
Last year, South Korea was held up as a model for how to handle the recent tensions in the trading system by tapping into fiscal policy. As the coronavirus has spread around the world, it has also been held up as a model for how to handle containment of the virus. Now to manage an expanding crisis Seoul is moving to take more aggressive fiscal measures to support the South Korean economy.

When the crisis first broke, South Korea faced a supply shock as parts suppliers in China became unable to continue production. Imports from China for the first two months of the year declined 11.9 percent. However, the decline was steeper in some industries that depend on parts from China. The automotive industry, for example, has seen imports fall by nearly 40 percent this year.

In the early stage of the crisis, South Korea unveiled a $13.7 billion stimulus package on March 4 that would provide funding to address healthcare costs, provide support to small and medium enterprises impacted by the crisis, and help make up for expected shortfalls in tax revenues. It had also previously announced on February 17 that it would make 300 billion won ($240 million) worth of low-cost loans available to airlines.

However, the situation has changed significantly since the Moon administration unveiled its initial stimulus package.

With COVID-19 having spread to many of the world’s other major economies the South Korean economy is likely to face a demand shock just as parts suppliers in China are able to begin resuming production and growing travel restrictions have created a crisis in the travel and tourism industries.

We are still in the early phases of the economic crisis, but four former chief economists at the IMF have already suggested that we know enough about the current economic challenges to conclude that the world has entered a global recession, which is defined as global growth falling below 2.5 percent.

While South Korean exports overall were up slightly in February, as the United States and the European Union go into what increasingly looks like quarantines and we gain a better understanding of the economic damage the coronavirus has done to China’s economy, we should expect South Korean exports to decline in March and potentially the months ahead as global growth slows.

On a corporate level, earnings estimates for Korean firms have declined by 6.5 percent over just the last two weeks and Goldman Sachs estimates that Samsung Electronics could see a decline in operating profit of $1.4 billion from the coronavirus.


The situation is particularly acute for the travel and tourism industries. When the initial airline loan package was put together on February 17, countries had not yet begun placing restrictions on travelers from South Korea. That number has now risen to 151 countries. The rapid growth in travel restrictions or warnings related to South Korea has resulted in Korean Air cutting its capacity by 80 percent and Asiana cutting its own by 70 percent. South Korean budget airlines have largely suspended their flights.

The International Air Transport Association had estimated that a relatively contained spread of COVID-19 would result in losses for the South Korean airline industry of $2.8 billion. But more recent estimates suggest that new restrictions on travel have decreased demand in the industry to such an extent that many of the world’s airlines could be bankrupt by the end of May without aid. Korean Air has $4.3 billion in debt coming due this year, most likely necessitating some form of government aid or increases in low interest loans.

The economic ripples from the slowdown also impact airport retail. With outbound and inbound travelers at Incheon International Airport down around 40 percent in February, food and beverage operators have seen sales declines of 30 to 50 percent. Those declines are expected to expand this month.

In the tourism industry, which the OECD estimates accounted for 5.1 percent of South Korean GDP in 2016, about a quarter of all tourism spending in the country is from foreign visitors. Given a decline of 14 percent in airline passengers traveling to South Korea – a level that is now likely underestimated — the tourism industry faces a minimum of $2.4 billion in losses.

Diplomat Brief Weekly Newsletter N Get first-read access to major articles yet to be released, as well as links to thought-provoking commentaries and in-depth articles from our Asia-Pacific correspondents. Subscribe Newsletter

To address the worsening economic crisis that is accompanying COVID-19, South Korean President Moon Jae-in is establishing an emergency economic council to address the economic challenges. The objective of the council would be to make swift decisions in what has been a rapidly evolving situation.

While the administration has yet to provide details of its plan, Moon has indicated that a new stimulus package and ensuring that businesses have liquidity will be components of any steps going forward.

South Korea has the fiscal space to be bold and should do so. After the initial stimulus package earlier this month, South Korea’s debt-to-GDP ratio was only expected to be around 41 percent. Yields on 10 year government bonds remain around 1.4 percent and interest rates are low, allowing Seoul to borrow at relatively low costs.

The current state of the crisis helps to provide outlines for what some elements of a new stimulus package might look like. With the collapse in air travel, additional low interest loans or financial aid will be needed to prevent South Korean airlines from going bankrupt. Most likely the aid will come with some stipulations that part be used to maintain the salaries of employees who might otherwise be laid off or put on unpaid leave. Additional funds will also be needed to support the restaurants and hotels that have been impacted by the decline in tourism.

To ensure liquidity more broadly, South Korea could follow the German model of extending loans to any firms hit by the crisis. However, any package should include fiscal stimulus with the goal of ensuring that demand is able to rebound quickly once the crisis ends. One way to achieve this would be to provide aid to individuals directly.

The containment of the virus should remain the priority, but ensuring that the economic damage is limited should be the second priority. An emergency economic council that can move quickly and provide substantial economic aid as the crisis changes may be just what the South Korean economy needs.