(Source: Nikkei Asian Review 13/Apr/2020)
Japan aims to cut social contact by 80%, here's why
As one hypothetical calculation shows what's needed, a debate rages on
TOKYO -- Residents in Tokyo, Osaka and five other prefectures have been asked to refrain from going out. The plea came after the central government on Wednesday decided to become more aggressive in combating the novel coronavirus and declared a state of emergency. Aichi prefecture declared one of its own on Friday.
The request that residents of big metropolitan areas stay home came out of the belief that by reducing social contact by 80% in those areas, these population centers can stymie the virus.
The target and instructions to stay home as much as possible are similar to the policies put forward by a British research group, and they provide Japan with perhaps its only viable plan to try to prevent the virus's explosive growth.
"The important thing," a specialist in Japan said, "is how thoroughly [these ideas] can be put into practice."
The U.K., which has already requested people refrain from going out, can serve as a reference point.
The British government initially did not restrict people's movements as it instead tried to bet on something called "herd immunity." Authorities convinced themselves that the situation would resolve itself once a large number of people gained immunity to the virus. Ride out the pandemic, the theory promised, and economic impact would be minimal.
But infections and deaths continued to spread. Prime Minister Boris Johnson himself had to be admitted to intensive care after contracting the virus. He has since been released from the ICU.
A team of specialists at Imperial College London eventually persuaded the U.K. leadership to discard its herd immunity hopes with a forecast that about 510,000 deaths would come by August if the situation continued and no additional measures were taken.
The specialists' report also says that if school closures and other strict measures were taken, it would be possible to limit total deaths to between 8,700 to 39,000. Reducing social contact rates by 75% is a prerequisite for getting the situation under control, it says.
Among the means of transmission are sneezes and coughs, which spray droplets of phlegm that the virus hitches rides on.
One virus carrier is said to transmit the disease to two to three other people, according to studies. If that can be brought down to one person or less, the fast spread of the infection would be checked.
"If we reduce contact between people by 80%, we can reduce the number of additional people infected to one or less," Hiroshi Nishiura, a professor at Hokkaido University, explained in a video posted by the public Twitter account of the health ministry's cluster response team.
In a hypothetical calculation in which one person transmits the virus to 2.5 people, social contact could be reduced by 60% and the virus could still be brought under control. But because there are those who will not refrain from going out for dinner and drinks, or engaging in other high-risk activities, "to stop the infection at a societywide level, the target was set at the higher level of 80%," Nishiura said.
Restricting people's movement has a large impact on society and the economy. However, it is seen as unavoidable, as controlling the spread of the infection as quickly as possible is the best way to minimize long-term damage.
But it can be difficult to decide what activities to restrict and what ones are appropriate during the state of emergency.
Experts advise that in addition to ordinary preventive measures, such as avoiding poorly ventilated areas, people should limit face-to-face interactions as much possible and think carefully about how they could become infected.
Some specialists think Japan could try to control the spread without focusing on the 80% goal. They talk about the "three Cs" -- closed spaces with poor ventilation, crowded areas and close-contact settings. "If people thoroughly avoid places where the three Cs overlap," said Mitsuyoshi Urashima, a professor at the Jikei University School of Medicine, "it may be similarly effective, even without people reducing their social contact by 80%."
There are also some who think that even if people successfully reduce their social contact by 80%, it will not be enough to stop the pandemic. "In the case of Tokyo, it needs to drop by 98%," said Aki-Hiro Sato, a professor at Yokohama City University who specializes in data science. If the virus spreads in urban centers like it did in Europe, people will need to limit their time outside to 110 minutes per week, he added.
There are several different models that estimate the spread of infections, and they are all based on different assumptions. As a result, they all come to different conclusions, meaning it is necessary to constantly reevaluate the situation and reconsider what actions to take.
(Source: Nikkei Asian Review 10/Mar/2020)
Asia's winners and losers from mayhem in the markets
The dramatic slump in the oil price has rattled investors but some sectors could see shafts of light
TOKYO -- Businesses across Asia already reeling from the spread of the new coronavirus now have new problems to contend with. This week's dive in oil prices, and the market upheaval triggered around it, risks changing the landscape in which many companies operate.
The region's oil companies are most directly exposed to the crude price war started by Saudi Arabia, which now represents the fiercest of operating headwinds. "The price collapse could be the trigger for a new phase of deep industry restructuring," said Wood Mackenzie, the energy consultancy.
But the ripples from the market turmoil are spreading across other sectors -- half a world away, shares in Tesla fell 13% as investors speculated that cheap oil would dent demand for expensive electric vehicles.
Sentiment across sectors has turned sharply more negative, with the oil price fall seemingly reinforcing a view that Asia faces a big downturn. "Investors are more vividly aware of risks that the fall in demand due to the COVID-19 outbreak may have kicked off a negative chain reaction, which could eventually lead to a global economic slowdown," said Yoshimasa Maruyama, chief market economist from SMBC Nikko Securities in Tokyo.
Here the Nikkei Asian Review highlights some of the sectors to watch as markets gyrate and confidence in the business climate takes another hit.
Generally, lower oil prices benefit Asian economies, which tend to be net oil importers -- but that is scant consolation to regional producers now facing big hits to investment plans and balance sheets.
As Wood Mackenzie noted, the last price war to shake the sector played out as recently as 2015-16, when OPEC again kept production high. But at that time the demand side of the market was healthier. This time, demand has been severely inhibited by the measures taken around the world to control the coronavirus outbreak, with many countries implementing travel restrictions.
Russia's refusal to agree to more production cuts -- the trigger for the price war unleashed by Saudi Arabia -- was widely seen as a way to squeeze U.S. shale producers. But for some Asian companies it promises to be no less challenging. Goldman Sachs on Tuesday cut its 2020 earnings forecast for the regional energy sector by 45%.
Capital expenditure is expected to take a big hit from the change in industry assumptions if the lower oil price endures. Petronas, Malaysia's state oil group, had based its investment plans -- for 28 billion ringgit ($6.6 billion) of domestic capital expenditure and upstream activities of 34 billion ringgit -- on an indicative oil price of $50 per barrel.
UOB Kay Hian, the investment bank, said Petronas would be forced to cut capital spending. "Covid-19 will be a triple whammy to Petronas in the form of oil prices (upstream income), petrochemical demand (downstream income) and disruptions or force majeures on long-term liquefied natural gas (LNG) exports (gas and new energy income)," it said in a research report.
Chinese oil companies, however, are seen as possible winners of the oil price war.
Lin Boqiang, a director of the China Center for Energy Economics Research at Xiamen University, called the lower crude oil price "a blessing" for Chinese oil companies. Since Beijing has set a floor price for refined oil products at $40 per barrel, the cheaper crude oil is, the fatter the profits generated for domestic oil refiners and distributors, Lin said.
Hong Kong-listed China National Petroleum Corp., commonly known as PetroChina, enjoyed a roughly 2.57% increase in its stock prices on Tuesday, outperforming the broader market. Shares of Hong-Kong-listed China National Offshore Oil Corp. and Hong Kong-listed China Petroleum & Chemical Corp. jumped about 2.96% and 1.05%, respectively.
Thanks to the government-controlled pricing mechanism, green energy groups in China have also been largely sheltered from the blow. "The oil price slump will have an impact on industries such as renewable energy and electric cars, but that impact is expected to be minor," Lin said.
In South Korea, state-run power company Kepco is a winner from the oil price drop because of its heavy use of LNG bought from Kogas. Kiwoom Securities estimated that Kepco benefits 110 billion won ($92.1 million) per year for every $1 fall in the oil price. Shares of Kepco jumped 8.1% amid Monday's market rout.
Slumping oil prices are also expected to provide relief for Indonesia’s state-owned oil and gas company Pertamina, which is planning to ramp up crude oil imports after it came under strong pressure to curb such purchases due to Indonesia’s widening trade deficit last year.
“There will be some [negative] impacts on the upstream business. But on downstream, this is good -- we will buy a lot while the price is still [low],” Pertamina president director Nicke Widyawati told local reporters.
High oil prices over the past few years have strained Pertamina's finances, as President Joko Widodo ordered the company to ensure the same prices for subsidized fuel across the sprawling archipelago, despite higher distribution costs to central and eastern Indonesia.
AVIATION AND TOURISM
Chinese carriers could be among the biggest winners from the collapse in oil prices, according to Morningstar equity analyst Ivan Su, who covers Asia's aviation sector.
"None of the mainland Chinese carriers, including Air China, China Southern Airlines and China Eastern Airlines, hedge their fuels, so a falling fuel price will probably benefit them the most," Su told the Nikkei Asian Review. "Cathay Pacific Airways and Singapore Airlines hedged a significant portion at around $50 to $60, so they will likely experience some hedging losses in the near-term."
Paul Yong, an equity research analyst covering aviation and transport at Singapore's DBS Bank, agreed that Chinese carriers would be the biggest beneficiaries.
In addition to not hedging their fuel consumption requirements, "China's domestic capacity and flight demand has shown signs of recovery as the COVID-19 situation in China outside of Hubei seems to be under control," Young said.
"Within the rest of our coverage, airlines have roughly between 30-70% of their fuel needs for 2020 hedged, and will benefit more the less percentage they have hedged," he said.
DBS estimates that Malaysia's AirAsia Group has around 73% of its jet fuel hedged, while Singapore Airlines' hedging is around 65% and Hong Kong's Cathay Pacific has around 35% of its fuel needs for the year hedged.
Daiwa Capital Markets expects Cathay to report HK$2.4 billion in hedging losses in 2020, with a hedging loss also likely in 2021, assuming an average Brent price of $57.89 per barrel.
Overall, MIDF research analyst Adam Rahim said the effect of lower fuel prices would not be enough to offset the sharp falls in the number of travelers.
"As Japan, South Korea, Germany and France are some of the countries with the highest number of Covid-19 cases outside of China, the downward pressure towards the tourism and aviation sector of [Southeast Asian] nations such as Malaysia will be amplified," Rahim said in a research note.
Earlier this week the International Air Transport Association increased its forecast for 2020 losses for the global aviation passenger business as a result of the coronavirus to between $63 billion and $113 billion.
BANKING AND FINANCE
Banks already rattled by stalling economic growth due to the virus now face another hit, even if they do not have a big loan book in the oil industry. As Citigroup analysts in London said, "the risks from slower growth and asset quality concerns are beyond direct lending to energy companies."
Having analyzed the correlation between lower oil prices and banks' performance, Citigroup found that among Asian lenders Bank of China's Hong Kong unit, HSBC's Hang Seng Bank and the three largest Singaporean lenders --DBS Banking Group, Oversea-Chinese Banking Corp. and United Overseas Bank -- exhibit "meaningful correlation" with crude oil prices.
One obvious risk for banks would be from interest rate cuts to try to shore up economic confidence. With the odds shortening that the U.S. will make a further aggressive rate cut, perhaps to zero, short-term rates in markets such as Hong Kong and Singapore are also set to slip. That would in turn cut banks' net interest margin, a key measure of lending profitability. Every 10-basis-point fall in net interest margins equates to as much as an 8% fall in profit.
That comes on top of an estimated $2 billion or more in lost revenue and an even bigger bill in provisions for soured loans due to the coronavirus outbreak, with the impact set to double if the epidemic is not contained by March.
S&P Global Ratings said in a note last month said the virus could add $770 billion in bad loans and triple mainland Chinese banks' gross nonperforming-loans ratio. Analysts polled by the Nikkei Asian Review see lost revenue of more than $300 million for each of the largest mainland banks as loan growth slips and income generated from the sale of wealth-management products, insurance, trading and arranging capital slumps.
HSBC, which is planning to redeploy capital to Asia, sees $600 million in additional loan losses as clients are forced to shut operations and demand for business from their consumers dries up.
DBS, Southeast Asia's largest bank by assets, estimates a drop of at least $100 million in revenue and a $50 million increase in credit cost. Standard Chartered, which focuses on emerging markets, warned last month that the virus outbreak and months of protests in Hong Kong meant it was likely miss its previous target of 5% to 7% growth in 2020. Hong Kong-based Bank of East Asia last month cut its loan growth forecast from mid- to high single digits to single digits and has lowered expectations for fee income from double digits to single digits. It also expects a deterioration of 10 to 20 basis points in credit costs in Hong Kong because of the outbreak.
RETAIL AND CONSUMER GOODS
Retail sales in Asia, especially in the high-end segment, are expected to suffer as people refrain from lavish spending due in part to slumping share values.
"Luxury retail as well as other non-essential purchases have already been hit badly in Asia because of the coronavirus outbreak," said Tommy Wu, senior economist at Oxford Economics. "The global shock to financial markets will dampen the already-poor sentiment even further," he said.
Unlike daily necessities, the sales of discretionary items are strongly tied to the performance of stock and property markets. Economists have explained the relations as the "wealth effect," which suggests people spend more as their investments rise, and less when they fall.
"When the stock market is up, it gives people who own a stock portfolio a sense of confidence and optimism about their future, and they allow themselves to indulge and spend more in discretionary goods and services, including luxury," said Pascal Martin, partner at OC&C Strategy Consultants.
International luxury brands have pinned high hopes on Asia for growth as they invested heavily to expand store network. Chinese consumers alone spent $115 billion on luxury items in 2018, accounting for about one-third of the world's total, according to McKinsey & Company's 2019 luxury report. Each luxury-consuming household in China spent an average of $11,500 per year on such items.
Following the U.S. market plunge, share prices of most of jewelry companies, cosmetics retailers and shopping mall operators listed in Hong Kong fell as of Tuesday noon despite an overall rise in the Hang Seng Index. Hayman Chui, an analyst at Cinda Research International, said the market plunge signaled people's pessimistic view on the macroeconomy. "Therefore, they would expect decreased income and reduce the spending on discretionary items," he said.
Martin said luxury sales had shown resilience during previous crises. But he said the current situation is "affecting people's life in profound ways."
"They don't go shopping as much, they don't go out as much, they don't travel anymore, they tend to stay home and get things delivered. As a result, they are not in a mood to buy expensive luxury products which they don't really need as long as they stay at home," he said.