Posted Date: February 7, 2020

The prospects for the global economy look increasingly uncertain with the outbreak of the novel coronavirus (2019-nCoV) in China. This is not surprising given that the Chinese economy accounts for an estimated one-third of global growth.

Compared to the severe acute respiratory syndrome (SARS) outbreak period in 2003, China's gross domestic product is now eight times larger (2003: USD1.7 trillion, 2020: USD14 trillion). Given this, as well as the fact that the coronavirus outbreak is larger than the SARS outbreak, the impact of this current outbreak will be much more significant. As of February 7, 2020, more than 31,000 persons have been infected by the coronavirus; the 2003 SARS epidemic, on the other hand, had resulted in only slightly above 8,000 cases.

Many airlines have cancelled and/or reduced their China flights. Given the rapid increase in the number of tourists from China in recent years, the repercussions of the 2019-nCoV outbreak on global tourism will be significant. It is a critical concern in Malaysia as the tourism sector is a major foreign exchange contributor to the domestic economy.

States in Peninsular Malaysia have only suspended flights from Hubei province. However, the East Malaysian states comprising Sabah and Sarawak have placed a total ban on all flights from China. This is understandable as East Malaysia is a tourist hotpot for Chinese nationals. In Sabah, for example, Chinese tourists made up 44% of total international arrivals in 2018.

Over the 2010-2018 period, tourist arrivals in Malaysia from China (including Hong Kong and Macao) rose by 160%, vastly outpacing the 5% growth pace of total tourist arrivals. On a compound average growth rate (CAGR) basis, tourist arrivals from China grew 12.7% p.a. while total tourist arrivals grew 0.6% over that period. The share of tourist arrivals from China as a whole had also risen rapidly to 11.4% in 2018, from 4.6% in 2010. The jump in the number of Chinese tourists was aided by the introduction of Electronic Travel Registration and Information (eNTRI), visa-free entries, Visa On Arrival (VOA) and e-visas.

The government expects the Visit Malaysia Year 2020 (VMY2020) campaign to attract 30 million tourist arrivals and tourist receipts to reach RM100 billion. With 10.6% of the target being Chinese nationals, it will be challenging for the government to achieve its VMY2020 campaign targets if the outbreak persists for longer-than-expected.

Past viral outbreaks may prove to be useful in terms of providing indicators. During the 2003 SARS outbreak, tourist arrivals in Malaysia from China fell by 37% while total tourist arrivals fell by 21%; inevitably tourist spending during this period fell by 39% and 17%. Given the scale of the current outbreak, these figures could be eclipsed in 2020.

According to the International Air Transport Association, monthly international passenger traffic returned to its pre-SARS outbreak level within nine months. Given that the 2019-nCoV outbreak is decidedly larger in scale, it is not unreasonable to suggest that it will be more than nine months before monthly international passenger traffic returns to its pre-2019-nCoV outbreak level. That is, it is possible that we could be in the new calendar year by the time monthly international passenger traffic returns to normal.

In any case, the services sector, which accounts for nearly 57% of Malaysia's economy and of which the tourism sector is a part, has remained resilient thus far. In 9M2019, it expanded by an average of 6.1% and contributed roughly 76% of Malaysia's headline GDP growth. However, the ongoing outbreak of the coronavirus, which has caused more than 600 deaths, is slowly weighing on its prospects going forward.

On the demand side, retail trade and accommodation are some of the major beneficiaries of international tourism. These sub-sectors collectively constitute around 15% of the services sector. Although tourist expenditures are not directly considered as domestic consumption, they will continue to be an important contributor to the economy as increased receipts can boost consumer-linked industries as well as exports of goods and services. This would indirectly spur domestic spending. Given that tourist expenditures will likely decline in 2020, Malaysia's private consumption growth will also be affected. This will naturally weigh on the economy as private consumption alone accounts for more than 50% of the economy and contributed more than 90% of headline growth in 9M2019.

Quah Boon Huat, +603-27172931/ boonhuat@marc.com.my;
Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my.