© YONHAP News

The Korean government has released a package of comprehensive measures to weather the impact of the COVID-19 virus on the economy. On February 28^th, it announced a special economic relief package aimed at minimizing the fallout of the virus and to swiftly overcome the outbreak. An emergency supplementary budget bill was also drawn up with the same purpose. Here is Lee In-chul, director of the Real Good Economic Institute, with more.

The latest measures show the government’s acute awareness of deteriorating public sentiment amid the rapidly increasing virus infection cases in local communities and its strong pump-priming efforts to stimulate the economy through financial support, tax benefits and regulatory innovation.

The government plans to spend more than 16 billion US dollars, to overcome the outbreak crisis. The support measures include fiscal injections, tax cuts, low-interest loans to small businesses and increase of funds provided by state-run institutions.

The key of the measures is to promote spending. In more detail, tax on car purchases will be reduced by 70 percent from March to June. Tax deductions on card spending will be doubled to 30 to 80 percent for credit and debit cards over the same period. Buyers of high-efficiency home appliances will receive a refund of 10 percent. And working parents with children under eight years old will be given government subsidies, if and when childcare leave is used due to the shutdown of daycare centers to prevent the spread of the virus. To encourage consumption, the so-called “spending coupons” in five areas such as employment, vacations, culture, tourism and family care will be provided to more people and to raise their financial ceiling.

The relief package also includes support measures for small business owners and mid-sized companies.

For businesses with annual sales of 50-thousand dollars or less, value-added tax will be cut to the level of that imposed on simplified taxpayers until the end of next year. This measure is estimated to allow 900-thousand people to save 160 dollars to 660 dollars each, while causing tax revenue to decrease by 720 million dollars over the next two years. To encourage spending, the government will issue “regional gift vouchers” worth 5 billion dollars and provide 2.5 billion dollars in cash vouchers that can be used at traditional markets. For landlords who temporarily lower rents for small and mid-sized businesses affected by the virus outbreak, the government will give them a tax deduction of 50 percent of the rent reductions they give their tenants.

Emergency funds for small- and mid-sized firms hit by the virus will be increased to 570 million dollars, while the insurance coverage of accounts receivable held by such companies will be increased to 1.8 billion dollars.

Under the new government measures, it will spend 5.8 billion dollars in the form of tax incentives, while some 7.5 billion dollars will be provided by state-run financial institutions. The government has already executed or earmarked 3.3 billion dollars for the same purpose. If this amount is added, the government will be spending over 16 billion dollars in total.

The government has decided on such a massive financial injection because economic activities are shrinking overall, due to the steep rise in the number of COVID-19 infections.

The alarming surge in infection cases raises concerns about its negative impact on the economy. Korea’s exports have dropped by nearly a two-digit rate, while domestic spending remains frozen. Streets are quiet and stores are empty even during weekends. People are reluctant to go to places that are typically crowded such as department stores, large discount chains and movie theaters.

Aviation and tourism sectors have been hit hardest by the virus. The outbreak has also taken a serious toll on small business owners. Most schools have cancelled their graduation and entrance ceremonies in fear of the spread of the virus, causing the demand for flowers to sharply decrease. As a result, local flower farms and shops are in deep financial trouble in, what should be, peak season. Small eateries are no exception. Prices of food ingredients have soared due to the troubles in importing them from China. To make matters worse, people refrain from eating out. So restaurants are facing a double whammy. It seems the virus has struck about every industry.

It seems Korea is headed straight towards a perfect storm, in which exports and domestic consumption go down together. Outbound shipments are expected to decline for 15 consecutive months as of February, while tourism revenue is likely to decrease this year as a result of a drastic fall in the number of Chinese tourists visiting Korea.

Self-employed people in Daegu, where the number of confirmed patients has surpassed 1,000, are even considering giving up their businesses. The famous Seomun Market in the city was temporarily shut down for the first time ever since it opened back in the Joseon era.

An increasing number of countries around the world are imposing an entry ban on Koreans, making it hard for Korean companies to work on their overseas investment plans. Also, foreigners find it difficult to invest in Korea for now. Indeed, business sentiment in Korea is deteriorating. The question is how long the virus situation will be drawn out.

Many are turning pessimistic about Korea’s growth outlook this year. Some forecast the growth rate may fall below 2 percent and even to the 0 percent range in the worst case.

Standard & Poor’s lowered Korea’s growth rate by 0.5 percentage point from 2.1 percent to 1.6 percent this year. The global credit ratings agency points out that Korea is vulnerable to a disruption in the China-led global supply chain. Nomura Securities also slashed its growth forecast for Korea from 2.1 percent to 1.8 percent. But it predicted that the rate could fall to 0.5 percent if the global supply chain fails to get back to normal by the end of June. Morgan Stanley also forecast the Korean economy will grow a mere 0.4 percent this year in the worst case.

When the Severe Acute Respiratory Syndrome or SARS hit Korea in 2003, the Korean economy posted negative growth for two consecutive quarters. The outbreak of Middle East Respiratory Syndrome or MERS in Korea in 2015 also dealt a severe blow to the local economy, which grew only 0.2 percent on quarter in the second quarter of the year.

Finance Minister Hong Nam-ki has said that the government will submit a supplementary budget, worth at least 5.2 billion dollars, to the National Assembly this week to cope with the economic fallout of the virus effectively.

Considering the extra 5.2 billion dollar budget and the government’s support measures worth over 16 billion dollars, the government will unleash more than 21 billion dollars. Now, the government needs to carry out restructuring proactively and execute its policy plans with determination in order to reinvigorate the economy. For these special measures to prove effective and lead to a successful economic turnaround, the government should clearly show its commitment to reform.

Economic policies should be implemented in a timely manner. With the COVID-19 virus spreading fast, the government needs to arrange response measures promptly and execute them swiftly in order to minimize the economic shock from the outbreak.