Lee Hyo-sik is Finance Desk editor at The Korea Times. He manages finance-related stories on macroeconomics, banks, stocks, bonds, crypto etc. He is passionate about covering what's happening in Korea's financial industry and explaining it to both Korean and non-Korean readers. You can reach him at leehs@koreatimes.co.kr. Your insights and feedbacks are always appreciated.
'Raise spending, encourage consumption'
Hong Sung-guk, left, executive vice president of KDB Daewoo Securities, talks with Lee Jong-woo, right, managing director of I’M Investment & Securities, during a recent roundtable discussion about the Korean economy in downtown Seoul. They said 2013 will be a tough year for Asia’s fourth-largest economy. Clockwise from bottom left are Hong; Lee In-pyo, economics professor at Ewha Woman’s University; Cho Yun-nam, head of research at Daishin Securities; Yu Byoung-gyu, executive director at the Hyundai Research Institute; Oh Suk-tae, regional head of research at Standard Chartered Bank Korea and Lee. / Korea Times photo by Shim Hyun-chul
By Lee Hyo-sik
In Korea Times roundtable, economists agree 2013 will be tough year
By Lee Hyo-sik
In a recent roundtable discussion hosted by The Korea Times, economists called on the government to introduce aggressive expansionary fiscal policies to boost domestic demand.
They also said the central bank needs to lower borrowing costs and adopt other loose monetary policy steps, while encouraging businesses to continue investing in new growth engines and a stronger presence abroad.
They said things will not improve much this year from 2012, projecting that Korea’s domestic output will expand by no more than 3 percent.
Exporters will continue to struggle with price competitiveness in global markets as a result of the weakening Japanese yen. The overall sluggish global economy, coupled with rising trade barriers and other unfavorable conditions, is expected to weigh down on local businesses shipping goods overseas.
On the domestic front, things are not much better either as the prolonged consumption slump, surging household debts and the stagnant property market will drag down the already-lackluster economy.
Yu Byoung-gyu, executive director at the Hyundai Research Institute, said the nation’s gross domestic product (GDP) grew at a lower-than-expected rate of 2 percent last year from 2011.
``Korea performed poorer than initially expected for 2012, due to sluggish outbound shipments and the consumption slump. The bigger problem is that the growth rate has shown a gradual downward curve over the past two decades. If the trend continues, the country may fall into a permanent low growth trap,’’ Yu said.
He then stressed 2013 is crucial for Korea in terms of whether it can buck the trend and resume an upward momentum. ``Korea needs to turn the tide in the next five years. Otherwise, it won’t be able to pull itself up from the low-growth trap.’’
Despite some encouraging signs emerging from the United States, Europe and China in recent months, the economists are not optimistic about the future course of the Korean economy.
``Global demand is projected to remain stagnant, while consumers and businesses here will continue to refrain from spending. I think the economy will grow about 2 percent at best this year,’’ the executive director said.
Lee In-pyo, economics professor at Ewha Woman’s University, echoed Yu’s views, saying the economy will struggle throughout the year. ``Everywhere we look, there aren’t any hopeful signs. It is hard to make a prediction but chances are that the economy will remain in the doldrums.’’
Lee Jong-woo, managing director of I’M Investment & Securities, said Korea has already entered a low-growth era. ``It is a fact that Korea won’t be able to grow as rapidly as it used to in the past. We have to accept this. Also, interest rates will remain low and the current fiscal crisis in Europe and the United states will persist.’’
Lee said it has become impossible for the nation to achieve over a 4 percent growth in the future.
Dealing with weak yen
Korean exporters in the nformation technology, automotive and other industries that fiercely compete with Japanese firms in global markets saw their bottom lines deteriorate due to the weakening yen. Their profitability will likely continue to suffer for the foreseeable future as the weak yen continues to make Korean products more expensive abroad.
``The yen’s weakness is a prevailing trend that will continue for the time being. I think the yen-dollar rate will go up to 120 yen,’’ said Hong Sung-guk, executive vice president of KDB Daewoo Securities. ``For the past few years, local exporters greatly benefited from the weaker won, with some emerging as the world’s top players.’’
Hong said companies must mobilize all available resources to strengthen their core competitiveness and expand their global operations in order to deal with the falling yen.
``During the strong yen era, many Japanese companies failed to hone their competiveness, develop innovative products and boost productivity. Korean firms should not repeat the mistakes of their Japanese counterparts,’’ he said.
Cho Yun-nam, head of research at Daishin Securities, also projected the yen’s weakness against the dollar and other currencies will persist for the foreseeable future.
``Information technology firms and automakers here in particular have been hit hard by Japan’s expansionary fiscal and monetary policies. They need to accept the fact that the weaker yen will be with us for a while. So they need to figure out how to deal with it,’’ he said.
Hong said the government should develop a strategy to help companies survive the era of the weak yen. ``If the government erects a trade barrier to protect local players, it will face a backlash from foreign governments. It should take a wise step to guide firms through the escalating global currency war.’’
He then stressed the importance of expanding into rapidly growing economies. ``The government should encourage businesses to enter Southeast Asia and other emerging economies. A stronger overseas presence will help buffer themselves from the strengthening won.’’
Oh Suk-tae, regional head of research at Standard Chartered Bank Korea, cautioned against policymakers for resorting to market-unfriendly steps to devalue the local currency.
``Some have called for the introduction of a Tobin tax to help regulate the movement of hot money in and out of Korea, and thus to curb the won’s rise,’’ Oh said. ``Only Brazil imposes such a tax on short-term cross-border capital transactions. But this is an exceptional case. Korea must not take such a step.’’
Boosting domestic economy
When asked about ways of propping up the falling domestic demand, Prof. Lee of Ewha Woman’s University said the government should play a more active role as both businesses and households have become extremely reluctant to open their wallets.
``With an uncertain economic outlook, companies are extremely reluctant to invest and hire workers. It goes the same for consumers who have become more concerned about their personal finances amid surging household debts and retirement costs. They simply do not want to spend,’’ Lee said.
He added that under such circumstances, the government is the only one capable of bolstering the economy. He urged the government to adopt more expansionary policies.
``Korea’s fiscal standing is sound, compared to those of Japan and other advanced countries. They have a large room for spending. But Korean policymakers are somewhat obsessed with maintaining a balanced budget. It is a right approach in a long run. But in the face of an economic downturn, the government needs to spend more than it earns,’’ the professor said.
However, Lee of I’M Investment & Securities presented a different view, urging businesses to do more.
``Listed firms are sitting on over 100 trillion won cash. Besides making larger investments, companies should pay workers more and offer greater job security to create greater buying power among households. This will generate a virtuous cycle and eventually help businesses,’’ he said.
Lee then said to some degree, corporations have been flourishing at the expense of workers over the past few decades. ``Now is time for them to fulfill their social responsibility by hiring more workers and sharing the fruits of their growth with small businesses.’’