South Korea's COVID-19 Success

Moon's government has managed a highly effective and popular nationwide "trace, test and treat" campaign to control South Korea's COVID-19 outbreak. Instead of implementing a disruptive nationwide lockdown, the government concentrated on aggressive testing, contact tracing and isolation for those infected, with a focus on the epicenter areas around the city of Daegu. On top of this, it suspended mass-gatherings, shuttered schools and recommended the closure of gyms, bars and churches. The next phase, in early May, will see the start of a so-called "everyday life quarantine," with a detailed set of government guidelines that involve continued social distancing, standards for businesses and public places, face masks at religious institutions and a request to limit mass gatherings. Widespread testing and tracing will continue. 

This post-outbreak period will see Moon and his allies in an unparalleled position of political strength. Lauded internationally for his government's adroit handling of the outbreak, Moon's progressive coalition was rewarded with a massive victory in mid-April legislative elections. This is a stunning reversal of political fortunes for Moon, who just months ago appeared at risk of losing ground in the legislature amid low approval ratings, dooming him to a weak, lame-duck status in the second half of his constitutionally limited single term. Instead, his Democratic Party and its ally earned themselves the largest majority in the country's modern history, securing 180 out of the 300 seats in the National Assembly. 

Moon's camp now has the supermajority needed to force through reforms without having to negotiate with the conservative opposition (with the exception of constitutional reform, which requires two-thirds of seats). But South Korea's newly empowered president and his allies will still need to focus most of their bandwidth on recovering the economy, leaving little room for Moon's ambitious progressive agenda that encompasses reducing the power of family-run conglomerates known as chaebol, as well as lowering income inequality and easing housing prices. 

Economic Pains Remain

Despite Moon's successful handling of COVID-19, however, the economic outlook for South Korea is bleak. Even before the worldwide pandemic, sluggish global demand was already sapping South Korean growth. The outbreak of COVID-19 in China and, later in South Korea, compounded these economic headaches in the first quarter. And now, even with China and South Korea coming back online, Seoul is already facing a second round of damage with outbreaks sapping growth in key Western markets. 

This presents massive demand-side risks for a South Korean economy that generates 44 percent of GDP from exports. And 29 percent of these exports are bound for North American and European countries, many of which are still in the midst of battling their own COVID-19 outbreaks. The International Monetary Fund projects that overall global trade volume will contract by 11 percent in 2020, and that global GDP will drop 3 percent. For South Korea, in particular, the IMF forecasts a 1.2 percent contraction in 2020 GDP with a rebound to 3.4 percent in 2021. These projections, however, don't factor in the risk of a second wave of COVID-19 infections in late 2020 or early 2021. Initial data shows a nearly 27 percent drop in South Korean exports through the first 20 days of April. South Korea's first-quarter GDP grew 1.3 percent year-on-year — the weakest since 2009 and coming alongside central bank warnings of far worse numbers likely in the second quarter. 

Managing the Fallout

Moon's progressive government has already unleashed economic support measures through an initial $9.6 billion supplementary budget, with the second totaling $10.06 billion approved by lawmakers April 30. These first two tranches include enhanced healthcare measures, loans for businesses in addition to tax relief and cash handouts to all South Korean households. Moon has also promised a third supplementary budget to be announced in detail in June, which will focus on boosting domestic demand, as well as a $32.4 billion fund to allow businesses to retain workers, with a focus on worst-hit sectors such as the airline, shipping, communications and automotive industries. 

This supplementary spending comes on top of an already planned $424 billion 2020 budget, with a focus on job creation, welfare spending and developing regions identified as potential growth drivers. The government has said it will fund these budgets with deficit-covering bonds, cost-cutting and budget reallocations. In terms of monetary policy, the South Korean central bank cut interest rates in mid-March from 1.25 percent to a record low of 0.75 percent — only the third time the bank has made such an emergency move, the others being in 2001 and 2008. 

Revised Ambitions 

Going forward, the economic playbook Moon largely used during the first half of his term will have to be largely scrapped. This will leave him with options to spur a recovery focused more on boosting employment rather than boosting incomes — his previous method via successive minimum wage hikes. In this, Moon will rely partly on enhanced government hiring, but will ultimately come to depend on the established players in the South Korean economy, namely the  chaebols that dominate many sectors, further stalling his hopes of weakening their grip on the economy. This will also leave little space for addressing the more systemic, long-term economic issues such as income inequality and housing. Instead, these challenges — which are difficult to address in even normal economic times — will now need to wait until late 2021 or beyond. 

In terms of foreign policy, Moon's hoped-for outreach to North Korea will find itself thwarted by COVID-19 as well. With Pyongyang currently turned inward to deal with the fallout of its own likely domestic outbreak and possibly a political crisis around the rumored ill-health of leader Kim Jong Un, the regime is unlikely to reciprocate South Korean outreach, even as Seoul shifts its attention to reforging infrastructure and even economic links with its northern neighbor. More important, the inter-Korean dynamic is still beholden to Pyongyang's actions within the context of U.S.-North Korea relations. With talks already completely stalled out since the start of the year, the White House is now focused on its own domestic COVID-19 crisis and recession. And with U.S. President Donald Trump's re-election prospects unclear, a continued stalemate or even a return to confrontation are the most likely scenarios until the November vote and perhaps beyond.