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Fitch, IHS expect Korea's GDP to contract in 1st two quarters
By Lee Kyung-min
Korea is feared to slip into a recession as the fast-spreading COVID-19 outbreak becomes a global pandemic, in what economists say signals the clear end of a decade-long cyclical economic expansion that is set to pound Asia's fourth-largest economy.
The much-dreaded recession, defined by at least two consecutive quarters of economic contraction, is increasingly becoming a reality after Finance Minister Hong Nam-ki acknowledged the likelihood of such in the first quarter of 2020.
Economists say the timing of a recovery hinges on how fast the viral spread becomes contained, while no immediate upturn is expected in exports, corporate investment and consumption.
Of bigger concern is the deterioration of asset quality in the banking industry, brought on by mass defaults of low-credit rated firms under mounting pressure over liquidity shortages.
Korea suffered a recession in 2003, amid fallout from the severe acute respiratory syndrome (SARS) caused by the SARS coronavirus.
The economy at the time shrank 0.7 percent from quarter-on-quarter in the January to March period. The following April to June quarter saw a further 0.2 percent contraction.
Gloomier outlook
In its latest outlook, global credit ratings agency Fitch forecast that the Korean economy will contract 0.6 percent in the first quarter and 0.9 percent in the second.
IHS Markit, a London-based research firm, also expects Korea to suffer a recession with its GDP shrinking 0.9 percent in the first quarter and 0.7 percent in the second quarter.
A Bloomberg survey of 14 such agencies also reported an expected average 0.9 percent contraction in the first quarter of 2020. It added that the possibility of Korea entering a recession in the next 12 months was 33 percent, a notable jump from 18 percent in January.
The most pessimistic view came from Nomura Securities, which expects the Korean economy to contract 3.7 percent in the first quarter from the last quarter of 2019.
Seoul National University professor Kim So-young said shocks to the real economy will be amplified, which will lead to a tightening of financial conditions.
"Debt defaults by individuals will translate into a crisis in the financial sector, mostly because lenders will not be able to receive interest on their loans, a key factor that deteriorates their asset quality."
In a report Monday, S&P Global Ratings said the Korean economy alongside other countries in the Asia-Pacific region will contract in 2020.
"The average growth rate for Asia-Pacific economic growth in 2020 will be 2.7 percent," it said. "We now expect China's GDP growth rate to slow to 2.9 percent in 2020. Economies will contract in Hong Kong, Singapore, South Korea, and a newly deflationary Japan."
This is an addition to its earlier report on March 18 when it said a recession was "guaranteed."
"People flows from the U.S. and Europe will be decimated for at least two quarters, heaping more pressure on the tourism industry," it said.
Similarly, Moody's Investors Service in said a March 20 report that a "sharp contraction of the global economy ― at least in the second quarter ― appears imminent."
"Uncertainty will remain for at least several months as to how long it will take to contain the spread of the virus and how businesses and households will cope with the resulting financial losses," it said.
Extra budget
The higher-than-expected uncertainty is strengthening calls to draft a second supplemental budget, as the first one amounting to 11.7 trillion won ($92.3 billion) will not be enough to fight the economic fallout from the new coronavirus.
Calls will intensify from the ruling party given its earlier attempt to increase the budget by 6 trillion won were dismissed by the National Assembly budget committee, March 17.
The move will be empowered further following remarks from President Moon Jae-in who has called for additional spending.
"Measures to fight against COVID-19 may require more than one budget plan. A second, and third plan may be needed down the road if the situation drags on longer than expected," Moon said March 16.
The idea is shared by Hong who said the plan will be included in discussions on ways to expand countermeasures against fallout from the virus.
"The issue will be discussed, including ways find money for the extra budget," Hong said, March 19.
