A Scandal Virus Just as Dangerous
THE effects of the Coronavirus outbreak cast dark clouds over global financial markets.
The biggest problem for investors is uncertainty. It remains unclear how this epidemic will end.
Instead of subsiding, incidents of the virus escalated rapidly, increasing tenfold within a week to nearly 10,000 cases around the world at the end of January 2020. China alone still has more than 15,000 suspect cases that can be tested positive for the virus infection. The death toll has reached 213, and the World Health Organization has announced a state of international emergency.
The financial market had already enough experiences with deadly epidemics originated in China. The SARS outbreak 17 years ago has many similarities to this one. However, it seems that this time, things will be more dire. After just two weeks, there are now more cases of Coronavirus infection than there was with SARS, which had 8,100 cases throughout the world in 2003.
At that time, SARS slashed Chinese economic growth by 2 percentage point, from 11.1 percent on Q1 2003 to 9.1 percent in the second quarter. Chinese economy back then was not as big as it is now. The country’s gross domestic product was still US$1.66 trillion. Now it is 10 times bigger and has become one of the main engines that keeping the world’s economy rolling.
The prices of main commodities like crude oil, minerals, and agricultural products all depend on the health of the Chinese economy. A more severe outbreak than SARS will certainly have a greater impact on China as well as the world economy. But how bad it will be is not yet known with certainty. The Chinese government is forced to completely isolate Wuhan and its surroundings, the point of origin of the Coronavirus. Total isolation has practically stopped all economic activities there. Wuhan is one of the centers for the automotive industry in China. Other than large factories, production supply chains of thousands of small-scale industrial components have also stopped operating due to the isolation.
In the coming days, a stalled economy will be felt more intensely throughout the world. Since last week, many countries have refused entry to visiting Chinese citizens. China’s big trading partners, like the US, have warned their citizens to not visit mainland China. Every business affair involving China seems to face an imminent standstill or a delay at the very least.
Even drastic measures cannot provide certainty. Will the spread of the virus be successfully contained? Or will it go the other way and continue to escalate exponentially?
The markets are starting to panic from the lack of answers to those questions. Safe assets such as government bonds and gold quickly went up in price. By contrast, stock prices have fallen. Last year, stock prices in the US rose by 29 percent on average and continued strong at the start of the year. Since the middle of January, they have reversed course. The S&P 500 Index, one of the main stock indices in the US, fell 2.5 percent in just two weeks.
In Indonesia, there has been no positive cases of Coronavirus yet. However, the composite index had fallen by 5.71 percent in just one month throughout January 2020. It seems that there is another virus attacking Indonesia’s capital markets. Not the Coronavirus from Wuhan, but the virus of Jiwasraya scandal.
A viral scandal may not cause people to fall ill, nor is it deadly. However, for the market, the threat of a scandal virus is no less dangerous. Once it damages investor trust in the market, the resulting wound is very hard to heal.