Current metrics suggest that South Korea has mastered the novel coronavirus pandemic, but Korea Inc now faces the formidable task of steering its trade-dependent companies through the mountainous economic waves rising ahead.
Widely praised globally for its high rates of Covid-19 testing, and also for its highly efficient contact tracing, the country had only nine new infections on Tuesday, according to the Korea Center for Disease Control and Prevention.
That followed Monday’s 13 cases and only eight on Sunday. In recent weeks, South Korea’s new cases have dropped from a high of more than 800 new daily infections at the peak of the outbreak to less than 50, to less than 30 and to numbers in low double and high single digits.
Remarkably, although the country has mandated a range of social distancing measures, such as closing schools and museums and forbidding large gatherings, it has not enacted any lockdowns, either locally or nationally.
Despite the government’s successful measures, Prime Minister Chung Se-kyun has repeatedly urged Koreans not to drop their guards. That may be sound advice as there has been a surge in infections in both Japan and Singapore in recent days, two countries which had suffered minimally from the virus.
But with exports representing 70% of South Korea’s economy, and with much of the developed world, notably the EU, Japan and the United States, under lockdown conditions that are crushing both consumption and production underfoot, Seoul faces an enormous challenge ahead.
“Growth in Asia is expected to stall at 0% in 2020. This is the worst growth performance in almost 60 years, including during the Global Financial Crisis (4.7%) and the Asian Financial Crisis (1.3%),” the IMF wrote on its website on April 15. “That said, Asia still looks to fare better than other regions in terms of activity.”
A range of analyses by investment banks and others suggest that South Korea is set to face its first recession since 1998 this year. In an effort to forestall the pain, Seoul has rolled out a series of aid packages worth almost US$100 billion. However, that cannot disguise the grim conditions facing the countries’ key companies and sectors.
Flagships face headwinds
Korea’s global brands – Samsung, Hyundai, LG, et al – are expected to disclose their first- quarter earnings in the days ahead. While there is likely to be some lag time reflected in Q1 results, given that the pandemic hit Asia in January and February, but did not fully assail Western nations until March, Q2 results are expected to be dire.
And ominous omens are already appearing for the first quarter.
In the first 20 days of April, South Korean exports fell 26.9% year-on-year, according to the Korea Customs Service. Shipments of memory chips, Korea’s leading export, fell 14.9%, while those of automobiles declined 28.5%. Exports to China dropped 17%, to the US 17.5% and to the EU 32.6%, the Customs data found.
Still, in preliminary Q1 earnings guidance, Samsung Electronics anticipated a 2.73% increase in profits thanks to solid sales of semiconductors, as customers stocked up on inventory and demand surged for DRAM chips for servers, local media reported.
The Q1 outlook for the number-two chipmaker, SK hynix, also looks reasonably bullish. Following a lingering downturn in the sector last year, analysts from 17 securities houses cited by Yonhap Infomax expect the company to more than double its operating income, quarter-on-quarter – albeit that will still be a year-on-year decline of 63%. Like Samsung, SK hynix is expected to benefit from robust demand for server chips.
Display makers will enjoy no such tailwinds.
Samsung Display is expected to post operating losses of $378 million in Q1, while LG Display is likely to suffer $310 million in operating losses, according to data compiled from brokerages by Yonhap Infomax.
The outlook for Korea’s leading carmakers is also bearish.
Fitch Ratings this month downgraded Korea’s leading carmakers, Hyundai Motor Co and its affiliate Kia Motors, to “negative” from “stable.” “As of early April, most of HMC’s and Kia’s overseas production facilities are temporarily shut, except the Chinese plants, which are slowly ramping up capacity following closures,” Fitch wrote. “However, production in South Korea, which accounts for 40% of HMC’s global shipments and 55% of Kia’s, is close to normal after being suspended from late February to early March due to shortage of a component manufactured in China.”
The outlook reflects concerns about the company’s operating performance and financial profile in 2020, and “uncertainties regarding the length and magnitude of the expected downturn in the global automobile industry,” Fitch said. But it added that the companies’ “robust liquidity” grants them “the financial flexibility to manage the downturn in the industry.”
Shipbuilding, where Korean technology leads the world in the high-valued added sector, is deeply downbeat.
As of February, the combined order receipts of the country’s three leading shipbuilders – Daewoo Shipbuilding and Marine Engineering, Hyundai Heavy Industries and Samsung Heavy Industries – stood at only 3.8% of their annual target, according to local media. This reflects a slump in the overall industry in the first two months. The amount of ship orders worldwide was 1.17 million compensated gross tonnage, or CGT – well below 7.77 million CGT in the same period in 2018 and 4.89 million CGT in 2019.
In March, Bloomberg found that Korean shipbuilders’ overall market share plunged. In February, Korean yards had secured 67% of new orders, but in March, that dwindled to just 4% as Chinese builders grabbed a 90% share, on the back of Chinese clients upping orders.
Worse may be on the horizon for the sector, given the fall in oil prices, which will impact the earnings of companies that normally order fuel carriers and offshore drilling rigs.
And with international travel being ravaged by the pandemic, the country’s two major airlines, like carriers elsewhere, are struggling to survive.
Flag carrier Korean Air will put 70% of its staff on six-month furloughs. The workers are expected to receive about three quarters of their regular pay, most of which is expected to come from a government assistance package.
Asiana says it is upgrading charters and cargo flights, but has announced it wants all employees to take a minimum of two weeks unpaid leave, while front-line staff – flight attendants and domestic airport employees – will be asked to take two-month leaves.
Local economy downbeat
In a country where local consumption makes up less than one third of GDP, construction is a key sector, but construction investment is expected to drop 3% this year, according to the Korea Research Institute for Construction Policy.
The Korea Economic Research Institute has suggested a worst-case scenario of 333,000 job losses this year, basing its estimate on a forecast by Nomura Securities of a 6.7% economic contraction for 2020. In March, dole payments hit a record high and were up 40.4%, year-on-year, Yonhap news agency reported.
And despite the lack of any national or local lockdown, small, cash-flow businesses are feeling the pain. Shop and restaurant owners in downtown Seoul questioned by Asia Times in recent days say their earnings are down between 50% and 75% due to the pandemic.