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SARS takes increasing toll on Asian economies

By Andrew Priest

SINGAPORE, April 24 (Reuters) - Economic fallout in Asia from the SARS crisis mounted on Thursday as the World Bank cut its regional forecast, Hong Kong received a credit rating blow and investors dumped shares of Asian retailers and exporters to China.

Although investors have already cut exposure to sectors most exposed to the virus, such as retailing and regional travel, selling picked up after an acceleration in cases in China and growing fears SARS may stall the region's economic engine.

A report that top Japanese carmaker Toyota Motor Corp plans to withdraw most of its Japanese staff and their families from Beijing due to the virus deepened the gloom.

"Now SARS seems a little bit more protracted and it's affecting China. People are revising down China's GDP numbers and that's an important growth engine for us," said Roy Phua, fund manager at DBS Asset Management, which manages S$5.6 billion.

Hong Kong shares slid one percents to their lowest levels in four and a half years. Taiwan stocks fell four percent and Singapore shares fell two percent, led down by Singapore Airlines .

Asian government attempts to shore up confidence seem to be doing little to turn the tide of anxiety over the outbreak of the deadly virus, which has killed at least 251 people.

Hong Kong unveiled a $1.5 billion SARS relief package on Wednesday, following Singapore's $129 million of help for its troubled tourism and transport sectors. Malaysia has said it may ask banks and utilities to cut costs for corporate customers.

RETAILER HIT

Casual clothing retailer Giordano , which has 1,256 stores worldwide, including 73 in Hong Kong and 532 in mainland China, said on Thursday Hong Kong sales had fallen 30 percent since the outbreak of the deadly SARS virus.

"I believe our results will deteriorate but we cannot assess the magnitude now," said Chairman Peter Lau, referring to the Hong Kong-based group's 2003 earnings.

Giordano shares fell almost four percent after losing almost a third of their value in the past month.

Worries about a slowdown in China's economy, which is replacing the United States as Asia's growth driver, sparked selling of shares in South Korea's POSCO Co , the world's second-biggest steel maker.

The shares fell almost six percent, rattled by worries that the spread of the SARS may reduce Chinese orders.

Facing possible stiff tariffs from the United States, POSCO has been turning to China, but the outbreak of the deadly disease is slowing its shipments to the world's top steel market as travel is restricted, as well as directly hitting demand from China, analysts said.

Citigroup and J.P Morgan Chase expect China's economy to contract in the second quarter due to the impact of SARS, putting an end to a stellar run that has seen the economy average more than seven percent growth in recent years.

With hundreds of flights cancelled and airports eerily empty, Cathay Pacific Airways and its parent Swire Pacific Ltd said they may cut proposed dividend payouts to preserve much-needed cash for the struggling airline.

GROWTH FORECAST CUT

The World Bank cut 0.5 percentage points from its East Asian growth forecast, in part due to the SARS blow to tourism and other face-to-face sectors such as business travel, transportation and retail. It now sees five percent growth this year.

But the impact would fall unevenly across the region.

"A 10 percent fall in tourist arrivals would have an impact effect of less than 0.2 percentage points of GDP in China but one of 0.5 percentage points in a more tourism-dependent economy like Hong Kong," it said.

"Countries with high foreign reserves and a decent fiscal position may well be inclined to consider carefully designed policies that support economic activity during the shock."

Although China is the epicentre of the SARS outbreak, its robust economy and domestic demand should act as a partial buffer for export-driven Asian nations, the World Bank said.

"SARS may have a severe effect over the short term, but it is unlikely to stop the discernible underlying trend towards a gradual strengthening of East Asian domestic demand and activity," it said in a report.

International rating agency Fitch Ratings cut its outlook on Hong Kong's foreign and local currency ratings to negative from stable on Thursday.

"Now well into its second month and continuing to deteriorate, the SARS outbreak appears to be depressing economic activity in Hong Kong dramatically," Fitch said in a statement.

Hong Kong is trying to bring its budget deficit, which at about HK$70 billion amounts to roughly six percent of gross domestic product, under control. But Wednesday's HK$11.8 billion economic relief package, amounting to about one percent of GDP, would strain finances further.

Fitch's move sparked a jump in the Hong Kong dollar one-year forwards, which measure the perceived risk to the territory's currency peg.

Rival rating agency Standard & Poor's later issued a statement saying the SARS economic package would worsen the budget outlook while credit ratings would depend on the government's commitment to fiscal improvement.