Growing outbreak spooks markets, government sees looming crisis

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Growing outbreak spooks markets, government sees looming crisis

Korea’s financial markets lost significant ground Friday as the country’s number of confirmed cases of the new coronavirus continued to increase rapidly, doubling for the second day in a row.

The benchmark Kospi on Friday lost 32.66 points, down 1.49 percent to close at 2,162.84. That followed a substantial drop Tuesday, when the stock market shed 33.29 points, or 1.48 percent.

The Kospi has lost a total of 76.85 points, or 3.4 percent, since Korea’s first case was confirmed on Jan. 21.

The Korean won also has depreciated sharply against the dollar, reaching its lowest value since Sept. 3. It closed at 1,209.2 won against the dollar on Friday.

Speculation is growing that the Bank of Korea could lower interest rates to prevent economic growth from falling below 2 percent.

“While Bank of Korea Gov. Lee Ju-yeol recently commented that any rate cuts have to be carefully considered, signs of economic stress from incoming data are expected to pave the way for future rate reductions,” international research institution IHS Markit stated in a report released on Friday.

IBK Securities analyst Ahn So-eun agreed.

“The financial market is already raising the possibility of this year’s [Korean GDP] growth in the 1 percent range,” Ahn said. Using the World Health Organization’s official name for the virus, he added, “As the Covid-19 spread continues, it’s hard to determine the size of the downward risks on both the external and internal economy.”

The analyst said the likelihood of the Korean central bank readjusting the key interest rate is high.

Meanwhile, the Financial Services Commission (FSC) on Friday said in the last two weeks since the government announced supportive economic measures in response to the spreading virus, a total of 322.8 billion won ($267 million) in financial support has been provided.

The FSC said state-owned financial companies, including the Industrial Bank of Korea and the Korea Credit Guarantee Fund, have provided 44.5 billion won in fresh loans, while 187 billion won worth of existing loan payments have been suspended.

Private companies also provided 91.3 billion won worth of financial support.

It said most of the support went to the tourism industry that has been heavily affected by the virus but also small- and medium-sized enterprises that struggled to secure raw materials supplied from China.

“With the number of people confirmed with the Covid-19 rising recently, uncertainties over our economy and financial market are expanding,” said Sohn Byung-doo, FSC vice chairman. “Small businesses are struggling as tourists are shrinking, and consumer sentiment is contracting while several [small- to medium-sized enterprises] in business with China are experiencing setbacks on production and exports.”

With concerns continuing to grow, the government promised more economic support in the future.

Finance Minister Hong Nam-ki on Friday reaffirmed the government’s plan to announce more economic measures. The measures will continue to focus on boosting companies’ investments and consumer spending next week.

“Government departments are currently reviewing measures that would boost the domestic economy and exports,” Finance Minister Hong said. “The most important thing is that the measures will help those in the field.”

He said one possible plan would increase financial support on small businesses through rent payments.

The ruling Democratic Party has also raised the possibility of lowering the individual consumption tax rate next week. The rate is currently at 5 percent.

The individual consumption tax applies to high-end goods, including automobiles and luxury items.

During the Middle East respiratory syndrome outbreak five years ago, the Park Geun-hye administration lowered the individual consumption tax to 3.5 percent between August 2015 and June 2016 in an effort to boost spending.

The current administration again lowered the rate to 3.5 percent in July 2018 amid unfavorable economic indices, including job figures. The rate moved back up to 5 percent at the beginning of 2020.

The finance minister declined to say whether the government is considering creating a supplementary budget.

“Projects and policies are more important than a supplementary budget,” Hong said Friday.

The ruling party has been increasing pressure to create a supplementary budget.

The party on Friday said it will discuss the possibility of additional budgets during a meeting Sunday with high-ranking government officials, including Hong.

“There are demands for an emergency supplementary budget among several lawmakers representing the Gyeongsang provinces within our party,” Democratic Party Chairman Lee Hae-chan said Friday. “We expect our party and the government to come up with measures that will protect the public’s safety and revitalize the economy.”

Former Prime Minister Lee Nak-yon, who is running in the general elections, said a supplementary budget would have to be prepared, if needed, during a radio interview Friday.

“The leaders in the opposing party argue that we shouldn’t spend more tax money [to combat economic losses],” Lee said. “But it is at such a time that we need to use taxes.”

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