MERS adds to Korea's economic woes

SEOUL — As South Korea enters into its usual languid summer, any sentient visitor to Seoul will sense the palpable impression of the still-evolving economic and political effect of the most significant outbreak of MERS (Middle East Respiratory Syndrome) yet outside its region of origin.
That Korea, the erstwhile Hermit Kingdom, would be, above all other countries, hardest hit is symptomatic of both Korea’s globalisation drive and the contrary perception that somehow it is immune from the fortitudes and vicissitudes of broader global trends (and thus slower to respond when affected).
The Park Geun-hye Administration, already assailed for its perceived inept response to the April 2014 sinking of the Sewol ferry that tragically took nearly 300 lives, is taking still more flack for its perceived initial missteps when MERS first made its appearance.
Actual unfolding of the MERS crisis was reminiscent of AIDS when it first appeared in the US. The first case, finally diagnosed on May 20, was initially not recognised by several hospitals despite repeated visits. The hospitals then
became major spreaders themselves as a result.
By the time MERS was identified in Korea, hundreds of people had been exposed and public health authorities belatedly scrambled to quarantine those exposed, in a desperate race to get ahead of it. As this issue went to press, 32 had died, 182 were in hospital and 2,562 remained in quarantine (of a total 14,500).
The rising toll of the casualties, hospitalised and quarantined has been daily news, but less reported was the number (74 as of June 25) cured and released. The mortality  rate in South Korea is at 17.5 per cent, slightly less than half of WHO estimates of 36 per cent globally.
The economic impact is reminiscent of mourning in the aftermath of the Sewol ferry disaster in April 2014, which resulted in mass cancellation of celebratory events. With MERS, public events such as conferences have been cancelled, hospitals closed and quarantined, and at least 120,000 tourists (mostly Chinese)  have deferred their plans.
GDP projections for 2015 have fallen from 3.8 per cent last December to 3.1 per cent as of the end of June, although how much is due solely to MERS is as yet uncertain. Inflation projections also declined from 2 per cent to 0.7 per cent.
In the first week of June, department store sales fell 17 per cent compared to the same period of 2014, and by 9.0 per cent in the
second week. Visitors to amusement parks fell 60 and 45 per cent, respectively, for the first two weeks of June. That mid-June declines were lower than the first week’s figures suggest that the initial shock is beginning wear off.
Nevertheless, in response to declining consumer confidence (lowest since December 2012) fuelled by, in addition to MERS, declining exports (down nearly 11 per cent in May, the sharpest decline in six years), and a severe drought, the Government announced a KRW 15 trillion (US$13.5 billion) stimulus package. It is seen as inadequate. Hyundai Research Institute estimates that KRW20 trillion is required to sustain a 3.0 per cent growth rate.
The Bank of Korea has cut its key interest rate to 1.5 per cent as a further stimulus measure, while large conglomerates such as Hyundai Motor, Korea Telecom and SK, have introduced initiatives including  delayed payments, vouchers for employees and gift certificates in a bid to boost domestic consumption.
Despite media focus on the short-term economic impact of MERS, the real concern should be on the slowing Chinese economy, Korea’s leading (and increasingly significant) economic trade partner.
The two countries officially signed an FTA on June 1, expected to boost bilateral trade to more than US$300 billion (and even higher should negotiations scheduled for 2017 remove barriers to trade in services). As tariffs on 90 per cent of bilateral trade are removed over the next two decades, the two economies will become increasingly intertwined.
Growing reliance on China was evident when Korea (along with most of Asia, apart from Japan) signalled its intention in April, in defiance of US dismay, to join the Chinese-led Asian Infrastructure Investment Bank (AIIB).
Should the Chinese economy slow further or even stall, the impact of MERS will be as analogous as the common cold is to pneumonia (or even MERS itself).