GO
Loading...

MH370 fallout may dent Malaysia’s economy

Hundreds of protesters, including many relatives of missing flight MH370 passengers, marched on the Malaysian Embassy in Beijing on March 25, demanding answers from Malaysian authorities about the fate of the flight.
Lintao Zhang | Getty Images
Hundreds of protesters, including many relatives of missing flight MH370 passengers, marched on the Malaysian Embassy in Beijing on March 25, demanding answers from Malaysian authorities about the fate of the flight.

Malaysia's economy may take a hit as tourists avoid the country in the wake of the disappearance of Malaysia Airlines' flight 370.

"The hit to Malaysia's economy could be sizable," said Matthew Circosta, an analyst at Moody's Analytics, in a note.

Read MoreChinese tourists, angry over missing plane, shun Malaysia

Tourism's total contribution was nearly 16 percent of Malaysia's gross domestic product (GDP) and 14 percent of employment in 2012, according to the World Travel and Tourism Council.

Many travelers are already shunning the country, especially as the handling of the search for the missing plane has been heavily criticized in China, Circosta said, noting reports some Chinese travel agencies have stopped selling flights to Malaysia.

On March 8, the Beijing-bound Boeing 777-200 vanished mysteriously from civilian radar screens, less than an hour after departing Kuala Lumpur, with few clues as to what exactly happened. Search efforts are under way in the Indian Ocean, where the flight is widely believed to have ended. About two-thirds of the passengers on the missing flight were Chinese nationals.

Chinese tourists are a key driver of growth in Malaysia's tourism industry, Krystal Tan, an economist at Capital Economics, said in an email, noting their arrivals in Malaysia have risen an average 16.7 percent year-on-year for the past three years, compared with total arrivals average growth of just 1.5 percent year-on-year.

Read MoreSeries of errors by Malaysia mounts in search for MH370

Amid the search for the missing flight, the country has stopped promoting its Visit Malaysia Year campaign, but the over 200 events associated with it appear set to go on as planned.

Previous Visit Malaysia Year promotions in 2007, 1994 and 1990 boosted tourist arrivals by 19 percent, 11 percent and 54 percent respectively, compared with a long-term compound average growth rate of 8 percent, according to a Credit Suisse report from February.

Read MoreMalaysia changes version of last words from missing flight's cockpit

"The sad events of MH370 raise doubt about the government's ability to meet its tourism goals" of boosting arrivals by 12 percent this year under its Visit Malaysia Year campaign, Circosta said.

Companies linked to air travel, such as Malaysian Airline System, AirAsia and Malaysian Airport Holdings (MAHB), will likely suffer in tandem.

"We estimate a substantial decline in visitors and throughput from the region," UOB KayHian said in a note last week. "Malaysian aviation is not the sector to invest in for the next six months." It noted China accounted for 6.3 percent of MAHB's throughput.

Read MoreMoney-losing Malaysia Air struggles in tough climate

"The Chinese are also known to be big spenders and retail spending will thus likely decline too. Coupled with the requirement for increased security, we believe MAHB will face higher-than-expected staff costs," it said.

Worries over the disappearance of flight MH370 have been compounded by what many view as a series of missteps by Malaysian authorities, both in directing the search and in communication with passengers' families and media.

In one misstep, while Malaysian Prime Minister Najib Razak said on March 24 that the flight was believed to be lost in the Indian Ocean, with all passengers and crew assumed to have perished, while on Saturday, the country's acting Transport Minister, Hishammuddin Hussein, told relatives he was still hoping to find survivors.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1