Is Korean economy faring better in pandemic? | HaB Korea.net

Is Korean economy faring better in pandemic?

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Worsening fiscal health, second virus wave cited as major risks


Korea has been recognized around the world for its economic resilience in the face of the COVID-19 pandemic, but it is still struggling to find an impetus to jumpstart and revitalize its economy amid lingering uncertainties here and abroad. Although Asia’s fourth-largest economy is on a better footing than many advanced countries, experts warn that Korea is still exposed to multiple downside risks, citing the nation’s worsening fiscal soundness and looming uncertainties over the easing of social distancing measures.

Korea Corona virus

After the quarantine protocol established by the government gained global popularity, the administration began expressing an optimistic outlook for an economic recovery. The Ministry of Economy and Finance said in a June report that downside risks to the macroeconomy had relaxed with improvements in domestic consumption and employment. Global credit rating agencies and foreign investment banks also made favorable comments on the Korean economy, compared to others.

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“Korea is set to perform better than other countries this year with a modest contraction of 1.5 percent ― unchanged from our last forecast,” S&P Global Ratings Asia-Pacific chief economist Shaun Roache said. He especially attributed the nation’s resilience to its high exposure to the technology sector. As a comparison, the rating agency cut its forecast for Japan’s economy this year to a contraction of 4.9 percent from a previous estimate of 3.6 percent, saying its downbeat consumers have increased their household savings, dampening consumption, investment, and economic recovery. Moody’s Investors Services predicted that Korea would become the only advanced economy whose real output next year would exceed the pre-coronavirus level. The rating agency ― by contrast ― drastically dragged down its forecast for economic growth among the G20 economies in June to a contraction of 4.6 percent from shrinkage of 4 percent made in April. In particular, it revised the outlook for the United Kingdom to -10.1 percent from -7 percent; France to -10.1 percent from -6.3 percent; Italy to -9.7 percent from -8.2 percent; and Germany to -6.7 percent from -5.5 percent.

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COVID-19 Seoul

Fitch Ratings upgraded its 2020 GDP forecast for Korea to a contraction of 0.9 percent from a contraction of 1.2 percent, citing better-than-expected incoming economic data and relative success in virus containment. HSBC even forecast the Korean economy would grow 0.3 percent this year and 2.9 percent next year. Morgan Stanley economists also said in a recent report that Asia ― excluding Japan ― as a whole is expected to edge out 0.1 percent growth in 2020, before accelerating to an 8.5 percent expansion next year. “This is so given the more effective institutional response in economies such as China, Taiwan, Korea, and Hong Kong, where COVID-19 was gotten under control earlier, and in some cases, without even needing to resort to lockdown measures,” read the report.

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Uncertainties continue

Despite the optimistic outlooks, uncertainties still remain for the Korean economy, according to experts. Moody’s warned Korea’s high risk of a resurgence in infections could make its recovery uncertain.

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Korea COVID-19

“The experience of Korea, which had controlled the virus early on, shows the high risk of a resurgence in infections after a relaxation of social distancing measures,” Moody’s senior credit officer Madhavi Bokil said in a report. Deteriorating fiscal soundness following the government’s expansionary policies to cope with the coronavirus has also been mentioned as a bigger problem. Although Fitch said in its February report that Korea’s sovereign credit rating could be downgraded if its debt-to-GDP ratio surpassed 46 percent by 2023, the figure is expected to reach 43.5 percent when the administration finishes implementation of its third budget. The National Assembly Budget Office predicted the figure could surpass 50 percent in 2022. Finance Minister Hong Nam-ki also admitted the national debt could top 1,000 trillion won ($833 billion) three years after that.

According to the Korea Economic Research Institute (KERI), the nation’s fiscal soundness had continued to worsen even before the virus outbreak, ranking it 26th in the index for fiscal sustainability among the 32 OECD member countries last year, down from the 14th in 2010. “Even if it is time for an aggressive fiscal policy, Korea needs a targeted fiscal policy, instead of helicopter money,” KERI’s economic policy team head Choo Kwang-ho said. “In the mid- to long-run, the government should come up with guidelines for healthier fiscal policies, such as spending below the level of income.”

Source: The Korea Times

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