By Choi Sung-jin
The U.S. interest rate hike may not necessarily trigger an exodus of foreign funds but affect the Korean economy in other ways, such as reducing exports to emerging economies and aggravating the household debt problem.
The heads of four economic think tanks made these and other economic forecasts during a talkfest at the Hyundai Research Institute Tuesday.
Kwon Tae-shin, president of the Korea Economic Research Institute, said he expects the U.S. Federal Reserve Board will go back to the previous interest rate of 3-3.5 percent over three years. Kwon said the worst-case scenario is for the Fed to follow the examples of Japan and Europe, whose rate hikes in 2000 and 2006, respectively, led to economic slumps.
"If U.S. deflation deepens and its exports slow as the result of rate hikes, the Fed could go backward, but I don't think such a possibility is high," Kwon said. "The next-worst scenario is a debt crisis in emerging economies, but the effects may not be very serious as they have already been reflected on markets."
Noting that Korea's household debt, which has surpassed 1,100 trillion won ($935 billion), will emerge as an "urgent" problem, the KERI head said the key lies in how to defuse the debt bomb before the U.S. rate goes back to its normal level.
Shin In-seok, president of the Korea Capital Market Institute, also played down the risks from the U.S. rate hike, which he said reflects the U.S. economy's recovery. "The long-anticipated move would not give too great a shock to markets, which could rather welcome it as dissolving the uncertainty," Shin said. "What matters is how long the upturn continues, and I think such possibility is quite high, too."
The participants largely agreed there is no need for the Bank of Korea to immediately follow the Fed's lead, in view of low growth and inflation here, and advised the central bank to wait and see for now.
Kang In-soo, president of the Hyundai Research Institute, noted that the China risk will be as serious as, or even more so than, the U.S. interest policy for the Korean economy, pointing out the rapidly narrowing gap in technology and the overlapping strategic sectors between the two countries.
Kim Do-hoon, president of the Korea Institute of Industrial Economics and Trade (KIET), agreed. He said 12 major industries have accounted for 80 percent of Korea's total exports for the past 15 years. "As China sees it, Korea is a good, unmoving target," he said. "It is meaningless whether China is behind Korea by one year or two. The Korea-China free trade agreement should awaken mannerism-ridden Korean industries to the need for innovation."
The experts warned against the possibility that the Park Geun-hye administration would be tempted to jack up the growth rate by all means to help the ruling party in the parliamentary elections next April.
"Instead of adhering to short-term growth, the government should shape industrial policy in a way to strengthen its fundamental and long-term competitiveness," said Kim of the KIET. "If the Park administration gets anxious to demonstrate progress quickly, it could make the already bad situation worse toward the end of its tenure."
The U.S. interest rate hike may not necessarily trigger an exodus of foreign funds but affect the Korean economy in other ways, such as reducing exports to emerging economies and aggravating the household debt problem.
The heads of four economic think tanks made these and other economic forecasts during a talkfest at the Hyundai Research Institute Tuesday.
Kwon Tae-shin, president of the Korea Economic Research Institute, said he expects the U.S. Federal Reserve Board will go back to the previous interest rate of 3-3.5 percent over three years. Kwon said the worst-case scenario is for the Fed to follow the examples of Japan and Europe, whose rate hikes in 2000 and 2006, respectively, led to economic slumps.
"If U.S. deflation deepens and its exports slow as the result of rate hikes, the Fed could go backward, but I don't think such a possibility is high," Kwon said. "The next-worst scenario is a debt crisis in emerging economies, but the effects may not be very serious as they have already been reflected on markets."
Noting that Korea's household debt, which has surpassed 1,100 trillion won ($935 billion), will emerge as an "urgent" problem, the KERI head said the key lies in how to defuse the debt bomb before the U.S. rate goes back to its normal level.
Shin In-seok, president of the Korea Capital Market Institute, also played down the risks from the U.S. rate hike, which he said reflects the U.S. economy's recovery. "The long-anticipated move would not give too great a shock to markets, which could rather welcome it as dissolving the uncertainty," Shin said. "What matters is how long the upturn continues, and I think such possibility is quite high, too."
The participants largely agreed there is no need for the Bank of Korea to immediately follow the Fed's lead, in view of low growth and inflation here, and advised the central bank to wait and see for now.
Kang In-soo, president of the Hyundai Research Institute, noted that the China risk will be as serious as, or even more so than, the U.S. interest policy for the Korean economy, pointing out the rapidly narrowing gap in technology and the overlapping strategic sectors between the two countries.
Kim Do-hoon, president of the Korea Institute of Industrial Economics and Trade (KIET), agreed. He said 12 major industries have accounted for 80 percent of Korea's total exports for the past 15 years. "As China sees it, Korea is a good, unmoving target," he said. "It is meaningless whether China is behind Korea by one year or two. The Korea-China free trade agreement should awaken mannerism-ridden Korean industries to the need for innovation."
The experts warned against the possibility that the Park Geun-hye administration would be tempted to jack up the growth rate by all means to help the ruling party in the parliamentary elections next April.
"Instead of adhering to short-term growth, the government should shape industrial policy in a way to strengthen its fundamental and long-term competitiveness," said Kim of the KIET. "If the Park administration gets anxious to demonstrate progress quickly, it could make the already bad situation worse toward the end of its tenure."
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