The outbreak of the novel coronavirus will have significant impacts on the poorest economies, even if they do not have confirmed cases.
A new ODI paper examines the transmission channels and identifies individual countries that are most vulnerable to the economic impacts of the coronavirus outbreak and a slowdown in the Chinese economy.
According to our vulnerability index, the top countries at risk are Sri Lanka, Viet Nam, and the Philippines. Sub-Saharan Africa also could lose up to $4 billion worth of exports as the outbreak dampens Chinese and global demand.
Global economic losses
In 2003, the severe acute respiratory syndrome (SARS) virus dragged the world’s output down by $50 billion. However, given that China’s GDP share of 17% globally in 2019 was four times higher than in 2003 and with confirmed cases more than double the total of SARS, the coronavirus outbreak is estimated to cost the global economy up to $360 billion.
The impacts on China in terms of a decline in stock market prices, halted production, closed borders, and cancelled flights are already clear. China may grow by one percentage point less than was forecast a few weeks ago, which will also affect other countries.
Should Chinese demand fall by 1% due to the coronavirus outbreak, low- and middle- income countries would lose $4 billion worth of goods exports and $0.6 billion of tourism receipts. If oil prices fall by 5% amidst lower global demand following the outbreak, sub-Saharan African countries would face a $3 billion cut on its mineral fuel export revenues.
Countries at risk and the vulnerability index
We have developed a vulnerability index to quantify which low- and middle-income countries are most vulnerable based on three main impact channels:
1. Health and connectivity
The immediate impact on the health of the population and connectivity are most visible through confirmed coronavirus cases, as well as through direct flight cancellations and travel bans. These include, for example, the Philippines and Viet Nam, as well as a range of mainly Asian countries which recorded infected cases and have imposed visa issuance restrictions. Some African countries are also included, as six out of eight airlines have cancelled their flights to China.
2. Economic links with China and global integration
The economic impact of the coronavirus outbreak will be mostly felt by countries with close links to China either through trade, investment, or the movement of people. Mongolia, Cambodia and Laos are the most exposed Asian countries, followed by Myanmar, the Philippines, and Viet Nam.
The majority of these countries export more than one-sixth of their total exports to China – and in some cases 90%. More than one-fifth of total tourist arrivals in Myanmar, Thailand, Mongolia, Cambodia and Viet Nam comprise of Chinese visitors.
The most exposed African countries include Angola, Congo, Sierra Leone, Lesotho, and Zambia. For example, Angola exports 60% of its goods to China.
The indirect economic impact of the coronavirus on global economic sentiment is already reflected in falling prices of oil (by 20%) and copper (by 7%) since the outbreak. We estimate that a 5% decrease over one year (or 20% in this quarter) would lead to a loss of $3.1 billion in the value of mineral fuel exports from sub-Saharan Africa. However, we will see major economic gains in South and Southeast Asia, but losses in Central Asia and Europe.
Countries with constrained fiscal resources and weak health systems are less resilient and more vulnerable. For example, while Ethiopia is distant from the centre of the outbreak, the government’s deficit equivalent to -3% of GDP and low levels of reserves (worth two months of imports) leave less policy space for fiscal and monetary interventions should the outbreak reach the country.
Ethiopia also spends less than 5% of its GDP on health and has low quality and access to health care services. This is a common picture for sub-Saharan African countries, which occupy 15 of the top 20 least resilient countries in our sample.
What needs to be done to address the crisis
We identified a range of policies to deal with the crisis:
- Countries need to implement a range of health-related policies and information campaigns to contain the spread of the virus.
- Countries must examine the potential economic fall-out and spill-overs effects. Our vulnerability index can examine a country’s direct exposure to the virus through trade, investment, and movement of people.
However, a protracted and wider coronavirus outbreak will eventually affect global value chains, financial markets, flow of capital, and price levels, affecting both firms and households, and economic transformation as a whole. These effects need to be examined in more detail.
- Countries should continue to lower economic exposure and increase resilience to the outbreak moving forward. Economic vulnerability to external shocks stems from heavy exposure to just one country or sectoral activity. While China is a major trading partner and creditor to many low-income countries, the coronavirus outbreak reminds us of the importance of diversifying export partners and funding sources beyond China.
Continued efforts to build up fiscal buffers is also highlighted in our paper. The reason being, that governments are expected to take urgent and large-scale action given the externality of the impact of a pandemic health shock to all individuals and sectors.
As this global health emergency unfolds, we need to keep monitoring its impact.