Wuhan virus may hit regional supply chain if not contained: report

THE regional impact of the novel coronavirus outbreak is likely to be greater than that of Sars if containment measures fail, according to a J. P. Morgan report on Feb 3.

Granted, the report's baseline scenario is for rapid containment, with infections peaking in the first quarter and then receding, and the situation improving significantly by the early second quarter.

In this case, the region could see economic activity contract materially, then recover to trend from the second quarter.

Tourism may be more affected than manufacturing. If demand is unaffected and virus-related disruptions are brief, pent-up manufacturing demand could help to offset declines in Q1, mitigating the shock to countries with exposure to China's supply chain such as Vietnam, Malaysia, and Singapore

But if there is a further extension or expansion of factory shutdowns, or if the outbreak lasts for longer, then the virus will not only be a demand shock -- hitting retail sales and regional tourism -- but also a supply shock, taking a toll on the global supply chain.

Since the Sars outbreak in late 2002 and 2003, China's regional footprint has grown in both manufacturing supply chains and tourism flows.

At least initially, the sectors affected by the Wuhan virus are expected "not to be too different from those hit by Sars", said the report: mainly hospitality and travel-related serivces affecting travellers from all geographies.

By this measure, Thailand, Hong Kong, and Vietnam have the highest exposure to tourist receipts. In Thailand, tourism exports form 11.8 per cent of gross domestic product, and arrivals from China are 28.6 per cent of all arrivals. In Vietnam, tourism exports are 6 per cent of GDP, and arrivals from China are 29.6 per cent of all arrivals.

However, with greater travel restrictions and border closures from the novel coronavirus as compared to Sars, there could be indirect effects on sectors involved in international trade, "which are materially larger than tourism-related sectors".

Factory reopenings after the Chinese New Year holidays have been postponed in the provinces of Hubei, Shanghai, Zhejiang, Jiangsu, and Guangdong, which "represent the two most important manufacturing and exporting bases in China, the Yangtze Delta and Great Bay Area", said the report.

If the outbreak escalates and shutdowns extend, this could pose a more severe supply shock to China and the region, particularly in the tech sector. This would be unlike Sars, which affected mainly services, with limited fallout on the tradable goods sector.

Assuming escalation beyond the report's baseline scenario, the largest impacts in the region would be felt in Taiwan, Vietnam, Malaysia, and South Korea, with the smallest impact in India and Indonesia.