A time for desperate measuresWhat can be more dangerous to the Korean economy: the outbreak of the potentially deadly Middle East respiratory syndrome (MERS) or snowballing household debt? For now, it is MERS and the largest outbreak of the disease outside Saudi Arabia. At least the Bank of Korea believes so. The BOK cut the base interest rate by 0.25 percentage point to a new record low of 1.5 percent. It took the surprising step despite the dangerous escalation of household debt already hovering at 1,100 trillion won ($987 billion) and the likelihood of a rate hike by the U.S. Federal Reserve in September because it feared that the economy and consumer sentiment are worsening rapidly because of the MERS crisis. Gov. Lee Ju-yeol said the negative impact was already showing as Korean people shy away from public events and public venues to avoid getting sick.
MERS had a chilling effect on the economy even faster than the sinking of the ferry Sewol that killed over 200 in April 2014. The finance ministry said the number of shoppers in department stores, people going to cinemas and restaurant goers has fallen more than after the ferry crisis. Tourism took a direct hit. Over 50,000 foreigners cancelled visits to Korea since the first patient was identified on May 20. Morgan Stanley estimates that Korea’s gross domestic product could lose 0.8 percentage point this year if the outbreak is extended.
The Korean central bank had maintained that fiscal stimuli would be more effective to help the economy than a rate cut, which could lead to a rise in household debt. Ultimately it decided that pre-emptive action was necessary because the economy was losing steam unusually fast. The ball is now in the courts of the government and legislature. They must take synchronized action by expediting a supplementary budget to reverse the course of the economy. Hyundai Research Institute estimates that national income could increase by 49.8 won if the government comes up with a decent supplementary budget. The government and legislature must discuss the appropriate time and scale of such a budget. There is no time to lose. All the ammunition must be employed to strengthen the economy. All the macroeconomic measures must be taken over a short period to maximize their effect in bolstering the economy. Only then would the central bank have leeway to respond to U.S. monetary tightening.
The public must play its part in changing the course of the economy. Hyper-anxiety won’t help. We cannot let a contagious disease rule our lives. We must be confident that we can defeat this.
JoongAng Ilbo, June 12, Page 30