Coronavirus to have a major economic impact on South Korea?

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China coronavirus may be showing signs of a slowdown, but for one country its impact may be starting to accelerate. In South Korea, the number of reported coronavirus infections breached the 830 mark on Monday. Moreover, the country has already warned that “emergency steps” are needed to limit the economic impact of coronavirus on South Korea.

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Impact of coronavirus on South Korea

South Korea has the most number of COVID-19 cases outside China. On Monday, the Korea Centers for Disease and Control and Prevention informed that the deadly virus had claimed seven lives in the country. The country has now seen 231 new cases, bringing the total count to 833 nationwide. A week ago, i.e. as of Feb. 18, the total number of cases was just 31.

South Korea is already feeling the negative impact of coronavirus on its economy. KOSPI closed down about 4% on Monday, its worst since October 2018. Shares of automaker Hyundai Motor and Kosdaq were down by over 3% in afternoon trade. The Korean won, which was already under pressure last week, weakened further.

Airlines stocks are also being hit hard. South Korea’s Korean Air Lines and Asiana Airlines, which are down significantly, announced Monday that they are suspending flights to Daegu. Daegu is South Korea’s fourth-largest city and has reported the maximum number of coronavirus cases so far, according to Reuters.

Samsung also, on Saturday, informed of a confirmed coronavirus case at its mobile device factory complex in South Korea (Gumi). The confirmed case resulted in the shutdown of the facility until Monday morning, Reuters noted. Though Samsung has shifted the majority of its smartphone production to Vietnam, it still makes many premium models at the Gumi complex. Thus, the suspension of work may impact the production of high-end models, such as the foldable Galaxy Z Flip and the Galaxy Fold.

LG Electronics, which also has a facility in the Gumi industrial complex, has already instructed workers who commute from Daegu, to work from home. Also, the workers who visited the Daegu area recently have been asked not to come to the office for two weeks.

Why is South Korea is feeling more of an impact?

South Korea is feeling more of an impact from the coronavirus because its economy is already fragile. On Monday, First Vice Minister Kim Yong-beom said that the epidemic poses a “large concern that it will limit the trend of economic recovery started late last year.” As per the minister, two major impacts of the outbreak are a drop in domestic consumption and exports to China.

South Korea’s economy is heavily dependent on China. In the first 20 days of February, Korea’s imports from China dropped about 19%, indicating the extent of the country’s supply chain disruption. More impact of the outbreak is expected to be seen in the days ahead as fears spread among the people.

Authorities are already asking people to avoid outdoor activities and mass religious services. Also, schools in the country will now open a week late. To minimize the impact of the virus, the country has pledged every possible support. Many also believe that the government could come up with an extra budget to boost spending and consumption.

President Moon Jae-in has raised the infectious-disease alert to the highest level – red. Such an alert level is the highest the country has seen since 2009, forcing authorities to limit public activities.

Korea’s central bank is also scheduled to hold a meeting to evaluate the situation and decide policy measures accordingly. Economists are of the view that the Bank of Korea would lower the benchmark interest rate.

Asia’s fourth-largest economy has already announced an emergency plan worth Won420bn ($356 million). The plan aims to offer  loans to shipping companies, travel agencies, airlines, and retailers facing a liquidity crisis due to the virus.

Economic impact imminent

Citi economists also believe that the negative economic impact of coronavirus on South Korea is imminent.

“Fear of the virus is spreading throughout the country, at a much faster rate than the virus itself,” Citi economists wrote in a research note, according to CNBC. “We expect the economic fallout to not be limited to certain regions (and) cities.”

In a note on Monday, economists said that consumption in the country is dropping as people are avoiding outdoor activities. Factories and stores are also shutting down for several reasons, such as the spread of the virus, lack of supply from China and continued losses.

Talking of the measures to limit the economic impact of the virus, Citi analysts expect the government to come up with a large supplementary budget. “Previous events suggest that the government tends to respond quickly to natural disasters or virus outbreaks,” the economists said.

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About the Author

Aman Jain
Aman is MBA (Finance) with an experience on both Marketing and Finance side. He has worked as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, reviewing tech gadgets, playing PC games and cricket. - Email him at amanjain@valuewalk.com

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