JAKARTA (TheInsiderStories)– In response to the rapidly escalating COVID-19 crisis, the South Korean government has proposed a US$9.8 billion (11.7 trillion Won) supplementary budget with a package of measures aimed at combating the medical and economic impact effects of the epidemic.
Until March 3, total number of confirmed cases in South Korea has reached 5,328, which is the second highest number in the world after China. The supplementary budget will allocate 2.3 trillion Won towards healthcare spending to tackle the rapidly rising number of COVID-19 cases, including increased hospital capacity and medical equipment, said the government.
The South Korean economy has already been hit by the impact of the virus on China’ economy, which is Seoul’ largest export market and accounts for 28 percent of total national exports. The automobile exports fell 16.6 percent in February, mainly reflecting supply chain disruptions for auto parts needed for auto plants due to the suspension of industrial production in China during the first half of February.
South Korea’ tourism industry was initially impacted by the collapse of Chinese outbound tourism due to the COVID-19 crisis. South Korea’ own coronavirus epidemic is now resulting in the collapse of international travel to the country.
According to Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit, key downside risk for the South Korean economy in the near-term is from weaker domestic consumption spending, as households become more fearful about going to public places. South Korean consumer spending is likely to be hit hard in coming months, with retail stores, restaurants, entertainment, tourism and aviation badly affected by slumping sales.
Disruptions to South Korean industrial production could also occur if the epidemic escalates further and certain plants have to close temporarily due to COVID-19 cases in their workplace. This could pose a risk to the global electronics supply chain, as South Korea is a key global producer of memory chips and display panels.
Despite the supplementary budget measures, the epidemic currently engulfing South Korea poses a major downside risk to its economic growth in 2020.
The COVID-19 outbreak also had a severe impact on China’ manufacturing sector in February due to efforts to contain the spread of the virus. Extended Lunar New Year work suspensions and factories operating well below capacity caused production volumes and new order intakes to plunge at survey-record rates. Supply chains were disrupted as a result, causing backlogs of work to accumulate sharply.
The negative effects, however, are expected to be temporary. Encouragingly, panel comments from the survey showed Chinese firms anticipating the difficult situation faced by the sector to be temporary. In fact, the level of confidence, as measured by the Future Output Index, rose to the highest for five years in February.
This optimism was supported by positive developments in the last week of February, where industrial production continued to resume work and infrastructure projects gradually restarting. The current situation is expected to improve as soon as in March with an increasing number of manufacturing enterprises resuming work.
While, Hong Kong Purchasing Manager’ Index (PMI) sank to 33.1, a level unprecedented since the survey started in July 1998, from 46.8 in January. Latest data are now broadly indicative of GDP contracting at an annual rate of nearly 5.0 percent, suggesting that Hong Kong SAR could be heading into a steeper recession in the first half of the year.
The latest PMI flashed red warning lights on the dire state of business conditions across Hong Kong in February amid the coronavirus. The outbreak comes at a time when business confidence has already been badly affected by political protests and United States – China trade war tensions, with expectations of the COVID-19 situation persisting in coming months to exacerbate the current downturn.
Measures taken in response to the situation, and general fear of being infected, saw business activity and new sales sinking at a record pace. Notably, orders from China for Hong Kong goods and services plunged by the greatest extent since data for this variable were first available in March 2005.
Unsurprisingly, the business mood became increasingly gloomy, suggesting firms do not expect any quick turnaround in the business situation. Confidence about the year-ahead outlook plummeted in the city to an all-time low, with a majority of firms anticipating lower future output amid expectations that the coronavirus situation will persist in coming months.
With the Hong Kong economy shrinking 1.9 percent during 2019, the average PMI reading so far (39.9) for the first quarter of 2020 signals a deepening recession in the opening quarter of 2020.
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