Brexit forces Korea to redraw long-term economic plan

By Choi Sung-jin

“We may have to reshape the nation’s frame for economic policies,” a ranking economic official said Friday after Britain decided to leave the European Union.

As the global economy and financial markets fall into uncertainty where one cannot even see an inch ahead, some pessimists predict the Korean economy will undergo its worst slump since the 2008 global financial crisis, regarding the government’s growth target of 3.1 percent for this year as off the table.

Officials’ response to this rather unexpected situation is rather calm and resolute, though. “We will do all we can to minimize the negative effects Brexit will have on the economy while trying to stabilize our financial and currency markets,” said Vice Minister of Strategy and Finance Choi Sung-mok emerging from an inter-agency meeting.

They think such adverse effects will be limited, given Korea’s balance of payments and fiscal conditions. According to the Bank of Korea, the nation’s foreign exchange reserves totaled $370.9 billion as of May 31, not a small amount for Korea’s economic size. The share of short-term external liabilities stood at 29.6 percent of the nation’s total foreign debt at the end of last year, the lowest it has been since 2004.

“As Korea already undergone these two previous financial crises, the nation has strengthened its economic fundamentals steadily,” a ministry official said. “Chances are slim we will be swayed wildly by external factors as we were in the past.”

If the ripple effects of Brexit spread wider and longer than expected, Korea may find it difficult to tide itself over with just “strong fundamentals,” however. In the 2008 global financial crisis, the Seoul government also boasted of its deep pockets of foreign exchange and its sound fiscal health, but experienced anxiety over its currency as major foreign media outlets raised the “Korean crisis theory.”

In September 2008, the government attempted to issue foreign exchange stabilization bonds in New York but suffered the humiliation of having to give up the plan because the interest rate on the bonds turned out to be too high. A month later, Korea managed to conclude a $30-billion currency swap agreement with the United States. Some experts said the Korean economy might have undergone greater turbulence than during the 1997 Asian financial crisis had it not been for the currency accord.

Government officials say it is these unpleasant memories that are forcing them to pay close attention to the Brexit’s effects on financial markets and the real economy.

The government has reportedly decided to make an across-the-board revision of the economic management plan for the second-half of the year, originally scheduled for release on Monday. Officials had planned to lower this year’s growth target from 3.1 percent to 2.8 percent but they are now considering lowering it down to the mid-2 percent range and expanding the extraordinary budget from the initially planned 10 trillion won ($8.5 billion).

“We will have to build a strong breakwater, so to speak, mobilizing all financial and fiscal tools we have to prepare for the tsunami of Brexit,” another official said.

Some private experts pointed out that the Brexit could not have come at a worse time for the Korean economy, which has already been reeling under its own problems, such as a protracted slump of exports and consumption as well as the long-delayed restructuring of ailing industries, including steel, shipping and shipbuilding.

Brexit may not bring about an enormous impact on the real economy but will cripple the already weakened momentum for recovery, which will highlight the need for further reduction of the interest rate and expansion of any extra budget, they said.

“In the wake of the Brexit vote, market interest rates in major countries tumbled, and Korea is turning out to be no exception,” said Oh Suk-tae, economist at Societe Generale. “Monetary policies will likely move toward the global zero rate or quantitative easing.”

What’s worrisome in the longer-term is a gradual shift from globalization and free trade to relative isolationism and protectionist trade, which will deal a crippling blow to a small open economy like Korea’s, other experts said.

When such concerns become reality, the nation will have no other choice but to shift from a strategy of export-oriented growth to an economy more reliant on domestic demand, in a genuinely fundamental reframing of economic strategy, the experts said.