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(2nd LD) (News Focus) New coronavirus set to spell trouble for S. Korean economy

All News 15:28 February 03, 2020

(ATTN: FIXES dateline; ADDS additional information in paras 24-29)
By Byun Duk-kun

SEOUL, Feb. 3 (Yonhap) -- South Korea's much-awaited economic recovery may again be drawn out in the face of the deadly virus spreading in China and apparently to the furthest corners of the globe, including South Korea, potentially undermining global demand and supply chains for weeks or even months to come, analysts here said Monday.

More than 17,000 cases of new coronavirus infection have been confirmed in China alone and more than 360 people have died there as of Monday.

The fatal disease has yet to claim any lives in South Korea but is widely expected to claim the country's economy as one of its first and possibly the largest victims.

"Apart from the risk to human lives, it is likely to hit travel and consumption activities. In a scenario of widespread infection, it could materially weaken economic growth and fiscal positions of governments in Asia," credit rating agency S&P Global Ratings said in a report.

The outbreak could not have come at a worse time, as the South Korean economy and its exports had been poised to recover.

South Korea's exports plunged 10.3 percent on-year in 2019 amid a prolonged trade conflict between the United States and China and a drop in prices of semiconductors, which in 2018 accounted for nearly one quarter of its overall outbound shipments.

Its exports continued to drop for a 14th consecutive month in January, but the rate of decline significantly slowed to 6.1 percent on-year in the month, encouraging the government and many others here to hope for a rebound in the near future.

A visitor reads a notice of closure at a duty-free shop on South Korea's southern resort island of Jeju on Feb. 2, 2020. The shop was forced to shut down due to a recent visit by a Chinese tourist who was subsequently diagnosed with the new strain of coronavirus that has claimed over 300 lives in China alone. (Yonhap)

But this outlook may have been dashed -- at least for now.

China is by far the single largest importer of South Korean products, importing US$136 billion of South Korean goods, or more than 25 percent of South Korea's overall exports, last year.

"China has come to account for a much greater portion of the global economy than in 2003, when it faced an outbreak of severe acute respiratory syndrome (SARS)," said Lee Sang-jae, an analyst at Eugene Investment.

"In 2002, China only accounted for 8.3 percent of the world's gross domestic product, but its weight has more than doubled to 19.3 percent in 2019," added Lee.

The analyst insisted that whether the outbreak in China actually leads to a global slowdown will largely depend on how quickly and effectively the disease can be contained.

"The new coronavirus is unlikely to have any immediate effect on South Korea's exports, but should it continue to spread for a significant period of time, the country's economic recovery will likely be delayed," he said.

Asia's fourth-largest economy expanded 2.0 percent in 2019 from a year earlier, its slowest growth since 2009.

It is forecast to grow 2.3 percent this year.

Economic think tanks here believe the outbreak of coronavirus may reduce its annual growth for the year by up to 0.2 percentage point.

"If the spread of the new coronavirus stays largely within China, South Korea's economic growth is forecast to be reduced by up to 0.3 percentage point from a year earlier in the first quarter and 0.1 percentage point annually," the Hyundai Economic Research Institute said.

"If it continues to spread in South Korea as well, its economic growth rate may be trimmed by up to 0.7 percentage point in the first quarter and 0.2 percentage point in the entire year," it added.

Kim Hyung-ryeol, an analyst at Kyobo Securities, said the problem may be more serious than it seems.

"The U.S.-China trade war that created systematic risks over the past two years was a supply-side risk that led to a drop in exports and corporate earnings but did not cause private consumption to retreat," he said.

"The new coronavirus, on the other hand, is increasingly becoming a demand-side risk by causing changes in life patterns," Kim added.

A section of a theater in Gwangju, 330 kilometers south of Seoul, is empty amid growing fears over the spread of the new coronavirus on Feb. 1, 2019. (Yonhap)

Already, many South Koreans are said to be avoiding public facilities and large gatherings, inevitably leading to a sharp drop in spending.

The Seoul government has also issued a travel warning advising its nationals to stay away from China, and is reportedly considering an expansion of its entry ban on visitors from Wuhan, the epicenter of the outbreak, to anyone from China.

Some believe the public scare may already be taking a toll on the local economy.

Samsung Securities said it has slashed its first quarter growth outlook for South Korea to 2.4 percent on-year from 2.6 percent forecast earlier, with others expecting the growth rate to dip to as low as 1.6 percent.

"A reduction in the first quarter growth rate may be inevitable due to reduced spending caused by the spread of the new coronavirus, with a possible drop in exports on reduced demands in China," Korea Investment & Securities said.

Im Dong-min, an analyst at Kyobo Securities, said the country's annual growth may again dip to the lowest in a decade.

"Under a scenario where China's local consumption faces a shock due to the coronavirus, China's economic growth rate is expected to slow to 4.8 percent this year. In such a case, the rise in South Korea's exports may drop to 0 percent, which in turn will bring its economic recovery to naught," Im said.

Seoul earlier forecast the country's exports to rebound to a 3 percent on-year growth in 2020.

Moody's Investors Service notes China will be most affected by the outbreak, but the spillover will reach many others in the region and throughout the globe.

"The primary impact is on human health. However, the risk of contagion is affecting economic activity and financial markets. The immediate and most significant economic impact is in China but will reverberate globally," it said in a recent report.

South Korean Finance Minister Hong Nam-ki agreed the outbreak may put downward pressure on the local economy if left to spread.

"The impact on our economy currently remains limited, but there is a need to handle it with a special sense of wariness since it is expected to work as a downside risk should we fail to terminate it at an early date," he told a meeting of related ministers in Seoul on Monday.


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