The coronavirus outbreak adds to other pressures on growth in Asia Pacific - Photo by DHL

JAKARTA (TheInsiderStories) – The coronavirus outbreak adds to other pressures on growth in Asia Pacific, with the impact felt primarily through trade and tourism, and for some sectors also through supply-chain disruptions. This shock comes on the back of a marked slowdown in 2019 as decelerating global trade hit the region.

Based on our baseline assumption is that the economic effects of the coronavirus outbreak will continue for a number of weeks before tailing off and allowing normal economic activity to resume. We also have lowered our China growth forecast to 5.2 percent for 2020 from 5.8 percent previously, reflecting a severe but short-lived economic impact, with knock-on effects for economies across the region.

Specifically, Macao (Aa3 stable) and Hong Kong (Aa3 stable) will face the biggest hit, given their close economic integration with China (A1 stable). The forecast revisions also incorporate updated views unrelated to the coronavirus outbreak, including weaker domestic demand in India (Baa2 negative) and Thailand (Baa1 positive), as well as expectations of policy offsets.

Reduced Chinese demand for the Asia’s exports and supply chain disruptions represent the two most direct transmission channels for slowing economic growth, although services trade adds a third channel. As such, goods and commodity exporters are most exposed to a protracted fall in Chinese demand, while tourism hubs that rely on Chinese visitors will also be vulnerable.

The credit conditions in Asia also will turn negative in 2020, in tandem with a slowdown in growth momentum, continued trade policy uncertainty and simmering political disputes. The outbreak of the coronavirus has added a further dent to growth prospects at a time when economic growth trajectories throughout the region were already declining.

Although several near-term pressures, such as the United States (US) – China trade dispute, have contributed to the downshift in Asia’ growth trajectory, the slowdown could turn out to be more than just a temporary blip, whereby the underlying causes are likely to be structural rather than cyclical.

These include China’ steadily decelerating growth and the fact that it is a major source of export demand for many Asian markets; growing demographic challenges in places like Thailand and Korea, a less stable geopolitical environment and the increasing threat to multilateral global trade relations.

In consequence, the likelihood of risks crystallizing in Asia has risen. A slowdown in Asian growth will constrain policy choices and limit the region’ ability to respond to negative shocks. Lower growth could make it more difficult for governments in the region to defuse social tensions, raising political risk and reducing policy effectiveness.

If Asia’ slowdown does turn out to be due to more than just temporary factors, investors might recalibrate their demand for assets from the region, possibly triggered by unexpected shocks, and funding costs for issuers could rise in weaker economies.

At the sovereign level, weaker growth prospects will hinder revenue generation and shock absorption capacity. The weaker growth outlook could increase refinancing risks for corporates and pressure asset quality at banks in the event that repayment capacities deteriorate. However, at present, Moody’s rated portfolio is well positioned to absorb such risks if they were to crystallize.

by Christian de Guzman and Deborah Tan from Moody’s Investor Service