The virus that spread across global borders in the past weeks has brought fresh fears of global instability while sending markets into a dive in the early first quarter of 2020. This article attempts to demonstrate the crippling effects of this virus and how it can affect your business in Cambodia.
Written by Sereyboth Sour
Suspended flights, cancelled tours, temporary restaurant closures, and millions of people in lockdown amid an extended nationwide holiday are just some of the results of a contagious New Coronavirus that has caused more than 200 deaths and about 10,000 confirmed cases in China.
“It’s is a serious health issue.” Said the WHO, which has called it’s an emergency for China, potentially for the rest of the world. It’s an Epidemic, for more or less, it will inevitably affect the global economy, not to mention that China is currently one of the important players in the international arena. Since opening up to foreign trade and investment and implementing free-market reforms in 1979, China has been among the world’s fastest-growing economies, with real annual gross domestic product (GDP) growth averaging 9.5% through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history.” Such growth has enabled China, on average, to double its GDP every eight years and helped raise an estimated 800 million people out of poverty. China has become the world’s largest economy (on a purchasing power parity basis), manufacturer, merchandise trader, and holder of foreign exchange reserves.
Though, it’s possible to identify what impact that “The Virus” has on the economy based on the damaged done by previous similar outbreak, in 2003, which also began in China. It is within China that there already is some economic damage. Travel restrictions have been imposed in parts of the country at a time of the Chinese New Year when millions of people travel. So the tourism business is already being hit.
According to JW Lee and WJ McKibbin’s article on The Global Economic Costs of SARS, the 2003 outbreak caused losses of USD 12.3-28.4 billion and an estimated decrease of 1% in GDP in China and 0.5% in Southeast Asia. The social burden of SARS in Guangzhou meant less income and spending, with a rough estimate of the total economic burden of RMB 11 billion.
Entertainment & Transportation
Customer who spend on entertainment and tourism will be affected as high foot traffic areas are said to be more susceptible to the spread of the virus. The sentiment of caution that has been communicated in the previous weeks by state or popular media channels have resulted in many travelers or customers cancelling plans or decreased patronage of entertainment venues.
According to BBC, “The impact is magnified by the fact that Wuhan, the city where it began, is an important transport hub. Travel restrictions are also a problem for any business that needs to move goods or people around. Industrial supply chains will be affected. Some deliveries may be disrupted and some will become more expensive. There will be lost economic activity as a result of people not being able or willing to travel to work.”
There is no apparent effect economically on Cambodia yet. Some of the most notable point to be made are the fact that both outbound and inbound flight related to China are either cancelled or delayed. We have seen a significant amount of flight rate drop in this last week, that proved to be the consequence of tight control over immigration. Further, the decrease of flight volumes is also related to the fact that, people became terrified of the virus and its capability to transmitting from one to another simply by staying in the same environment for a certain amount of time.
Despite Cambodia’s geographical distance from China there has only been one confirmed case of the virus in Sihanoukville and according media it has been so far contained. In this regard if the virus is not monitored and continues to spread “the outbreak will hit Asia Pacific economies, particularly in retail, restaurants, conferences, sporting events, tourism and commercial aviation,” said Rajiv Biswas, Asia Pacific chief economist at IHS Markit.
“The rapid rise in household incomes in China has triggered a boom in Chinese tourism visits abroad, which have risen from 20 million in 2003 to 150 million in 2018. Consequently, the vulnerability of many Asia-Pacific economies to a slowdown in Chinese tourism visits has increased significantly over the past two decades,” said Biswas in a note on Tuesday.
“Over the past two decades, the rapid economic growth of China has made it a key export market for many Asia-Pacific nations. However, China’s growing importance in Asia-Pacific trade and investment flows has also created considerable vulnerability for the Asia-Pacific region from this type of unpredictable ‘black swan’ event currently hitting the Chinese economy,” said Biswas.
A 2018 study from Shaun Roache, Chief Economist for APAC Region, Standard & Poor’s, estimated that another global pandemic could kill 720,000 people and cost $500bn, or 0.6 percent of global income per year. That is within the range of estimated global losses from global warming (between 0.2 percent and 2 percent of global income). Lower and middle-income countries would suffer the most, with an estimated 1.6 percent of annual income lost if an influenza pandemic occurred. High-income countries are expected to lose about 0.3 percent of the annual income. China-wide, if spending on things including discretionary transport and entertainment dropped by 10 percent, overall gross domestic product (GDP) growth would fall by about 1.2 percentage points.
How The Stocks Are Shocked
The virus that spread across global borders in the past weeks has brought fresh fears of global instability while sending markets into a dive in the early first quarter of 2020. It has provoked alarm that the world economy may be in for another shock, offsetting the benefits of the trade negotiations or the easing of political risk, and providing new reason for businesses and households to hunker down.
On Monday, investors dumped stocks on exchanges from Asia to Europe to North America. They entrusted their money to traditional safe havens, pushing up the value of the yen, the dollar and gold. They pushed down the price of oil over fears that weaker economies would spell less demand for fuel. In short, those in control of money took note of a growing crisis in a country of 1.4 billion people, whose consumers and businesses are a primary engine of economic growth around the world, and they chose to reduce their exposure to risk.
By this week, the virus had killed more than 200 people in China. More than 10,000 had been infected — mostly in mainland China, but also in Hong Kong, Japan, Macau, Malaysia, Nepal, Singapore, South Korea, Taiwan, Thailand and Vietnam, and as far away as Australia, Canada and the United States.
“It’s the uncertainty of how the global economy is going to respond to the outbreak,” said Philip Shaw, chief economist at Investec, a specialist bank in London. That will depend on the severity, the spread and the duration of the outbreak, he said, and “we don’t really know the answers to any of these questions.”
Stocks in Japan and Europe fell more than 2 percent. In New York, the S&P 500 was down 1.6 percent, with stocks of companies whose sales are dependent on China especially susceptible. Wynn Resorts, which operates casinos in the gambling haven of Macau, a special administrative region of China, dropped more than 8 percent.
The 2002-3 SARS & Present Outbreak
Despite the recent outbreak, many commentators look back to yet another deadly illness that began in China, the 2002-3 outbreak of severe acute respiratory syndrome, or SARS, which killed nearly 800 people for answers. “In many ways, it looks similar,” said Nicholas R. Lardy, a China expert and senior fellow at the Peterson Institute for International Economics in Washington. “We are seeing fast increases in the number of cases. The hospitals are overwhelmed and are not even able to test people with symptoms. I’m expecting the cases to go way, way up.”
In the end, SARS significantly slowed the Chinese economy, dropping the annual growth rate to 9.1 percent in the second quarter of 2003 from 11.1 percent in the previous quarter, according to Oxford Economics, an independent research institute in London.
The episode is coinciding with the Lunar New Year, a major holiday in which hundreds of millions of Chinese journey to their hometowns to visit relatives. With air, rail and road links in central China restricted as the government seeks to block the spread of the virus, hotels, restaurants and other tourism-related businesses are likely to suffer.
Some economists assume that those effects will quickly dissipate, leading to a revival in the consumer economy within months. That is how events played out in 2003. “Our baseline is that it will be a fairly big impact but relatively short-lived,” said Louis Kuijs, the Hong Kong-based head of Asia economics at Oxford Economics.
From Wuhan, China & Then The World Economy
In the hopeful view, economic damage will be contained by the Chinese government’s aggressive response in effectively quarantining the outbreak’s center — Wuhan, a city of 11 million people, and much of the surrounding area in Hubei Province.
But Wuhan is a hub of industry, sometimes called the Chicago of China, intensifying the quarantine’s implications for the national economy. “This is really unprecedented,” Mr. Lardy said. “The economic effects may be much larger than SARS. Wuhan is a major industrial city, and if you’re basically shutting it down, it’s going to have a major effect.”
Given that China’s economy is the source of roughly one-third of world economic growth, the slowdown could be felt widely. Most directly, China’s neighbors would be affected by the downturn, especially those dependent on tourists from China — among them Hong Kong, the Philippines, Singapore, Thailand and Vietnam. Over the weekend, China announced that it was barring overseas group tours by its citizens.
If China’s factories are hobbled by additional restrictions on transportation that limit factory production, that could become a global event. It could hit iron ore mines in Australia and India that feed raw materials into China’s smelters. It could limit sales of computer chips and glass panel displays made at plants in Malaysia and South Korea.
It could trim sales of factory machinery produced in Germany and auto parts made in the Czech Republic, Hungary and Poland. It could even affect the purchases of additional American farm goods that China agreed to under the trade deal signed this month.
The shock is hitting just as China contends with its slowest pace of economic growth in decades, reviving fears that its reduced appetite for the goods and services of the world could jeopardize jobs on multiple shores. “China is obviously slowing down in a structural way,” said Silvia Dall’Angelo, senior economist at Hermes Investment Management in London. “The global economy is clearly shakier, with sluggish growth. It is clearly more vulnerable to shocks.”
The SARS outbreak prompted the government to stimulate the Chinese economy by directing surges of credit that financed huge infrastructure projects. But whatever damage China confronts this time, its willingness to respond will be limited by the government’s concerns about mounting public debt.“They are much more constrained now,” said Mr. Lardy, the China expert. “I think people underestimate the conviction that the top leadership has, that they really want to reduce financial risk.” But as global investors try to gauge the outlook, one element is the same as ever in China: Information is scarce. Trust in the authorities is minimal.
During the SARS outbreak, the government was slow to acknowledge the existence of the virus as local officials actively covered up cases, allowing the threat to multiply. This time, the government has sought to project the sense that it is forthrightly reckoning with the crisis. President Xi Jinping has publicly acknowledged the threat, while warning local officials not to hide reports of trouble. But in the current moment of agitation, any perceived lack of information tends to weigh in as bad news.
“This is, of course, still a government system where transparency is not really held up as an important criterion,” Mr. Kuijs of Oxford Economics said. “This is still an overall system in which discretionary decisions by bureaucrats are driving everything instead of very clear rules.”