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Coronavirus Outbreak May Disrupt Supply Chain, Impact Credits In Medium Term

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Coronavirus Outbreak May Disrupt Supply Chain, Impact Credits In Medium Term
Aparajita Gupta - 12 February 2020

New Delhi, February 12: India Ratings and Research (Ind-Ra) does not expect the Coronavirus (2019-nCoV) outbreak to materially affect Indian corporates’ supply chains in the near term, provided it remains contained in the Hubei province.

In case the virus is transmitted over the next three to four months, the extent of supply chain disruptions globally could be higher than that during the 2003 SARS outbreak. The quantum of impact on sectors would be contingent on the nature of business activity and the nature of linkages the rest of the world has with mainland China, the report added.

Also Moody’s Investors Service said in a new report that a prolonged outbreak of the Coronavirus would hurt the asset quality and profitability of Asia Pacific (ex-China) banks.

India Ratings said credits in certain sectors, which are on a negative outlook, such as ancillaries, and/or are reliant on imports for raw materials from China such as pharma could be severe. On the other hand, commodity prices would soften, which are likely to benefit corporates in general. Ind-Ra said that till the time the outbreak remains concentrated in China, the threat to indigenous demand in other parts of the world remains limited.

Several Indian industries have a significant direct dependence on supplies from China. Some of these products such as antibiotics, activated pharmaceutical ingredients (APIs) and fertilizers are critical commodities and any disruption in the supply over the long term could have far-reaching economic consequences for India, the report pointed out.

“Textiles and automobiles could also face supply disruptions for critical raw materials. All this put together could further worsen the recovery in industrial production over the near to medium term,” the report said.

China accounted for nearly 11 per cent of the global imports and 13 per cent of global exports in 2018. It also serves as an import supplier of various raw materials and intermediate goods. Thus, the supply chains for various global and Indian industries are linked to China.

China is a net importer of various commodities globally. Commodities where the country contributes to a large part of global consumption are likely to experience pricing pressures over the near to medium term. Indian corporates, which are net users of these commodities, are likely to report an improvement in their debt protection metrics; whereas some of the net producers are likely to be affected.

In a scenario where it takes longer than anticipated to contain the 2019-nCoV outbreak, the downside risks to global growth could be substantial. Indian exports could be affected at two levels – first, by way of a slowdown in Indian exports to China and second, as global demand recovery remains lacklustre. For instance, India accounts for nearly 16 per cent of China’s cotton imports and 13 per cent of its construction material imports.

“If the outbreak intensifies and the disruptions stemming from it are not contained in the next few months, we expect negative impact on banks in Asia Pacific through various channels,” says Eugene Tarzimanov, Moody’s Vice President and Senior Credit Officer.

“While such effects would mostly stem from macroeconomic consequences that can take many quarters to materialize, some events, such as a decline in commodity prices, could have a rapid knock-on effect on banks,” adds Tarzimanov.

In the event of a prolonged outbreak, Moody’s expects that the banks will be affected through the following channels (1) travel and tourism, (2) private consumption, (3) supply chains, (4) commodities, (5) property prices and (6) financial markets.

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