War on SARS will take longer than war on Iraq
21 April 2003
The war in Iraq is largely over, save for some policing action. However, another war is now underway against severe acute respiratory syndrome (SARS), a new and deadly form of pneumonia that originated in China. And many economists think that SARS may have a more damaging effect on East Asia's economies than the war in Iraq.
The disease has created great concern worldwide. While most of the victims have been in Asia – particularly China, Hong Kong, Singapore and Vietnam – the disease has already found its way around the globe. According to a World Health Organisation (WHO) update on 19 April, a cumulative total of 3547 cases with 182 deaths have been reported from 25 countries. The WHO issued an urgent warning a few weeks ago that travellers should postpone non-essential trips to both Hong Kong and southern China. Health officials in badly-hit regions have put thousands of individuals on quarantine, shut down schools and imposed restrictions on travellers. Health checks on travellers have been instituted in many Asian airports.
All these have hit Asian airlines badly. A number of airlines, in particular Cathay Pacific, have cut capacity as air travel throughout East Asia plunged over the past few weeks. Taiwan is considering suspending air links to China, which would be a blow to many of the companies that manufacture in China.
Retail sales also fell over that period, by between 10 percent and 50 percent depending on the type of business, the Singapore government said on 17 April.
An AFP report on 17 April, citing a survey conducted by the Far Eastern Economic Review, stated that the disease had already cost Asia some US$10.6 billion. According to the report, the outbreak has cost Hong Kong US$1.7 billion so far, with retail sales there plummeting by half since mid-March and tourism arrivals from mainland China falling by 70 to 80 percent.
Many economists have recently cut their growth forecasts for Asian economies. The United Nations said on 17 April that the combined effect of SARS and the Iraq war would cut almost half a percentage point off economic growth throughout Asia this year. Earlier, Morgan Stanley trimmed its GDP growth outlook for Asia ex-Japan in 2003 by 0.6 percentage point to +4.5 percent due to SARS. Standard & Poor's, a credit-rating agency, thinks the disease's impact could cut Hong Kong's GDP by 0.6 to 1.5 percent this year, Singapore's by 0.4 to 2 percent, and China's by up to 0.5 percent. The Singapore government itself has cut its forecast for economic growth for the year to between 0.5 to 2.5 percent from 2 to 5 percent earlier.
In reality, however, few economists can be sure of the exact impact of SARS on Asian economies. Morgan Stanley's Andy Xie, for example, wrote in the Global Economic Forum on 14 April that its recent cut in Asian GDP outlook might still be too optimistic. "The World Health Organization would lift its advisory against traveling to Hong Kong if three incubation periods of the virus (30 days) pass after new daily infections fall into single digits in Hong Kong. The current infection rate is still over 40 per day in Hong Kong. Our scenario requires the daily infection rate to decline to single digits in two weeks."
Others remain relatively sanguine. In a recent research article, online unit trust distributor Fundsupermart.com wrote: "Many Asian companies may see their revenues go down due to the dip in tourism and local spending. But we believe this is temporary. Once the spread of the virus is effectively controlled, the tourism industry and local spending will recover…Investors should thus consider buying equity funds now because, very often, the best time to invest is when everybody is afraid to do so."
Mark Mobius, Franklin Templeton's emerging markets guru, seems to think so too. "There is pretty much a panic situation here in Hong Kong," MSN Money quoted him as saying. "I think it provides an opportunity."
The key is how long it takes to control the disease. The longer it takes, the greater the damage to the economy. A vaccine, which would be the most effective way of controlling the disease, is at least many months and tests away. Investors should not put too much hope in it. More realistic is a diagnostic kit, which would help health officials to identify victims quickly and isolate them while allowing other patients to be treated normally, thus minimising the impact to the population at large. With the genetic code of the virus already broken by researchers, a diagnostic kit could be made available within the next few weeks.
However, controlling a disease merely by isolating affected patients will take time. The risk of not identifying and isolating victims before they infect others will always be substantial. Those hoping to see things return to normal in Asia should be prepared to wait for quite a while more.
Disclaimer: The commentaries posted here represent the opinions of the author at the time of posting and should not be taken as investment advice. Readers who wish to take any investment action based on information obtained from this site should seek appropriate advice from a qualified financial adviser.