>Asian Macro Views (CITI)

Swine Flu Impact – SARS Déjà-vu?

■ WHO seems likely to raise its pandemic alert level to 6 — Confirmed cases are still largely in the West and only two cases have been found in Asia so far (Hong Kong and South Korea). Swine flu mutates rapidly and reporting problems make morbidity and mortality rate calculations unclear. Laboratory tests showing the efficacy of anti-viral drugs such as Tamiflu are encouraging, though there is no vaccine yet that exactly matches swine flu.

■ Differences with SARS may result in smaller economic impact — First, there already exists a medical fix for swine flu, even if imperfect. Second, Asia is not the epicentre of the shock. Third, Asia is much better prepared now, both from a medical and governance standpoint. Hence the direct economic impact may be somewhat less severe now, though it could still be a hindrance to a smooth economic recovery.

■ Pandemic a negative shock to aggregate demand and supply, with greatest impact on non-tradables sectors, which should result in real exchange rate depreciation — If disease is contained relatively quickly and there is no permanent decline in population and production, the immediate net impact of a pandemic is to lower output and inflation. With a greater proportional impact on non-tradable/ services where “human interaction” is unavoidable, as compared to tradables/ manufacturing, this should imply a REER depreciation, particularly for small open
economies, as was the case during SARS.

■ Poorer, more densely populated and very open countries look more vulnerable to higher rates of infection — Our pandemic vulnerability index finds that Pakistan, Indonesia and India as well as Hong Kong and Singapore are most vulnerable to higher rates of infection, even though the last two have some of the highest health care expenditure per capita in the region. The countries that look to be the least vulnerable would be Taiwan and Korea, though ironically, Korea is one of the two Asian countries with confirmed cases of swine flu, illustrating the random nature of the spread of disease.

■ Assuming equal rates of infection, economies most dependent on transport/tourism could take the biggest hit to GDP growth — Our economic vulnerability index, which looks at the exposure of each economy to vulnerable sectors, finds that Thailand, Singapore and Hong Kong are likely to take the biggest hit on GDP growth. At the other end of the spectrum are Korea, Malaysia and Indonesia. Surprisingly, Taiwan does not fare too poorly, contrary to the SARS experience, though this was because Taiwan was more badly infected by SARS than many other countries.

To see full report: ASIAN MACRO VIEWS