MERS infects Korea’s economy

Korea’s MERS outbreak is a public health crisis that has grown to become a political and economic problem. On Wednesday, President Park Geun-hye announced she was canceling a weekend visit to the U.S. to deal with the crisis. One day later, Bank of Korea Gov. Lee Ju Yeol cut interest rates to a record low citing the spread of Middle East respiratory syndrome as a threat to growth.

Some critics suggest Seoul is overreacting to an illness that, scary as it is, has killed only 16 (as of Monday). In truth, Lee and Park are still showing too much caution. After all, MERS isn’t the only acute threat to Korea’s economic health.

Korea needs to account for the fact that China, Asia’s biggest economy, is stagnant. In May alone, Chinese imports plunged 18.1 percent - a third straight monthly decline (exports fell 2.8 percent). Producer prices fell 4.6 percent, extending declines of more than three years and pushing consumer prices toward deflation. What’s more, Beijing’s aggressive stimulus efforts are reaping smaller returns. All this is taking a toll on Korean exports, which fell 10.9 percent last month, the fifth straight monthly decline.

Asia’s second-biggest economy is compounding Korea’s pain. Japan’s 30 percent currency devaluation over the past two years has sent deflationary forces Korea’s way that won’t be offset by Thursday’s cut in the seven-day repurchase rate to 1.5 percent.

Meanwhile, the MERS drama has delivered a blow to Korea’s economic confidence, as consumers stay home to avoid any possibility of infection. “Korea is hunkering down and uncertain,” says James Rooney of Seoul-based consulting firm Market Force. “We need to restore confidence and get back to normal living.”

So far, Seoul’s response to the outbreak hasn’t helped. In addition to Park’s cancelation of her much-anticipated U.S. trip, the Korean government closed more than 2,000 schools. The government’s response to the MERS outbreak seems to be filtered through the lens of the SARS (severe acute respiratory syndrome) epidemic that 12 years the base interest rate by 0.25 percentage point to a new record low of 1.5 percent ago devastated Asia’s travel and retail industries for many months.

Park’s critics contend that she is unnecessarily indulging the public’s fears about this latest illness, at the expense of the nation’s psychological and economic well-being; they fear that Korean consumers, taking cues from the president, may needlessly cancel their own travel and shopping plans. On June 10, the World Health Organization urged Seoul to reverse its school closures. (To be fair, Park is not the only Asian official who seems to have the SARS epidemic in mind: On Wednesday, a woman in Hong Kong was isolated in a hospital simply because she had recently visited Korea. The news sent Hong Kong’s Hang Seng Index to its lowest close in two months.)

Part of the tragedy is that the Korean economy was just starting to shake off the effects of last year’s Sewol ferry tragedy, which resulted in the deaths of 304 people, most of them school kids. It’s hard to exaggerate the damage that disaster did to the nation’s collective psyche - and to Park’s political fortunes. The fallout dented the president’s popularity and paralyzed her agenda.

Hence Park’s decision now to scrap her U.S. trip and Lee’s urgency with rates. “The BOK is trying to be more preemptive in taking action this time than it was after the Sewol ferry accident,” economist Chang Jae-chul of Citigroup told Bloomberg News.

But this doesn’t amount to a sustainable economic strategy. Eventually, the MERS cases will dwindle and the public’s face masks will come off. And, at that point, Korea will still be uncomfortably wedged between a slowing China and Japan’s beggar-thy-neighbor recovery plan. Having proven their mettle as crisis managers, Park and Lee need to prove they can tend to their country’s more chronic ailments.

*The author is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.

by William Pesek