Coronavirus to prompt further rate cuts

Before the coronavirus hit, the latest data suggested the region’s economies had turned a corner. Our regional GDP Tracker nudged up slightly at the end of last year, while GDP figures for Taiwan, Korea, Singapore and the Philippines (the only four countries to have reported Q4 data so far) show growth accelerated last quarter. However, the spread of the virus is likely to lead to a sharp slowdown in growth this quarter. At least initially, the main channel through which the region will be affected is by a decline in tourism. Hong Kong, Cambodia and Thailand looks most vulnerable to a sharp drop in Chinese tourist arrivals. The impact will be much greater if the virus spreads further across the rest of Asia (so far the vast majority of cases have been in China). This would cause a slump in domestic spending as people stay away from shops and restaurants for fear of infection. The impact will also depend on how much disruption is caused to the industrial sector. The decision by China to extend factory closures following the new year holiday will soon start to disrupt regional supply chains. Policymakers across the region are now starting to respond. Sri Lanka’s central bank today cut interest rates in part due to fears over the spread of the virus, and we expect the central banks of Thailand and the Philippines to cut rates at their scheduled meetings next week. Further fiscal support is also likely. Malaysia today hinted that it would introduce a fiscal stimulus to boost growth. Given the healthy fiscal position of most countries in the region, further loosening is likely over the coming weeks.