Coronavirus shocks might affect the financial sector

The latest coronavirus outbreak is affecting not only the domestic but also overseas operations of some of the top South Korean manufacturers including Samsung Electronics and Hyundai Motor. The impact of the outbreak was mostly limited to industries such as the service industry that rely heavily on domestic demand, but now it appears that it is spilling over to manufacturing and exports.

After an employee was diagnosed with COVID-19 on Friday, Hyundai Motor temporarily closed down its Ulsan factory that produces the Genesis GV80 and Palisade. Two of Samsung Electronics’ facilities, one in Gumi and the other in Giheung, are also closed for deep cleaning after three employees tested positive for the virus. On Sunday, LG Innotek stopped the assembly line in its factory in Gumi with one confirmed case.

Overseas business operations are not immune to the effects of the disaster either with more than 80 countries banning the entry from South Korea, which has disrupted business travels. LG Chem, which formed a joint venture with General Motors to build a battery production plant in Lordstown, Ohio, the United States, is planning to invite U.S. President Donald Trump to a groundbreaking ceremony, whereas LG Display is aiming to complete the construction of its plant in Guangzhou, China and start production by March. However, given the current circumstances, it is unclear if these schemes can be executed as planned.

COVID-19 will have a more lasting and extensive impact on the economy than SARS or MERS. South Korea’s exports volume decreased last month by 16 percent in the automobile industry, which struggled to source car parts, while daily exports volume was down by 11.7 percent year on year.

The impact was more immediate on domestic demand. Retail sales declined by 3.1 percent in January when the full impact was not captured. Considering that restaurants, movie theaters and department stores are empty, the numbers for February are expected to be much lower. Credit card spending fell by 45 percent from Feb. 1 to Feb. 23, compared to January, the credit card industry says.

On Monday, the government and ruling party discussed the need for increasing the budget. Fast planning and execution should follow to solve problems at hand. However, the additional budget will not be able to help all businesses get back on track. As of last year, the debt of small and medium-sized companies amounted to more than 440 trillion won, and the delinquency rate is on the rise as a result of a recession.

Against this backdrop, the government should closely look at the trends in the household and business debt as well as the delinquency rate and see if the figures rise due to the coronavirus outbreak as it can trigger a financial crisis. It should also devise long-term solutions that can strengthen the economy and attract investment from businesses.