The Russian invasion of Ukraine is dampening the global economy. However, the U.S. Federal Reserve raised its policy interest rate by a quarter of a percentage point a week ago to curb inflation, ending the zero-interest-rate era. The Fed projected that six more similarly sized rate increases would occur this year, followed by four next year, pushing the benchmark interest rate to 2.8 percent at the end of 2023. Europe is moving in the same direction, ushering in an era of global monetary tightening.
The new Korean government that will take office in May should consider the U.S. interest rate of nearly 3 percent in operating the economy. Global austerity is the process of normalizing the financial system, but heavily indebted economic players cannot avoid falling into trouble. In this country, the government, households and businesses are criticized for accumulating debt too rapidly.
The incumbent administration should realize that too much debt will restrain the next government's economic operation. That also explains why financial experts recommend that the government adjust fiscal expenditures and use financial and taxation tools to raise the loss compensation fund of 50 trillion won ($41 billion) for self-employed people and small businesses reeling from the COVID-19 pandemic fallout, instead of issuing more bonds.
Private debt held by Korean businesses and households is also growing too quickly compared to other countries. According to the Bank for International Settlements (BIS) on Sunday, Korea's credit gap, or the ratio of credit to gross domestic product, stood at 18.9 percent in the third quarter of 2021, the third-highest among 43 countries surveyed. If the figure exceeds 10 percent, a country receives a warning, but this country is already way above that level.
Korea needs to be on alert as the BIS index indicates that it can face a financial crisis if an external shock comes. Therefore, the incoming administration and monetary authorities should take timely and appropriate measures to avoid a potential crisis while keeping pace with global austerity.