The good news is that the number of newly infected cases of the new coronavirus 2019-nCov has been stabilizing. However, the fear of economic fallouts from the coronavirus 2019-nCov have become ever louder. In a previous piece, we argued that if the SARS outbreak of 2003 is used as a yardstick, China’s economy would not suffer from the coronavirus, but would make up any losses in its current economy, trade and FDI over the course of the year 2020. This assumes that the crisis is contained within the next couple of weeks.
At the same time, however, worries within BRI countries about the economic impacts of the coronavirus have intensified. They include
- Less demand for products, which would slow trade
- Disruptions in supply chains with trickle-down effects (e.g. inability to continue production)
- Fall in commodity prices due to declining demand (e.g. for oil, gas, raw materials) with positive effects for countries that import resources and negative effects for countries that predominantly export commodities
Furthermore, there are indirect consequences, such as increased risks of bankruptcies of companies with low capital reserves as they fail to generate revenues to pay their bills. Finally, although the cases of coronavirus in many BRI countries are low, fears of insufficient healthcare systems in many BRI countries heighten the risk of an epidemic, should the coronavirus arrive in any of the countries from Southeast Asia to Eastern Africa and beyond.
Obviously, any predictions of economic impacts of the coronavirus in the countries of the Belt and Road Initiative (BRI) are prone to massive error. In this article, we capture sentiments about possible economic consequences in selected BRI countries by looking at media reports from these countries and enrich them with our own analyses on trade and investment. What becomes obvious is that particularly countries in South East Asia and countries exporting fossil fuels are vulnerable should China’s economy wobble. Accordingly, to deal with the potential crisis, we recommend for countries at particular risk that:
- Central banks should lower central bank rates for re-financing (as did the Chinese central bank)
- Regulators should step in and support green growth and economic diversification to reduce dependence on fossil fuel exports
- Multilateral development banks and donors should mobilize funds to support struggling economies (as the ADB already did at the beginning of February).
- NGOs and WHO should continue to strengthen resilience of healthcare and emergency systems to avoid any outbreaks of the coronavirus
China is the biggest trade partners of Vietnam, constituting 19% of Vietnam’s exports with USD 49.1 billion (followed by the USA with 17.66% and Japan with 6.67%). Any percentage changes in exports to China directly impact Vietnam’s economy. As a consequence of the virus, Vietnam’s exports to China could decrease by between US$400million and $600 million, equal to 5-8%, depending on the evolution of the epidemic. Accordingly, estimates predict that if the epidemic is controlled in the first quarter of 2020, Vietnam’s GDP growth rate will drop by 0.5% to 6.3% year-on-year growth. Should the epidemic be only controlled in the second quarter of 2020, the estimated drop in GDP growth will be around 0.7%.
“This makes it difficult to accomplish the objectives and targets of socio-economic development in 2020 assigned by the National Assembly (…) To achieve the 2020 GDP growth rate of 6.8 per cent as set out in Resolution No.1, it is a huge challenge,” said Minister of Planning and Investment Nguyễn Chí Dũng.
On the positive side for Vietnam, however, global companies are rushing to diversify their supply chains from their dependence on China. As a consequence, both Chinese and international partners are accelerating their investments in production facilities in Vietnam as a good alternative to China. As we have already seen in the US-China trade war, Vietnam might be a long-term winner of supply-chain de-risking.
China is a major investor in Vietnam, contributing about 1.4 billion USD in 2019 alone. With investments in energy (particularly alternative energy), China has been supporting Vietnam’s economy. Any decline in such investments will have a strong impact on Vietnam’s economy.
Indonesia’s economic growth has been on a downward trend already in 2019 (it slowed from 5.17% growth in 2018 to 5.07% in 2019). As China is Indonesia’s biggest trading partner, contributing 13,8%, or USD 25 billion USD, of Indonesia’s export (followed by the USA with 10.8% and Japan with 10%). any changes of export to China will hurt Indonesia. Besides exporting particularly coal and palm oil, Indonesia’s economy is highly dependent on tourism (constituting 6% of its “exports”). Destinations like Bali are among the most popular and accessible tourist destination for China’s growing number of travelers. In 2018, China’s tourists already accounted for 13% of tourist arrivals in Indonesia. Indirect consequences for Indonesia from the coronavirus are a decline in global commodity prices, where Indonesia is particularly dependent on fossil and agricultural exports.
Driven by the potential of a continuing slowing economy, Indonesia’s re-elected President Joko Widodo is possibly pushing through unpopular labor market reforms, which could lead to social unrest.
With about USD 8 billion of investments (particularly in energy and steel), Indonesia was also the biggest recipients BRI investments from China in 2019. Any changes in these investments are likely to hurt the economy, but might benefit Indonesia’s emissions.
Studies comparing the economic impacts of the 2003 SARS virus and the corona virus conclude that economic impacts on Malaysia’s economy due to the new coronavirus will be limited. Accordingly, current estimates still forecast a 4.3% GDP growth for 2020. Should the current condition worsen, fears are that the outbreak has the potential to shave off up to 0.2% off annual GDP growth.
However, when looking at Malaysia’s dependency on the Chinese market for its exports, a different picture emerges: China is by far the largest buyer of Malaysia’s exports, constituting about 19%, followed by the USA (13%) and Singapore (11.8%). More than 50% of exports to China are electronics products, followed by fossil fuel products. If China slows imports of these goods, e.g. due to slowing economies or even due to supply chain interruptions, Malaysia’s economy will be harder hit. Similar to other countries in the region, fears of dropping tourists numbers also weigh heavy with Chinese tourists make up more than 10% of tourists visiting Malaysia.
Malaysia also received substantial BRI investments in 2019 of about USD 780 million, particularly in energy and transport. However, these investments are comparably small to overall FDI and a small decline in investments from China are less severe for Malaysia when compared to other countries.
The economy of the Philippines has grown relatively strong over the past years, particularly when compared to other countries of the region (e.g. 6% in 2018 GDP growth versus 5% in Indonesia, 4.7% in Malaysia). Current estimates forecast a slowing growth rate of less than 0.1% due to the corona virus in a good case, 0.3% in the case the virus is contained by June and 0.7% if the virus is only contained by the end of the year.
Areas of the economy that are particularly vulnerable are tourism (which accounts for about 5% of the GDP of the Philippines) and real estate (where Chinese developers and buyers constitute an ever larger share of the market and where offshore gambling seems to be a particularly large market dependent on Chinese money).
However, when looking deeper at the numbers, the risk for the Philippines of a struggling economy in China becomes bigger, as China is a major buyer of products from the Philippines, particularly electronics (about 45% of exports to China), and machinery (about 25% of exports to China). In regards to investments from China, the Philippines were among the top 10 recipient countries of BRI investments in 2019 with about USD 3.3 billion. Sectors with Chinese investments in the Philippines were energy and technology. A decline of Chinese investments in the Philippines will directly affect the economy.
Sri Lanka is less dependent on China’s than many of its neighboring countries. China accounts for only 4% of Sri Lanka’s total exports and 20% of its imports. However, few products like precious metal ores, footwear, other base metals may be affected with a slump in demand in China, which accounts for more than 20% of these exports. Much more, if China’s supply chains are not re-established soon, Sri Lanka might struggle to import the necessary materials to build their export products: A wide range of imports are likely to be affected due to shipment delays as a result of factory closures and transport restrictions in China.
Also Sri Lanka’s tourisms industry is likely to suffer from a decline of Chinese tourists: in 2019, Chinese tourists contributed to 10% of tourists to Sri Lanka – the second most from any country but India. However, so far the impacts are minimal: in January 2020, Chinese incoming tourists declined by only 6% compared to the year before.
Looking deeper at the numbers, another risk for Sri Lanka is a decline in global shipping, as both its Hambantota port and its shipping industry are increasingly depending on global exports. In regards to investments, China brought in about USD 300 million in capital in 2019 – most of which in hydropower. A decline of Chinese investments is not ideal, but would not affect Sri Lanka’s economy as much.
Nepal’s economy is less dependent on China – with only about 3% of Nepal’s exports going to China (compared to 53% to India, 12% to USA). However, Nepal’s tourism industry is dependent on Chinese tourists and business travelers. Out of the 1.1 million tourists visiting Nepal, 153,000 were Chinese. This sector is expected to slow due to the virus outbreak, prompting what might become a significant downturn in passenger traffic between China and Nepal. At the same time, trade between the two countries is at risk due to border restrictions as a precaution in the wake of the virus.
With only about USD 270 million investments in 2019, Nepal is not among the top recipients of BRI investments from China and changes in the investment volume are unlikely to affect Nepal’s economy too strongly.
Turkey’s economy is less dependent on China than other BRI countries. Only about 2% of its exports are shipping to China (compared to about 10% to Germany and 6% to the UK). Turkey’s exports to China are particularly in ores, which might be affected in the short term by slowing construction in China, however, might profit over the medium-term by a construction stimulus that China might see to fight the economic impacts of the outbreak.
According to other sources, the coronavirus could have positive impact on Turkish economy, but in long term, it could carry risks. In short term, the less Chinese demand for iron or oil, the more the decrease in commodity prices, from which Turkey as a commodity importer country could benefit. Also, some Turkish goods such as textiles may be preferred. Tourism and healthcare industry may also benefit from the coronavirus. In the long term, a Chinese cyclical slowdown would have a negative impact on EU countries that are selling China technology and engines. If the EU economies struggle, so will Turkey, whose main export markets are the EU (around 50%).
In regards to investments from China, Turkey has received more than USD 2 billion in BRI investments from China in 2019 alone, more of half of which went into fossil fuel investments. A decline in such investment might hurt the economy, but would benefit the climate.
Poland’s economy is not directly dependent on China with only 1.5% of its exports going to China (compared to 27% to Germany). However, in order to build its products, Poland imports almost 10% of its total imports from China. Thus, any disruptions in supply chains from China could have an impact on Poland’s economy. As such, some studies fear in an extremely pessimistic scenario that the Polish GDP would be hit by a drop of 1.5% in 2020.
In regards to investments, Poland received about USD 290 million in investments from China in 2019. As this only constitutes a small portion of FDI in Poland, it is therefore less vulnerable to changes from China’s investments should they happen due to the coronavirus.
China is a major market for Russia’s exports, accounting for 18% of the total (followed by Germany accounting for 12% and the USA accounting for 5%). Contrary to some expectations, fossil fuels only account for 0.63% of exports to China, compared to 26% of machinery and 20% of textiles. However, as the Russian overall economy is heavily dependent on oil, impacts on the oil prices due to slowing economies have a direct effect on Russia’s overall economy. Indeed, as a consequence of the coronavirus, oil prices have dropped in January (slightly recovering over the last days).
China was also the biggest “supplier” of tourists to Russia and studies suggest that the country is losing at least 1.3 million Chinese tourists. On the other hand, it seems that Russian pharmaceutical companies and pharmacies that have profited from the situation.
In regards to investments, Russia was the second most important recipients of Chinese BRI investments, totaling 7.5 billion USD. Particular sectors were fossil fuel energy and chemicals.
Kazakhstan’s economy is at high direct and indirect risk from any turbulence in the Chinese economy. China is Kazakhstan’s major trading partner, accounting for about 13.4% of its exports (followed by Russia with 10.2% and France with 8.6%). Kazakhstan’s economy is particularly dependent on fossil fuels and ores. Demand and prices are both products are at depending on the global economy and a drop in global demand will directly hurt export values for Kazakhstan. Accordingly, reports suggest that “Kazakhstan [is] among ‘most vulnerable’ countries to economic losses because of coronavirus”
In regards to investments, Kazahkstan received more than 1 billion USD in BRI investments from China in 2019, particularly in road transport and agriculture. Therefore, a decline in Chinese investments is highly likely to hurt the economy.
The direct impact of the coronavirus in China on Ukraine’s economy is moderate. Currently, only 4.6% of Ukraine’s exports go to China (compared to almost 9% to Russia, 5.6% to each Italy and Poland). Also, as most exports from Ukraine to China are agricultural products, these exports are possibly even increasing should China be in need of more agricultural imports (e.g. due to problems within its own agricultural sector or the US-China trade war). As such, studies currently suggest that the Ukrainian economy will not feel any negative impact from the current situation in China. The impact on tourism wouldn’t have impact on Ukrainian economy since it only accounts for 2% of the GDP. They also do not expect for any negative impact on the sales turnover between Ukraine and China.
The biggest risk for Ukraine from the virus are possible declining investments from China. In 2019, Ukraine received almost USD 1.3 billion from China in 2019, particularly in alternative energies.
South Africa’s economy remained in sluggish in 2019, growing only 0.8%. The corona virus is likely to exacerbate fears that the country could be headed towards a recession. With about 18% of South Africa’s exports going to China (followed by Germany with 13% and the USA with 6%), any changes in demand for South African products in China have an outsized effect on South Africa. Accordingly, The South African Rand (ZAR) remained highly sensitive because of coronavirus, losing value against other currencies.
In regards to investments, South Africa – despite being an important trading partner of China - received no major investments from China in 2019.
Port authorities in Kenya have introduced disease control to ensure that cargo, vessels and crews are Covid-19 free causing delays for imports and exports. As such, some fear that Kenya’s economy is at risk of suffering from any hiccups of China’s economy.
However, looking at the overall numbers, China only contributes to 2.5% of Kenya’s exports, while the bulk of Kenya’s exports go to neighboring Uganda, Pakistan and the UK.
However, when looking at investments, the risks for Kenya’s economy seem higher: In 2019, Chinese investors poured about 1.3 billion USD into Kenya’s economy, particularly in transport (such as roads and railway) and a drop of these investments will most likely hurt Kenya’s economy.
Uganda’s economy is currently not only under strain from potential impacts from the coronavirus. Much more, it suffers from an outbreak of locusts that are devouring agricultural products across the country. This is particularly disastrous for Uganda’s economy, which depends to 60% on agricultural exports. Accordingly, the direct consequences of the coronavirus in regards to trade with China are not severe – particularly as only about 1% of Uganda’s exports go to China. In regards to the coronavirus, the biggest fear in Uganda revolves around a healthcare system that might not be able to deal with the coronavirus in case of an outbreak.
Also in regards to investments from China, Uganda is not as vulnerable. As China “only” contributed USD 430 million in 2019, the consequences of slowing investments from China are less severe.
Nigeria’s economy is particularly at risk from plunging oil prices due to the coronavirus outbreak. Its exports depend 90% on crude oil. Accordingly, predictions forecast that Nigeria’s economic growth only grows 2% instead of 2.5% in 2020. The spread of the coronavirus virus has curbed demand in China, driving oil prices down nearly 13% this year, and below the $57-a-barrel the Nigerian government forecast in its 2020 budget.
In regards to investments from China, Nigeria is not as vulnerable as some of the other BRI countries. It “only” received about USD 500 million in 2019 – most of which went to shipping.
BRI investment data: China Global Investment Tracker 2019, American Enterprise Institute, 2020