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(EDITORIAL from Korea Herald on Feb. 5)

All News 06:56 February 05, 2020

Rising risks
Fundamental policy shift needed to overcome economic impact of virus

The rapid spread of a deadly new coronavirus is threatening to throw South Korea's economy into a perfect storm beyond dashing its fragile recovery momentum.

The epidemic, which originated in the central Chinese city of Wuhan in December, is beginning to affect the country's economy across the board, from consumption to production and the financial market.

Korea, which relies on China for a quarter of its exports and a third of its inbound tourists, is positioned to take one of the hardest hits from the outbreak.

Coupled with rising concerns over local infections, the spread of the epidemic is expected to reduce domestic consumption by 0.3-0.4 percentage point this year.

Due to disruptions in their parts supply chains in China, major Korean manufacturers have suspended or scaled down their operations.

A slowdown in the Chinese economy and its impact on global trade are likely to dash hopes that Korea's exports will rebound this year.

Outbound shipments from Asia's fourth-largest economy fell 6.1 percent from a year earlier in January, extending the downward streak to 14 consecutive months. In 2019, Korea's exports shrank 10.3 percent.

Over the past 10 trading days, Korea's stock prices tumbled 7.28 percent, the second-steepest drop after Hong Kong among Asian markets excluding mainland China.

Departing from their initial assessment, government officials are now raising alarm over the potential negative impact of the spreading virus on the economy.

In a meeting with economy-related ministers Monday, Finance Minister Hong Nam-ki, who doubles as deputy prime minister for economic affairs, said the virus could significantly weigh on Korea's economy unless it is contained quickly.

The SARS virus, which similarly originated in China in late 2002, cut Korea's annual economic growth by 0.1 percentage point in 2003.

The fallout from the new strain of virus, which has proven more infectious than SARS, is expected to be extensive given that China now has a much bigger role in the global economy. In 2002, it accounted for 8.3 percent of the world's gross domestic product, but its weight more than doubled to 19.3 percent in 2019.

Experts predict the spread of the virus could trim Korea's economic growth by up to 0.7 percentage point in the first quarter of 2020 and 0.2 percentage point this year. But the effect could be greater if the virus is not brought under control quickly.

Korea's economy grew 2 percent on-year last year, marking the slowest pace in a decade.

The government expects the economy to improve and achieve 2.4 percent growth this year.

Regardless of the impact of the epidemic, ill-conceived policies implemented by President Moon Jae-in's administration might make it difficult to reach the growth target.

The country saw facility investment decrease 8.1 percent on-year in 2019 and manufacturing output capacity shrink 1.2 percent -- the steepest contraction in nearly five decades. The decline in investment and production came as the government's labor-friendly and regulatory measures dampened corporate vitality.

In Monday's meeting, Hong said the government would spare no efforts to minimize the economic fallout from the epidemic.

He said the government would unveil new measures to support exports by helping manufacturers diversify overseas markets by the end of this month. More policy loans will be offered to domestic consumption-focused companies.

But these steps fall far short of a fundamental shift in the government's misguided policies, which have weakened corporate activity and market vitality.

Since taking office in 2017, the Moon administration has pushed for its income-led growth initiative backed by a string of pro-labor measures such as steep minimum wage hikes and a shortened workweek. But the country saw its gross domestic income, a key indicator of the nation's total purchasing power, decrease 0.4 percent on-year in 2019 -- marking the first decline in more than two decades.

The government should ditch its dysfunctional policies and carry out regulatory and labor reforms to encourage private-sector firms to increase their investment.

But the Moon administration continues to adhere to fiscal expansion as a means to bolster the sluggish economy while turning a blind eye to the real hard work needed to revitalize the economy.

It is poised to use the spread of the virus as an excuse to accelerate fiscal expansion ahead of April's general election in a bid to forge favorable voter sentiment for the ruling party.

Any sensible voter would hand down a stern judgment against the Moon government's refusal to correct policies that have proven misguided. Otherwise it may not be possible for the economy to avoid being trapped in a low-growth rut, even after the fallout from the coronavirus outbreak dies down.

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