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Korea's COVID Comeback Holds Lessons For The World

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Korea's COVID Comeback Holds Lessons For The World

Chart 1

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Korea shows what's ahead for global firms as they emerge from COVID-19. The country was among the earliest and hardest hit by the pandemic. It is an open, export-focused economy with diverse industries that is highly exposed to global dynamics. S&P Global Ratings believes Korea highlights two important trends as companies come out of COVID: that demand and GDP can recover quickly if policies are right, and that new-economy firms will outperform so long as the crisis continues.

Korea's fiscal response to COVID-19 has cushioned the blow to households and firms. On March 17, 2020, just 11 days after the country's new infections peaked, Seoul announced the first supplementary budget. The government has since followed up with three additional packages.

The size of the direct stimulus, excluding loan guarantees, has been moderate compared with other economies (at less than 5% of GDP). But it has been timely and targeted, including cash transfers to low-income households.

The central bank has cut its policy rate by a cumulative 75 basis points to a record low 0.5%. It has supplemented conventional easing by buying government bonds and raising the ceiling for its lending facility to small and midsize enterprises.

A Glimpse Of Life After COVID

The country's virus containment measures have also been effective, earning the early praise of the World Health Organization as a model for the world. With the country now containing daily new infections at less than 100 cases, Korea has been able to largely reopen its economy. Critically, this includes allowing normal services at restaurants, shops, and bars.

Partly because its measures have been so effective, the Korean government has avoided imposing strict lockdowns on its people. This has allowed people, goods, and trade to function more or less unrestrained through the crisis.

This is reflected by mobility data provided by Google. This shows the degree to which people are mobile--that is, free to move about to consume and produce, and otherwise contribute to the economy. The data show that the country resumed normal activity much more quickly than other Asia-Pacific countries (see chart 2).

Chart 2

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As a result, the Korean economy is making a fast recovery from the outbreak. We now assume GDP will slip 0.9% in 2020, a substantial improvement on our prior estimate (made in June) of 1.5% economic shrinkage.

The upshot is that Korean employment and consumer demand have rebounded. The number of employed Koreans initially fell 4% during the worst of the pandemic, but about half those jobs have returned in the past two months. With almost one in four workers in Korea employed in the accommodation, food service, and retail sectors, the swift reopening has been critical to restoring household confidence.

Chart 3

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Korea's GDP performance in 2020 compares favorably with that of the U.S., where we expect the economy to contract 4%, and eurozone GDP, which we assume will slide 7.4% in the year (see "A Double-Digit Rebound Has Begun, But It’s No Time To Celebrate," Oct. 6, 2020).

Korea Exemplifies COVID's New Economy, Old Economy Divide

Korean corporate ratings are active. Some firms are on a clearly negative path, while many others are recovering rapidly from the low base set during the pandemic.

For example, Samsung Electronics Co. Ltd.--easily Korea's biggest company by revenue--is benefiting from excellent world appetite for its semiconductors.

While consumers generally know Samsung for its phones and TVs, its memory chip division contributes almost two-thirds of its operating profit. We've seen a sharp rise in global spending on internet data centers, cloud servers, and IT devices in response to work-at-home measure rolled out during the pandemic.

We estimate Samsung will generate strong discretionary cash flow and maintain solid net cash for the next 24 months, largely due to its healthy semiconductor business and well-diversified business portfolio (see "Samsung Electronics 'AA-/A-1+' Ratings Affirmed On Robust Performance Despite Macroeconomic Headwinds; Outlook Stable," July 16, 2020.

Corporate Sectors That Continue To Struggle

However, Korea's more old-economy sectors are still grappling with the effects of the pandemic. This includes oil refining firms, steelmakers, and retail entities.

We hold a negative outlook on about one-third of our ratings on Korean firms. Korean corporates' debt-to-EBITDA ratios have been on a rising trend since 2017 (see chart 4).

Chart 4

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Earnings took a further sizable hit in the first half of 2020, when Korea's COVID crisis peaked, with the refining, chemicals, auto, and retail sectors hit particularly hard.

Chart 5

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Much of the decline reflects the fact that corporate Korea is highly integrated into the global economy.

We have taken negative rating actions since the start of the outbreak on all three major Korean refining companies: SK Innovation Co. Ltd., S-Oil Corp., and GS Caltex Corp. This reflected our view that a weak world economy would depress refinery and petrochemical demand, and on likely losses on oil inventory (see "GS Caltex Downgraded To 'BBB' On Weakening Financial Metrics; Outlook Stable," March 19, 2020.

Chart 6

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Likewise, the earnings of Korean steel producers have been hurting amid slow world demand for cars and ships (see chart 7).

Chart 7

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The country's physical retailers are grappling with consumers' move to online shopping (see chart 8).

Chart 8

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We revised the outlook on E-MART Inc. to negative in February 2020. The bricks-and-mortar discount retailer was among the first to feel the effects of the country's downturn. The downward rating action also accounted for Korean consumers' increased interest in online shopping, a trend that has only accelerated since the start of the outbreak, in Korea and around the world (see "E-MART Inc. Outlook Revised To Negative Due To Weak Profitability And Rising Debt; 'BBB-' Rating Affirmed," Feb. 19, 2020).

Just as Korean companies are contending with slipping profits, rising debt, and rising capital expenditure, shareholders are pressing for more dividends and share buybacks. Firms' free cash flows have been dropping since 2017. We expect escalating shareholder demands for greater returns to continue to weigh on the firms' financial metrics (see chart 9).

Chart 9

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We lowered the ratings on SK E&S Co. Ltd. in September on the view the issuer was adopting an aggressive dividend policy while operating conditions remained stretched (see "SK E&S Co. Ltd. Downgraded To 'BBB-' On Aggressive Dividends Amid Tough Operating Conditions; Outlook Stable," Sept. 10, 2020).

Why Korean Firms Have Been So Resilient

Korea Inc.'s trend toward declining profit and rising debt obscures perhaps the more meaningful story: the country's rated firms appear remarkably resilient.

Consider for example, the fact that we have a negative outlook on the ratings on about one-third of the firms we cover. A batch of these negative outlooks pertain to firms under the Hyundai and Kia umbrellas (see table in the Appendix).

Hyundai Motor Co. and Kia Motors Corp. and their subsidiaries are indeed struggling with the pandemic, particularly with the steep downturn in the European, U.S., and Chinese auto markets in the first half.

However, Hyundai and Kia are also outperforming their global peers. While global auto demand plunged in the first half of 2020, Hyundai and Kia both recorded growth in the domestic Korean market, while maintaining a more resilient and steady overall profitability than its global peers.

Hyundai has helped its situation with an improved product mix, model launches, and effective cost management. More broadly, Korea's success in containing the virus and kick-starting its economy have ensured domestic demand has stayed healthy (see chart 10).

Chart 10

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And while a large section of corporate Korea is old-economy and industrial (and the ratings on such firms tend to have negative outlooks), the country is also home to many high-tech firms that are faring well. Strong global demand for electronics is boosting demand for the semiconductors made by Samsung and SK Hynix Inc. (see chart 11).

Chart 11

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LG Electronics and Samsung are also helped by robust domestic demand. In the second quarter of 2020, LG and Samsung's consumer electronics divisions substantially outperformed their global peers such as Whirlpool Corp. and AB Electrolux (see chart 12).

Chart 12

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LG Chem Ltd. supplies batteries to Tesla Inc.'s Chinese business and is expanding aggressively to supply global carmakers active in the European market for electric vehicles. The company strengthened its global position during the first half of 2020, gaining top market share in terms of volume, while pushing its operating profit into the black (see chart 13).

Chart 13

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What The Korean Experience Says About The World

We can extrapolate from Korea's experience about where companies globally may be heading in COVID's aftermath. New-economy firms are doing well, thanks partly to demand for new equipment used in home offices. If COVID has ushered in a permanent shift in work and consumption patterns, these demand tailwinds may persist.

Old-economy firms dealing in commodity products such as steel or energy are still contending with weak demand amid a sluggish global economy.

Some of this weakness will fade as the world moves to its new normal. However, if COVID results in less commodity-intensive activity--including less office construction or reduced business travel--these industries may experience a permanent erosion in demand.

We note that our negative rating actions through the pandemic have tended to land more frequently on industrial firms producing goods that rely on robust aggregate demand. Steel firms, energy and chemicals companies are strained globally, and so they are in Korea.

Indicatively, we have taken negative rating actions on 83% of our rated capital goods firms through the pandemic, 76% of rated carmakers, and 61% of rated energy firms (see "COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date," Oct. 13, 2020).

By comparison, we have taken negative rating actions on a relatively light 29% of the global technology firms we rate since the outbreak started. This is reflected in ongoing strength for Samsung, Hynix, LG, and the like.

Korea's example also shows how quickly an economy can regain its footing once COVID-19 is controlled, particularly if economic policies are timely and targeted where it is most needed. Korea's stimulus was directed, in part, to cash-constrained households. The early signs suggest this supported both spending and employment at small businesses.

Korean consumer demand rebounded quickly in June. The pace has slowed since then, as a second infection wave rose but quickly fell, but we expect household spending to remain resilient in the coming quarters. As Korea goes, the world may follow.

Appendix

Notable Ratings Actions On Korean Firms In 2020
Date To From

POSCO

January 2020 BBB+/Stable/-- BBB+/Positive/--

Hyundai Steel Co.

February 2020 BBB/Negative/-- BBB/Stable/--

SK Innovation Co. Ltd.

February 2020 BBB/Negative/-- BBB/Stable/--

SK Global Chemical Co. Ltd.

February 2020 BBB/Negative/-- BBB/Stable/--

KCC Corp.

February 2020 BB+/Stable/-- BBB-/Negative/--

E-Mart Inc.

February 2020 BBB-/Negative/-- BBB-/Stable/--

Hanjin International Corp.

March 2020 B-/Watch Neg/-- B-/Negative/--

GS Caltex Corp.

March 2020 BBB/Stable/A-2 BBB+/Negative/A-2

S-Oil Corp.

March 2020 BBB/Negative/-- BBB/Stable/--

Hyundai Motor Co.

April 2020 BBB+/Watch Neg/-- BBB+/Stable/--

Kia Motors Corp.

April 2020 BBB+/Watch Neg/-- BBB+/Stable/--

Hyundai Mobis Co. Ltd.

April 2020 BBB+/Watch Neg/-- BBB+/Stable/--

Hyundai Glovis Co. Ltd.

April 2020 BBB+/Watch Neg/-- BBB+/Stable/--

Hyundai Steel Co.

April 2020 BBB/Watch Neg/-- BBB/Negative/--

Hanjin International Corp.

April 2020 CCC+/Watch Neg/-- B-/Watch Neg/--

Doosan Bobcat Inc.

April 2020 BB/Negative/-- BB/Stable/--

MagnaChip Semiconductor Corp.

May 2020 B-/Positive/-- B-/Stable/--

SK E&S Co. Ltd.

September 2020 BBB-/Stable/-- BBB/Negative/--

Hyundai Motor Co.

September 2020 BBB+/Negative/-- BBB+/Watch Neg/--

Kia Motors Corp.

September 2020 BBB+/Negative/-- BBB+/Watch Neg/--

Hyundai Mobis Co. Ltd.

September 2020 BBB+/Negative/-- BBB+/Watch Neg/--

Hyundai Glovis Co. Ltd.

September 2020 BBB+/Negative/-- BBB+/Watch Neg/--

Hyundai Steel Co.

September 2020 BBB/Negative/-- BBB/Watch Neg/--

Hanjin International Corp.

September 2020 CCC+/Negative/-- CCC+/Watch Neg/--

MagnaChip Semiconductor Corp.

October 2020 B/Positive/-- B-/Positive/--
Source: S&P Global Ratings.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:JunHong Park, Hong Kong (852) 2533-3538;
junhong.park@spglobal.com
Asia-Pacific Chief Economist:Shaun Roache, Asia-Pacific Chief Economist, Singapore (65) 6597-6137;
shaun.roache@spglobal.com
Secondary Credit Analysts:Minjib Kim, Hong Kong (852) 2533-3503;
Minjib.Kim@spglobal.com
Minsung Lee, Hong Kong + 852 2532 8014;
min.sung.lee@spglobal.com
Daye Park, Hong Kong (852) 2533-3581;
daye.park@spglobal.com

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