Value context and insight. lkm@koreatimes.co.kr
Coronavirus to weigh down on Korea's weak exports, investment
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By Lee Kyung-min
By Lee Kyung-min
The fast-spreading new coronavirus will have a worse-than-expected impact on Korea's export-reliant economy due to the country's heavy dependence on intermediate goods imported from China, experts said Sunday.
The growing pessimism fuels concerns that Asia's fourth-largest economy, still reeling from a slowdown due to the drawn-out U.S.-China feud, should brace for a further drop in exports, investment and consumption.
Most international organizations and global investment banks have projected that Korea will not be able to see its exports grow even 3 percent in 2020, a target set by the government in its economic policy outlook at the end of 2019.
The most pessimistic view came from the London-based research group Oxford Economics, which said Korea's exports will only grow 0.5 percent year-on-year in 2020.
This was followed by JP Morgan Chase and Societe Generale which estimated Korea's export growth rate at 1.8 percent and 1.7 percent, respectively.
Korea's investment growth forecast for February 2020 averaged 1.9 percent, down 0.1 percentage points from a month earlier, according to Bloomberg data.
The delayed import of key intermediate parts leads to an inevitable shutdown of factories that produce final goods, incurring a substantial loss to the businesses. Additionally, the longer-than-expected virus outbreak will result in subdued consumption and an overall drag on investment, according to an economist.
“It is a vicious cycle,” said Standard Chartered Bank Korea chief economist Park Chong-hoon.
“Businesses will have to delay facility investment because of the halted production of final goods, compounded by already weak consumption becoming weaker, which will deal a heavy blow to the retail and services sectors amid a slowdown that began more than a year ago,” he said.
Korea is the third most vulnerable economy to uncertainties in China due to its reliance on the world's second-largest economy for key intermediate goods.
According to the report from Oxford Economics, of the total intermediate goods Korea needs, 28.4 percent comes from China, behind Vietnam (41.6 percent) and the Philippines (30.8 percent).
“The heavy reliance on China amid a spread of the new coronavirus highlights how vulnerable Korea's key industries can become in times of uncertainty, mostly due to a disruption in the value chains,” Korea Development Institute (KDI) researcher Song Yeong-kwan said.
“Widely depressed private consumption in China is increasingly spilling over to other global economies, with Korea being one of the most affected,” he added.
Some local economists expect that the country could see a first quarter contraction from the last quarter of 2019.
“This is obviously a temporary shock, but will inevitably shave off annual growth,” Seoul National University economist Kim So-young said. “Although giving a certain percentage point estimate is hard, contraction could be in store.”
A Korea Investment & Securities report said the economy will contract by as much as 0.7 percent from the previous quarter.