ed A new financial turmoil?

Seoul should prevent contagion of Russian crisis

It’s unlikely that the financial troubles currently afflicting Russia will affect Korea directly. However, that does not mean the Seoul government can just look indifferently at the currency crisis in Moscow.

If the ruble’s plunge affects the currencies of other emerging economies in a big way, or the plummeting global oil prices further dampens the already deflationary European economy, the financial turmoil will no longer just be a proverbial fire on the other side of the river for Korea.

It comes as a relief then that economic officials seem to be doing exactly what they should be doing ― keeping a close watch on the developments in the global financial markets and planning steps to stem any possible side effects. Foreigners may say that Korea is like a burnt child dreading the fire, but Seoul cannot be too cautious against repeating the nightmare of 1998.

Granted, overreaction is unwarranted, given the rather negligible share that the Russian economy has on the global scale, as well as the minor amount of commodity trade and financial transactions between Seoul and Moscow. Still, the current situation is eerily reminiscent of 16 years ago. Some emerging economies, such as Venezuela, if not Russia, may default, as a few Southeast Asian countries did in the late 1990s.

Then, as now, the U.S. dollar was regaining strength while the Japanese yen has fallen to its lowest level in years. This means that foreign capital will flow out of Korea while the nation’s key industries, including automobiles, electronics and petrochemicals, lose their market share to both the rapidly chasing Chinese exporters and newly competitive Japanese rivals armed with a weak currency. All this comes on top of the nation’s snowballing debt owed by both the government and households.

Of course, Korea is not what it was 16 years ago, at least in terms of the soundness of its financial sector. Still, one can’t help but recall the Asian financial crisis when government officials tried to convince the people ― and themselves ― that Korea would be okay thanks to its "strong fundamentals,” pointing to booming exports, solid corporate earnings, and stable inflation. Unfortunately, it took but days for Koreans to realize their small, open economy was built like a house of cards in the face of regional financial turmoil.

Now is the time for policymakers here to recall past mistakes not to repeat them. They should turn the unprecedented weakness of oil prices into an opportunity to lift the Korean economy to a higher level. The government needs to faithfully convey the benefits of lower energy prices to consumers, lessening the latter’s financial burden and increase their purchasing power, thus bolstering domestic demand. Seoul also has to implement policies to encourage businesses to spend saved production costs on research and development and other investments to sharpen their competitive edge.

Also needed is a revision of the nation’s long-term energy plan, reflecting the current shale gas revolution that originated in the United States.

It’s an ill wind that blows nobody any good. We hope Korea will emerge as a winner from this situation. Key officials responsible for economic affairs have a lot resting on their shoulders.