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SARS - Tsunami or passing storm?
By James S.
1646
2003 6 1
Malaysian Business
MALBUS
45
(c) 2003 New Straits Times Press (Malaysia) Berhad

WORRIES about the impact of the Severe Acute Respiratory Syndrome (SARS) outbreak on
key Asian economies have spread in recent weeks, with many economists and analysts
downgrading their growth forecasts for the region. While the economic effects of SARS are
understandably bad, the degree of its impact varies pretty much from country to country.
Countries such as Hong Kong have seen their economy come to a virtual standstill while
Singapore has noted that its tourist arrivals have been down some 61% year on year in the
last two months. Taiwan and China have seen a rise in SARS cases recently while South Korea
and Malaysia are also bracing for SARS-related impacts, although to a much lesser degree.
However, a large number of countries are not affected, such as those in Europe, Latin
America and Oceania, and the United States.
We look at some of the implications of SARS in this article and whether SARS is a tsunami
wave of destruction or just a passing storm. Stock markets worldwide including the KLSE
have voted for the latter, with most markets either up or relatively flat since the onset
of SARS.
We also look at how the Government is fighting the SARS malaise, which has plagued the

economy as fears and uncertainties spread, causing a drastic drop in tourism and service
activities, and in consumer sentiments and business confidence. The Government's new
economic stimulus package, aimed primarily at lessening the effects of the above, is timely
and its importance is actually in the measures designed to boost overall consumer
sentiments and business confidence in the country (see side bar).
The Impact of SARS
While the number of SARS cases looks negligible compared to the population of the 32
countries that have reported infections, its cumulative impact on business and consumer
sentiments is worrying. Undoubtedly, the SARS fallout will have negative direct and indirect
implications to our economy. Either way, most analysts believe that it will erode business
confidence and consumer sentiment, which will eventually limit Gross Domestic Product
growth. Another implication of SARS could be a slide in corporate earnings, which may weigh
on the current fragile market sentiment. Direct Hit
The services sector has suffered the most from SARS. Retail outlets, restaurants, hotels,
travel agencies and entertainment establishments are the front-line businesses that have
borne the brunt of the fallout due to the drop in tourist and business travels. While it is hard
to quantify the actual impact of SARS, the repercussions are nonetheless significant.
Businesses have been reeling from the impact. According to news reports:
* KFC Holdings Bhd said that the group's food outlets have seen a drop of 20%-30% in
turnover in the months of March and April. It said this would almost certainly be reflected in
its earnings.
* The Malaysian Retailers Association (MRA) has estimated that turnover for member
companies has fallen by between 10% and 30% since April.
* Travel agencies, which survive on the cash they receive from bookings, are earning 25% to
45% less in monthly revenues. PST Travel and KHT Travel, both in the British American
Tobacco (M) Bhd stable, said that they have seen many cancellations and postponements of
tour packages for travel in the months of April, May and June.
* Shangri-La Kuala Lumpur, one of Malaysia's top five-star hotels, said that its occupancy rate
has declined by 60%-70% in the `SARS period'. Overall, hotel occupancy rates have dropped
to 30%.
Indirect Blow
The banking industry could be a sector that will feel the first indirect impact of SARS as it has
a very high correlation with the economy. It is believed that the SARS outbreak could affect
the earnings of banks via two major elements: loans growth and loans loss provision. The
recently announced result (1Q03) of OCBC Singapore where the bank's net profit declined
6% (QoQ) and 26% (YoY) could be a reflection of the potential damage of SARS, although the

impact on Malaysian banks is believed to be much softer as Malaysia has not been
designated a SARS-affected country. Who Could The Winners Be?
Amidst the doom and gloom, there are obviously sectors and companies that will benefit
from the SARS impact. One of the industries that will directly benefit is the pharmaceutical
business, where some companies have reported increased sales:
* Kotra Industries Bhd said the consumption of vitamins and generic drugs has increased,
and thus the business for these segments has improved over the past few months.
* Demand for disinfectants, masks and thermometers has risen and supply cannot meet the
heightened demand, said Apex Pharmacy.
* Some analysts are also recommending direct-selling companies like Amway and Cosway as
companies that could gain from the SARS epidemic, as the outbreak is likely to make people
more health conscious. This awareness is boosting the sales of healthcare products.
* Another sector that could benefit in the long term is the insurance industry. Increased
health awareness will certainly influence people to place greater focus on life and healthcare
insurance.
The Cost of SARS
The bill is somewhat hard to be estimated. First of all, no health organisation knows when
the outbreak will be wiped out. Thus, not surprisingly, most researchers across the world are
at their wits end as how to quantify the cost of SARS. Some experts have predicted huge
economic losses resulting from SARS - the World Bank, for example, forecasts a total loss of
US$15 billion (RM57 billion) in Asia alone. The Government of Singapore now said its 2003
GDP growth would be between 0.5% and 2.5%, down substantially from the 2%-5% range it
had previously predicted. On the domestic front, MIER (Malaysian Institute of Economic
Research) has lowered our 2003 GDP forecast from 4.5% to 3.7%.
While there may be other economic costs associated with SARS, the greatest part of these
losses will be the result of irrational panic, which is currently leading to a decrease in tourism
and consumption, rather than the disease itself. Given that business and consumer
confidence is the best prescription to check the slide, the Government's new strategic
economic package can help reduce the irrational fears and impact of SARS.
The SARS scare is making foreign investors more nervous about visiting or investing in China,
which is currently drawing out foreign direct investments (FDI) from other countries in Asia.
Some economists believe that the postponement or cancellation of investments in China
may well be good news for emerging countries (those less affected bySARS) in South-East
Asia. Motorola is an example. Before the outbreak of SARS, the group was considering to
invest 80% of its capital in China. However, this has since been scaled down to 50% and the
company is believed to be directing the remaining portion back to other emerging markets
like Malaysia.

The Pause of Globalisation?

A research report published by SIIA (Singapore Institute of International Affairs) said the
possibility of SARS becoming a truly global threat and pulling the plug on globalisation could
not be discounted.
`The outbreak of SARS has brought the question of how governments should react
domestically and cooperatively with other neighbouring countries and the international
community to limit the damage of viral globalisation. The barrage of criticisms that China has
received for failure to act on SARS more quickly, openly and truthfully has shown how the
lack of international consciousness can bring untold damage to the normal rhythm of
societies and economies. Impact of SARS on China's key trading partners such as Hong Kong,
Singapore and Taiwan; the backlash against the Chinese community in SARS-infected
Toronto, the Malaysian government's ban on Chinese tourists, clearly illustrate this point.'

The Beginning of Price Wars?

Andy Xie, an economist from Morgan Stanley, on the other hand, believed that SARS would
have a greater impact on corporate earnings rather than on GDP. The disruption in sales
could expose fixed-cost businesses to insolvency risks in the coming months, and rising
inventories in distribution channels could trigger price wars.
`Regardless of the ability to control SARS, and the timeframe involved, most of the
businesses will still see real and considerable costs to corporate earnings that markets will
probably have to contend with in the coming months. Further, we believe that inventories
that have piled up in distribution channels will likely lead to price wars as demand recovers across the region and in both goods and services. While the impact of SARS on GDP could be
mitigated by such price wars (to keep volumes up), corporate profits are likely to be reduced
significantly, in our opinion. Current earnings expectations will probably be tested severely in
coming months.'
How Will The Market React?
It is notable that despite the onslaught of bearish news in the past few months, beginning
with the build-up to the US-Iraq war and the actual war itself to the current SARS outbreak
and new terrorist threats, the KLSE and other major markets in the region have been
seemingly reluctant to dip further. In fact, South Korea's KOSPI index has already seen a rally
in the past few weeks. Is the market trying to convey a bullish signal to participants?
Contrarians certainly think so and believe that it's better off being a contrarian in a chaotic
period rather than follow the herd blindly. With the SARS outbreak winding down in a
number of countries, notwithstanding its short-term economic impact, could it be just a
storm in a teacup for the stock market? In other words, has its impact already been priced
into the market? On a lighter note, some Feng Shui masters are saying that the

SARS outbreak will taper off in August 2003. If it comes true, the market as a forward
indicator may well be seeing a recovery rally before then.
New Straits Times Press (Malaysia) Berhad

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SARS ()
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The World Bank SARS 570

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2002~2003 SARS
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