(LEAD) S. Korea's economy may contract, more measures eyed to ease credit crunch: finance minister

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SEOUL, March 20 (Yonhap) -- South Korea's economy may contract in the first quarter of the year in the face of growing economic fallout from the new coronavirus outbreak, the country's chief economic policymaker said Friday.

The country's financial authorities may roll out an additional measure to ease a credit crunch and boost U.S. dollar funding, according to Finance Minister Hong Nam-ki.

"We cannot rule out the possibility of negative growth (during the first quarter), given the impact of the virus on private spending, investment and exports," the minister said in a meeting with foreign correspondents here.

South Korea's economy, Asia's fourth-largest, is bracing for the spread of the novel coronavirus with industries ranging from retail to airlines hit hard, as citizens avoid going out and exports are widely expected to face a slump amid the fast spread of COVID-19 around the globe.

South Korea's economy grew 2 percent last year, the lowest in a decade, and had been expected to rebound to 2.3 percent growth this year on an improvement in chip prices and overall exports.

But the Bank of Korea trimmed its outlook for the economy in 2020 to 2.1 percent from the previous 2.3 percent prediction and is ready to further cut its growth estimate.

Global investment bank JP Morgan cut its 2020 growth outlook for South Korea to 0.8 percent from the previous 1.9 percent, citing the global economic fallout of the coronavirus pandemic.

This is JP Morgan's second growth downgrade for Asia's fourth-largest economy in less than two months.

Other investment banks have been in a rush to cut their own growth outlooks for the economy, expecting less than 2 percent on-year expansion due to the impact of COVID-19.

Feeling the pinch of the virus's economic impact, the South Korean financial market has been reeling from panic selling on the stock and currency markets.

The country's key stock index, the KOSPI, plunged by more than 11 percent this week as foreign investors continued to sell local stocks worth a combined 9.1 trillion won (US$7.34 billion) in the past 12 sessions. On Friday, the KOSPI rebounded by more than 7 percent on a currency swap agreement between South Korea and the United States.

The Korean won also sank to the lowest point against the U.S. dollar in almost 11 years on Thursday. The local currency closed at 1,246.50 won against the U.S. dollar on Friday, up 39.20 won from the previous session's close.

On Thursday, South Korea and the United States signed a US$60 billion bilateral currency swap agreement, a move expected to relieve the liquidity crunch caused by the global spread of the new coronavirus.

The currency swap line will be in place for at least six months, according to the Bank of Korea.

The latest currency swap deal was the second of its kind to be signed with the United States, according to the BOK.

"The won-dollar rate will remain volatile, but the degree of volatility will be moderate down the road," Hong said. The minister said the financial authorities are also reviewing other options to help stabilize the currency market in addition to the currency swap deal with the U.S.

Early this week, South Korea took a series of steps to funnel more liquidity into the financial system and its economy amid the deepening global market rout and economic impact.

In particular, the country's financial authorities raised the cap on foreign currency forward positions for local banks to 50 percent of their equity capital from the current 40 percent in an effort to ease the dollar shortage in the capital market.

South Korea, hit by the growing COVID-19 outbreak, has announced an extra budget worth 11.7 trillion won to help the economy chug along. The central bank also cut its policy rate by half a percentage point to a record low of 0.75 percent.

sam@yna.co.kr
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