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Virus-hit Korea urged to use expansionary policy
From left are Robert Carnell, chief Asia-Pacific economist at ING; Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Global Market Research; and Mauro F. Guillen, the Zandman Professor of International Management at the Wharton School of Business. / Korea Times file
By Park Jae-hyuk
Experts say GDP growth rate can fall below 1%
By Park Jae-hyuk
Korea should carry out an expansionary fiscal policy immediately to reduce the negative impact of the faster-than-expected spread of COVID-19 (2019-nCoV), according to overseas economic experts, Wednesday.
Saying the growth rate of Asia's fourth-largest economy may fall below 1 percent this year, they supported Seoul's move to create an extra budget to overcome the fallout from the viral epidemic.
Since President Moon Jae-in ordered bold fiscal measures Monday, the government and the ruling party have pushed forward a supplementary budget which will likely total 6 trillion won ($4.9 billion).
Robert Carnell, chief Asia-Pacific economist at ING, told The Korea Times the additional budget would be a “sensible reaction” to the current crisis.
In order to minimize the impact of the virus, the economist said short-term support packages, including additional cheap lending, tax offsets and forbearance on bank loan services, were needed for small- and medium-sized enterprises reeling from the crisis.
He agreed with Morgan Stanley and Nomura, both of which forecast Korea's 2020 economic growth rate could fall below 1 percent in the worst case scenario.
“There is a chance that Korea's growth rate falls below 1 percent,” he said. “That depends on how deep and how widely it spreads.”
Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Global Market Research, also supported an expansionary fiscal policy, agreeing on the skeptical growth outlook toward Korea.
“Growth could fall below 1 percent or even become negative if the situation with the coronavirus goes past the second quarter,” she said. “Ad hoc fiscal measures to reduce the impact of coronavirus seem warranted.”
Mauro F. Guillen, the Zandman Professor of International Management at the Wharton School of Business, said policymakers should be ready to provide fiscal stimulus, as the coronavirus affects both demand and supply in the economy.
“I would expect that the impact on GDP will be felt mostly before the summer,” he said.
Divided over key rate cut
The three experts, however, differed in their opinions about a rate cut by the Bank of Korea (BOK) which may be agreed on at a monetary policy board meeting slated for Thursday.
Guillen said the central bank should be prepared to provide a monetary stimulus to the market.
Carnell noted that a key rate cut would have a limited impact, although it could help the cash flow of firms hurt by the economic slowdown and interruption to supply chains caused by the virus.
“This will not prevent an economic slowdown, it will only mitigate the effects,” he said.
Garcia-Herrero recommended the BOK take a more cautious approach toward credit easing.
“The BOK needs to keep its bullets unless it wants to move into quantitative easing,” she said. “Korea has more fiscal space than monetary space so the former is clearly preferred. Korea needs to avoid the trap of negative rates so fiscal policy is a better answer.”
The central bank has frozen its current base rate of 1.25 percent since October 2019.
Domestic analysts initially expected the BOK would cut the key rate after April at the earliest.
As the coronavirus is dealing a severe blow to the economy, however, a growing number of analysts here have begun to say the central bank should carry out a rate cut this month.