South Korea Braces for Economic Pain as Virus Cases Soar

(Bloomberg) -- South Korea warned its fragile economic recovery is under threat from the coronavirus that has spread dramatically across the country over the past week, and pledged action to minimize the fallout. The country’s currency and the main stock index plunged.

The epidemic poses a “large concern that it will limit the trend of economic recovery started late last year,” First Vice Minister Kim Yong-beom said Monday, according to the Finance Ministry. He cited a drop in domestic consumption and exports to China, among other impacts.

Samsung Electronics Co. and LG Electronics Inc. are among companies taking precautions as the number of cases rises, including the infection of a Samsung employee at a local production facility. The country’s largest technology company shut down a plant in Gumi City over the weekend after the employee tested positive for the virus, restarting operations Monday afternoon.

The number of infections in South Korea soared from just over 30 to more than 760 in the past week, with the virus claiming the lives of at least seven people so far. The spike has led President Moon Jae-in to raise the country’s infectious-disease alert to the highest level for the first time since 2009, allowing the government to restrict public activities.

The Bank of Korea held an emergency meeting in the afternoon and discussed the virus impact, according to a text message from the central bank, which didn’t mention whether any policy action was reviewed. An increasing number of economists are convinced the bank will cut its benchmark interest rate at its regularly scheduled meeting Thursday. President Moon asked his secretaries Monday to consider drafting an extra budget with parliamentary approval.

Quick Impact

South Korea’s economy tends to be impacted quickly by global events due to its reliance on trade, especially with China. Korea’s imports from the world’s second-largest economy plunged 19% in the first 20 days of February, illustrating how the virus is disrupting the region’s supply chain.

What Bloomberg’s Economists Say

“The Bank of Korea may ease at its February meeting in a pre-emptive move to cushion the economic impact of the coronavirus outbreak.”

--Justin Jimenez, Bloomberg Economics

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The economy is expected to suffer further as fear spreads among the population, limiting economic activity. The government has urged citizens to avoid outdoor activities and mass religious services, and delayed the start of the school year by a week.

Samsung Worries

The Samsung case is troubling because Gumi has a number of facilities operated by Samsung, LG Electronics, LG Display, Toray Group and other companies. Samsung has two production lines in Gumi, about 200 kilometers (124 miles) southeast of Seoul, for some of its smartphones.

LG Electronics, which has TV plants in the Gumi industrial complex, told workers who commute from Daegu to work from home. LG Display has instructed workers who have visited the Daegu area not to come to the office for two weeks, while headquarters staff are restricted from visiting the region without approval from management.

Samsung has shifted more than half of its smartphone production to Vietnam but still produces some of its premium models at the Gumi complex. The stoppage at the plant may affect production of Samsung’s high-end models, including the foldable Galaxy Z Flip and the Galaxy Fold.

Markets React

South Korea’s won dropped to a six-month low and stocks plunged as traders start pricing in a deeper impact than initially anticipated from the outbreak. Bonds rallied.

“The virus appears to have a bigger-than-expected negative impact on the financial markets,” said Park Sang-hyun, an economist at HI Investment & Securities Co. “The point is whether the virus outbreak would stabilize in end-February or early March.”

Forward swap rates indicate that investors have priced in a rate cut over the next three months, with the odds jumping to 80% as of Feb. 21, from less than 40% on Feb. 14. Yields on Korea’s 10-year sovereign bonds dropped 3 basis points to 1.42%.

The won tumbled 0.9% to 1,220.35 against the dollar, while the benchmark Kospi Index sank 3.9% at the close in Seoul, the most since October 2018.

--With assistance from Hooyeon Kim and Heejin Kim.

To contact the reporters on this story: Sam Kim in Seoul at skim609@bloomberg.net;Sohee Kim in Seoul at skim847@bloomberg.net;Kanga Kong in Seoul at kkong50@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Michael S. Arnold, Jiyeun Lee

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