China’s coronavirus and the fallout for EMs

There is no longer any doubt that China’s newly-identified coronavirus will hit its GDP growth in Q1. And other parts of Asia (notably Hong Kong and Thailand) will suffer a drop in Chinese tourism receipts, which could shave 1.5-2.0%-pts off GDP growth in these countries. As a result, it looks like EM GDP growth will slow sharply in the first quarter of the year. Outside of Asia, the direct macroeconomic effects should be limited. While Chinese tourism is much larger than it was during the SARS epidemic, tourist arrivals to many EMs are still pretty small. The indirect effects could, in theory, be bigger. Indeed, commodity prices and currencies have come under further pressure today. But so long as the spread of the virus is contained, we still think that commodity prices will rise this year, which should prevent a lasting hit to EMs’ terms of trade. Moreover, the falls in EM currencies have so far been small. As a result, the market fallout shouldn’t dissuade central banks from continuing to cut interest rates in the coming months.