By Choi Kyong-ae
A combination of fiscal and monetary measures will be of help to keep the Korean economy from worsening further amid mounting worries of the spread of Middle East respiratory syndrome (MERS), economists said Sunday.
As of June 7, Korea reported five deaths and 64 cases of the deadly respiratory disease. MERS, first reported on May 20 in Korea, keeps spreading amid growing public fears and questions over the government’s capability to tackle the illness.
Economists say that if the government fails to contain the disease as quickly as possible, the domestic economy, which is already struggling to maintain recovery, will take another hit.
“There already had been the need (for the Bank of Korea or BOK) to take an additional monetary easing measure to support the country’s debilitating exports and spending. A rate cut now seems to be inevitable due to the outbreak of MERS which stymies consumer spending further,” LG Economic Research Institute economist Cho Young-moo said Sunday.
He expected the central bank to cut the benchmark interest rate in the next week’s rate-setting committee on June 11.
“If the central bank’s monetary easing proves not to be working, the government should come up with fiscal policies as well within the first half,” Cho said. “The government needs to draw up a supplementary budget to minimize the impact of MERS on the overall economy.”
But Finance Minister Choi Kyung-hwan said during a televised press conference held Sunday morning that the impact on the economy from MERS was “not serious enough to consider a supplementary budget for stimulus.”
Economists didn’t agree. They said the impact from MERS may not serious enough to push monetary and fiscal steps together for now but an extended MERS crisis could pull down the country’s growth to below 3 percent for the year.
Global economic organizations such as the International Monetary Fund and the Organization for Economic Cooperation and Development have recently lowered their growth outlook for Korea to the lower end of 3 percent from the upper end of 3 percent, said Yun Chang-hyun, professor of finance at the business administration division of University of Seoul.
“The government already witnessed what impact the Sewol ferry incident had on the domestic economy last year. In order not to make such a slump happen again, preemptive measures should be taken by the central bank and the finance ministry,” Yun said.
On April 16 of last year, the ferry sinking which claimed 304 lives ― most of them high school students on a field trip ― resulted in steep cuts in consumption.
The BOK has cut the policy rate three times since August last year to be in line with the government’s 41 trillion won ($37 billion) drive to stimulate the economy. The base rate stands at a record low of 1.75 percent and the next rate decision will take place on Thursday.
But the stimulus packages didn’t help boost spending. Instead, exports continued to fall in the January-May period and a weak yen remains a major headache for Korea heavily dependent on exports.