INTERVIEW Pandemic to mar twin engines of economy

Moody's, S&P cut 2020 outlook to below 1.5%

By Kim Bo-eun

The Korean economy is set to take the brunt of the novel coronavirus as the epidemic has escalated into a pandemic damaging its twin growth engines ― exports and domestic demand, top economists from global credit ratings agencies warned Thursday.

They expect the rapid spread of COVID-19 to have an impact on both economies and financial markets worldwide by severely disrupting global supply chains.

Against this backdrop, Moody's Investors Service and S&P Global Ratings recently lowered their growth forecast for Korea for this year to 1.4 percent and 1.1 percent, respectively.

Korea's GDP grew 2 percent in 2019, already the slowest annual growth rate in a decade.

Madhavi Bokil

"The global spread of the coronavirus COVID-19 is resulting in simultaneous negative supply and demand shocks," Moody's Vice President and Senior Credit Officer Madhavi Bokil told The Korea Times in an email interview, Tuesday.

"We have therefore revised down our 2020 baseline growth forecasts for all G-20 economies, including Korea."

Bokil noted a mixture of factors would contribute to lower growth here including, "ongoing supply chain disruptions given reliance on Chinese inputs, diminished trade prospects as global economic growth weakens, and domestic consumption shock due to high rates of infections."

Shaun Roache, chief Asia-Pacific economist at S&P, shared this view, touching upon expectations of slower exports.

"External demand for Korea's exports is likely to be weaker," he said via email.

"This is because China's economy is getting back to normal only slowly, and Europe and the United States are also set to grow slower as the virus spreads there."

Exports to China already slowed in February, as demand has faltered and Korea's car production has fallen based on shortages of parts coming from China, according to the Korea Development Institute.

An extended period of sluggish domestic demand is also set to slow the economy, according to Roache.

Shaun Roache

"Outbreaks of coronavirus in Korea will mean tighter government restrictions on movement of people and temporary shutdowns caused by infection of employees," Roache said.

"This will disrupt the production of firms, especially in the manufacturing sector."

The economist noted at the same time, consumer spending will likely be curbed as households avoid public spaces such as restaurants, movie theaters and shopping malls.

"This will dampen consumer spending on discretionary goods and services. We estimate that discretionary consumption accounts for about 25 percent of GDP so this matters a lot for the economy," he said.

Weathering virus crisis

The government has pledged to boost fiscal spending to provide a stimulus, with an emergency budget of over 11 trillion won awaiting approval.

In addition, the Bank of Korea is expected lower its key rate next month, after it kept it frozen at 1.25 percent in February.

The economists forecast rate cuts will take place, but warned of their limited effects.

"We expect global monetary policy support to partly counter the tightening of financial conditions," Bokil said.

"However, monetary policy will likely be less effective in countering falling demand due to health and contagion concerns."

Roache said S&P expects two rate cuts this year by the BOK totaling 50 basis points.

But he noted "lower interest rates will not convince firms and households to borrow and spend much more unless uncertainties about the coronavirus ease.”

The economist said targeted support for afflicted sectors could be more effective.

“We think targeted and temporary fiscal measures aimed at affected sectors would prove more effective than rate cuts,” he said.

“We have seen other countries adopt measures to help affected firms, especially small- and medium-sized firms, to retain workers until the economy returns to normal later this year. These include payroll tax cuts and wage subsidies.”