights are expected to be affected by the current situation.
According to past figures during the 2003 SARS outbreak, Malaysia Airlines Holdings Bhd’s (MAHB) passenger traffic growth in Malaysia took a breather that year to fall by just 1.5 per cent year-on-year (y-o-y) to 33.5 million.
In a report, the research team at MIDF Amanah Investment Bank Bhd (MIDF Research) noted that total international passengers at KLIA Main Terminal travelling to and from China declined by 10.7 per cent y-o-y during the same period.
Given AirAsia X Bhd’s (AAX) exposure to more routes to and from China, the research team believed that it could be affected by the decline in inbound tourists from China.
“Based on our preliminary analysis, we found that capacity catered for destinations in China by AAX make up between 25 and 45 per cent of AAX’s total capacity.
“We understand passengers flying to or from destination in mainland China are given an option for a credit account or full refund.
“Assuming a worst case scenario where all affected passengers opted for a full refund, we estimate that revenue per kilometre (RPK) could decline by nearly as much as 20 per cent to 30 per cent. This in turns will reduce AAX’s profit after tax by 27 per cent,” it explained.
Nevertheless, it highlighted that despite the initial decline, passenger traffic at MAHB’s Malaysian airports rebounded by 17.8 per cent y-o-y after the SARS scare died down in 2004.
“Similarly, international passengers from China at KLIA Main Terminal recorded a whopping 75.8 per cent y-o-y growth in 2004,” it added.
Source: Tourism Malaysia
Furthermore, MIDF Research pointed out that during the SARS outbreak between November 2002 and July 2003, passenger traffic took an average of two to three months to normalise.
“For instance in Malaysia, April 2003 saw a huge 30.1 per cent month-on-month (m-o-m) drop to reach the lowest point that year of 1.02 million passengers before increasing 18.1 per cent m-o-m in June 2003 and another 19.6 per cent m-o-m increase in July 2003 to reach back a normal level of 1.48 million passengers.
“As for China, May 2003 saw a 66.7 per cent m-o-m decrease in passengers before advancing 50.0 per cent m-o-m in
June 2003 and another 166.7 per cent m-o-m gain in July 2003,” it explained.
“Given that this was nearly 20 years ago, we believe that technological advancements in the healthcare sector will likely contain the disease better,” it added optimistically.
Source: AmInvestment, Bloomberg
Rubber sector biggest gainer as demand surges
Malaysia is currently the world leader in the production of medical gloves, with approximately 180 billion pieces exported worldwide.
In 2018, Malaysia’s glove exports contributed RM17.7 billion to the nation while in 2019, the export touched RM18 billion.
Demand for rubber gloves or medical gloves are expected to increase as the Covid-19 crisis sinks in and customers stock up as a pre-emptive measure against the virus.
Kenanga Investment Bank Bhd’s research team (Kenanga Research) pointed out that there are already signs of an uptick in demand as 3Q19 results season indicated a positive recovery in demand and hence volume growth from industry leaders such as Top Glove Corporation Bhd (Top Glove) and Hartalega Holdings Bhd (Hartalega).
“Both players recorded six and 14 per cent sequential volume growth, respectively. From our ground checks, demand for nitrile gloves is picking up again with players’ new capacities swiftly taken up. We believe this uptick in demand is turning positive and should be reflected in players bottom-line in subsequent quarters,” it added.
However, analysts have also warned that there are signs that demand could outstrip supply, which could lead to higher average selling prices (ASP).
“Tell-tale signs of demand outstripping supply could potentially lead to higher ASPs. Looking at the stable raw material price, ceteris paribus, hike in ASPs is expected to lead to margins expansion.
“We understand that some players have raised prices in anticipation of higher demand and we also noted the current high 90 per cent utilisation rate for nitrile-centric players which is a stark contrast compared to the lacklustre demand in 2019,” Kenanga Research said.
On the other hand, there is also the possibility of oversupply post-outbreak.
AmInvestment Bank Bhd’s research team (AmInvestment) pointed out that based on previous experience with the SARs outbreak, there was an excess supply in the customers’ inventory which lowered sales growth subsequently.
“For instance, Top Glove’s revenue surged 36 per cent while net profit climbed 45 per cent in FY10. Subsequently in FY11, revenue dipped 1.2 per cent while net profit fell 53.9 per cent. The earnings pattern is similar for the other glove players,” it noted.
Nevertheless, it noted that in comparison, during the 2009–2010 H1N1 pandemic outbreak, the glove companies’ net margins surged by 3.4 to 9.7ppts and remained high before falling after the WHO announced that the outbreak had been contained.
“We believe this was due to the highly-contagious nature of the disease as well as the affected location,” it said.
It added that from the H1N1 pandemic, the highest death toll was in the US. Europe was also badly affected by the outbreak.
“We believe the demand from gloves was stronger as glove consumption per capita is typically high in the America and Europe regions,” it added.
In the long run, the Malaysian Rubber Export Promotion Council (MREPC) said the rubber products industry will continue to capitalise on the growing demand for rubber products from the global healthcare sector.
It predicted improvements in economic performance in emerging markets in Latin America, the Middle East as well as emerging and developing Europe which will also drive demand for rubber products.
A heads-up for healthcare
For the healthcare sector, economists say that the impact of the Covid-19 outbreak will likely be muted on the sector.
However, in the long run, they believe that the coronavirus outbreak could lead to a rise in healthcare awareness and hence, it should be positive for the overall sector.
In a report, the research team at Affin Hwang Investment Bank Bhd (Affin Hwang) said: “We think that the coronavirus outbreak is likely to have only a muted impact on the private hospital operators as the private hospitals are required to report and refer such cases to public hospitals and the national infection centre based on Ministry of Health (MoH) guidelines.”
It added: “Nevertheless, long term, we believe the rising healthcare awareness arising from the outbreak should be positive for the sector.”
It also pointed out that pharmaceutical players could potentially benefit from a surge in demand for products related to the prevention of seasonal viral diseases with similar symptoms.
“Given that the speed of contagion is nearly double that of its predecessor SARS, we noticed there is an obvious trend of rising health awareness which has led to higher demand for products related to prevention of seasonal viral diseases with similar symptoms such as flu, cough and fever.
“A lot of people are rushing to pharmacies, convenience stores and Chinese medicine shops to stock up on face masks, hand sanitisers, consumer health products and herbal products, especially those that could help boost the immune system such as Vitamin C and liquorice.
“We think that this could potentially benefit the pharmaceutical players that are involved in the production, wholesale, distribution and/or retail of the abovementioned products. Based on our channel checks, most of the pharmaceutical players have seen a strong surge in demand for these products,” Affin Hwang said.
However, it noted that the impact of this increase in demand could be minimal on pharmaceutical players’ bottom lines.
“Nevertheless, long term, we believe the rising health consciousness should be positive to the sector as people are increasingly aware of the need to stay healthy and keep their immune system strong,” it added.
Private healthcare sector gearing up in 2020
The growth prospects for the sector globally are generally expected to be positive over the long term, underpinned by an aging population, rising affluence and increasing life expectancy.
The local private healthcare sector, according to AmInvestment, has an added catalyst, which is medical tourism backed by its highly competitive charges and hospitalisation costs (compared with those in developed countries), a generally English-speaking population as well as various incentives provided by the government.
“We expect the hospital’s operational metrics to continue to improve on the back of an increase in medical tourism.
“This is underpinned by the RM25 million allocated to the Malaysian Healthcare Tourism Council (MHTC) for the Malaysia Year of Healthcare Travel 2020 programme which is expected to strengthen Malaysia’s position as the preferred destination for medical tourism.
“However, we expect the hospitals’ net margin improvement to be limited (more or less one percentage point) on the back of a continued drag from gestational costs of its newly opened hospitals as well as upcoming new hospitals,” it added.