Economy has to steer clear of dangerous reefs in 2016

By Choi Sung-jin

The Korean economy went through a difficult year in 2015. Yet this year will not likely be much easier, what with the media comparing Korea Inc. to a vessel embarking on an unchartered sea full of sunken rocks.

Finance Minister nominee Yoo Il-ho, the new economic czar of President Park Geun-hye, will have to tackle the old issue of industrial restructuring by getting rid of ailing businesses as soon as he wins parliamentary approval. Yoo then will need to wrestle with the many populist pledges being made by ruling party’s candidates running in April’s parliamentary elections. In May, the housing market is expected to cool off drastically as banks will squeeze credit, and the already sluggish domestic consumption will drop further as the harshest-ever anti-corruption law will go into effect in September.

Analysts are less than sure whether Yoo, head of President Park’s third economic team, will be able to successfully meet all of the challenges, economic and political, from home and abroad.

The single biggest event looming of the horizon of 2016 will be the parliamentary election on April 13 to elect the 20th National Assembly. As always, political concerns will dominate economic issues during the first-half of the year, at least, pushing aside Park’s four major long-term reforms. At stake is whether Yoo and other economic ministers can fend off the politicians’ requests to allow marginal businesses in their precincts to stay afloat.

The same will be true with applying the government’s toughened guidelines for mortgages, beginning with provincial borrowers where the supply of homes far exceeds the demand, which will dampen the housing market further and trigger complaints from provincial voters about what they perceive as financial discrimination.

The biggest shock will come from abroad if and when the U.S. Fed raises its benchmark interest rate again in March, drastically increasing the debt burden on Korean businesses and households. Marginal domestic businesses, which have long been under the anesthesia of the low interest rate, are likely to be driven to a liquidity crisis. The outstanding issuance of corporate debentures, which stood at 119 trillion won ($101 billion) in 2008, soared 123 percent to 266 trillion won in 2014, and household debt, too, rocketed from 724 trillion won to 1, 166 trillion won over the same period.

In September, the implementation of the so-called Kim Young-ran Law, named after the former Supreme Court justice who drafted it, will punish all public officials who receive money and goods worth 1 million won or more, regardless of whether there are any strings attached, cleaning up this corruption-ridden country but further dampening the already moribund domestic economy.

There are some positive factors, too, such as the Olympic Games in Rio de Janeiro, Brazil, in August and the opening of the nation’s highest skyscraper, Lotte World Tower, in December, which are expected to help both exporters and firms targeting domestic markets.

Overall, however, pessimism outweighs optimism for the Korean economy in 2016, analysts largely agree, forcing most economic players, corporations and individual citizens, to prepare for events and changes preemptively.