[Q&A] Bank of Korea: "Significant Pressure on Korea if Global Economy Contracts Due to Novel Coronavirus"

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[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The Bank of Korea forecasted that as the novel coronavirus infection (Wuhan pneumonia) spreads and China's domestic demand contracts, it will impact the overall global economy, putting considerable pressure on South Korea.

On the 6th, Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, said during a Q&A session with reporters immediately after the announcement of the "Preliminary Balance of Payments for December 2019," "If China's domestic demand contracts and our country's economic activities decrease, a situation will arise where the global economy as a whole contracts," adding, "We must keep in mind that for our export-dependent country, this could act as significant pressure."

According to the Bank of Korea's announcement of the December 2019 balance of payments, last year's current account surplus was $59.97 billion, down $17.5 billion compared to the previous year. This is the lowest level in seven years since 2012 ($48.79 billion). The causes were the sharp drop in semiconductor prices and the decline in global trade volume. Last year, the current account surplus ratio relative to Gross Domestic Product (GDP) was estimated to be around 3.5 to 3.6%.

The following is a Q&A.

- To what extent is the impact of the novel coronavirus reflected in the January balance of payments?

▲ The novel coronavirus began to emerge around the end of January. Therefore, I do not think it will immediately affect the January current account. Since there are no figures, I cannot say precisely, but I believe the impact of the novel coronavirus in January will not be very large.

- It seems the novel coronavirus will also affect the service balance and goods balance.

▲ Recently, Chinese factories have been shutting down, so our export sectors such as processing trade and intermediary trade may be hit, affecting the goods balance. The reduction in flights will also impact the travel balance and could negatively affect the transportation balance. This will depend on future developments. Since there are still arrivals, the short-term impact may not be significant, but if entry and exit restrictions occur, the travel balance could be greatly affected in the long term. In the mid to long term, if domestic demand in China contracts and our economic activities decrease, a situation where the global economy contracts overall may occur. We must keep in mind that this could act as considerable pressure on export-dependent countries like ours.

- Imports have decreased. Could this also be linked to a weakening domestic demand in our country?

▲ Compared to 2018, there was a factor of falling oil prices. As major import unit prices declined, the overall amount decreased. Since the semiconductor market contracted, related investments did not take place. Imports of machinery and equipment themselves contracted, resulting in an overall decrease in imports.

- There is an evaluation that this is a recession-type surplus.

▲ A recession-type surplus refers to a situation where a surplus occurs when there is no surplus or when the economy is bad. Although last year's surplus decreased, the decline in exports was greater than the decline in imports. It is not easy to call the current situation a recession-type surplus.

- Exports and imports continue to decline. Will this trend continue?

= Although various situations are changing, generally speaking, the global economic growth rate could be higher than last year. While advanced countries are not doing well, emerging countries are improving, which could lead to better global economic growth than last year. The semiconductor market is expected to recover this year, and exports and imports are increasing, so the trend is expected to change, according to the research bureau. However, we need to observe how the novel coronavirus and other factors will develop recently.