HONG KONG, 26 February 2020. Pengyuan International has today published a commentary on the potential impacts of the COVID-19 epidemic on China’s Economy. In our view, the full-year impacts of the COVID-19 epidemic may be determined by economic activity in the month of March. While we remain cautiously optimistic on the economy’s resilience in 2020, we present three likely scenarios that may materialize in the remainder of the year. These scenarios inform our views on individual corporate sectors and we will continue to review our macro assumptions as new data points become available.
Here are the key takeaways from the report:
Base Case. Our base-case scenario assumes that the epidemic has largely been contained and that economic activity will gradually recover from late-February. In this scenario, we expect the short-term economic impacts to be the most severe for the retail, hospitality, entertainment, travel, and transportation sectors. The industrial and construction sectors may also come under pressure to some extent. Overall, we regard the short-term impacts on consumption and industrial production to be manageable, bottoming out in the first quarter. Our sector-level assumptions lead to our GDP growth forecasts of 3.3% for 1Q20 and 5.5% for the full year, which represents a downward revision of 50 basis points from our original expectation.
Pessimistic Case. In our pessimistic case, we assume economic activity will remain stagnant until late-March. We expect that, under this scenario, the government will implement more drastic stimulus measures, which will fuel a turnround in early-April. If this scenario emerges, we anticipate that a meaningful number of corporate entities, especially micro, medium and small enterprises, will default on their contractual obligations as a result of a sharp contraction in revenues and liquidity shortage. While we consider the ultimate impact to be short- to medium-term, a significant part of the economic loss may not be recaptured in subsequent months. These more conservative assumptions lead to our GDP growth forecast of 0.7% for 1Q20 and 4.9% for the full year.
Severe Case. Our severe scenario assumes that the COVID-19 outbreak will continue to spread nationally and social order will not be restored until late-May, and that economic activity will largely be stalled until early-June. Should these conditions occur, we anticipate that a significant number of small and medium enterprises will have defaulted. A considerable number of mid- to large-sized issuers may also be under liquidity distress, leading to a sharp decline in investments and widespread unemployment. We consider the resulting impact to be structural and mid- to long-term. Under this scenario, we expect full-year GDP growth to fall to 3.1%.
To mitigate the potential impacts of the above scenarios, we are of the view that a proactive policy stance is necessary. Specifically, we believe the current environment calls for: (1) a more aggressive fiscal stimulus program, coupled with an accommodative monetary policy; (2) targeted policies to boost consumption; (3) continued reforms towards economic restructuring; (4) temporary relief in corporate and household financial burden to stabilize employment; and (5) prudent risk oversight to maintain systemic financial stability.
+852 3615 8278
Stanley Tsai, CFA
+852 3615 8340
Ke Chen, PhD
+852 3615 8316
Date of Relevant Rating Committee: 25 February 2020
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