The spread of the Middle East respiratory syndrome across the country is feared to be making a deep indent on the Korean economy, which has already been struggling with declining exports and slumping domestic spending.
Thorough measures should be taken to contain the deadly virus from spreading further. Still, it is necessary to prevent excessive panic from worsening the economic downturn.
The current situation is comparable to the spread of concern in 2003 over the severe acute respiratory syndrome hitting Hong Kong and other Asian countries. At the time, the government set aside 4 trillion won ($3.6 billion) in a supplementary budget and the central bank lowered its key interest rate twice by 0.25 percentage points to help keep the economy from being pulled into recession. The measures were also designed to cope with deteriorating economic conditions abroad.
It has yet to be seen how severely the economy will be affected by the MERS outbreak. But the fear over the disease, which has been exacerbated by the government’s negligent initial response, has already hit the tourism and retail sectors. With exports declining due to a weaker yen and sluggish global demand, the further slump in domestic expenditure may pull this year’s economic growth rate below 3 percent.
Government and central bank officials have not yet sent signals that they will take additional measures to help boost the economy. Financial policymakers may hesitate to put forward a large-scale supplementary budget due to a possible shortage of tax revenues. Central bankers may be concerned about the impact of the U.S. interest rate hike that is expected to come later this year.
As many experts note, however, the current conditions seem to require a mixture of fiscal and monetary measures that could help preempt the further withering of consumer and business sentiment.
The Bank of Korea’s monetary policy committee is watching efforts to contain the spread of the MERS virus before it convenes a meeting Thursday to decide whether to lower the key rate, which stands at a record low of 1.75 percent. The committee may be right to cut it additionally this time as it will be more difficult to lower the rate when the U.S. rate increase is imminent.
