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| Institute of Global Economics Chairman Jun Kwang-woo / Korea Times photo by Shim Hyun-chul |
Ex-financial regulator warns about overheated stock market
By Park Jae-hyuk
A noted economist here has warned against adopting a blind optimism about the possible influence of the Joe Biden administration's policies on the Korean economy, amid a rosy outlook for recovery from the global economic downturn resulting from the COVID-19 pandemic.
Institute for Global Economics (IGE) Chairman Jun Kwang-woo, who previously served as the first chairman of the Financial Services Commission, said Friday that Korea should brace for medium- to long-term side effects from the new U.S. president's plan to pursue expansionary fiscal policies.
"If the expansionary economic policies increase consumption and investment in the U.S., this can have a positive impact on the Korean economy in the short run," he told The Korea Times. "But if an economic stimulus is seen as always a better choice even in the medium- to long-term, there will be no reason for other governments to avoid such policies."
The Biden administration is pushing ahead with additional stimulus packages, probably worth over $1.5 trillion, although this could lead to a massive increase in the U.S. government's deficit and inflation. U.S. Treasury Secretary-designate Janet Yellen also indicated her plans for aggressive fiscal expansion during her Senate confirmation hearing.
Participants in stock markets in Korea and the U.S. appear to have welcomed such measures, considering both the Seoul and New York stock markets hit a record high on the new U.S. president's inauguration day.
The IGE chairman, however, warned about an overheated stock market, saying the discrepancy between the real economy and the capital market has almost passed the danger level.
"The growth outlook for the Korean economy this year is about 3 percent, while the global economic growth forecast is around 4 to 5 percent," he said. "It is difficult to say that the domestic stock market is still undervalued. The pace of market correction can be as fast as the pace of the previous stock market rally."
Considering the recent rise in the U.S. Treasury yields, he advised retail investors betting on Korean and U.S. stocks to be more prudent about their investments and brace for a possible interest rate hike which could spark a negative shock in the market.
"It is too risky to make investments with debt at this moment," he said.
'Keep distance from China'
As for businesses, Jun said they should lower their reliance on the Chinese market, especially if they are engaging in high-tech industries, which are considered strategically important for the U.S. and democratic countries.
The new U.S. administration is set to rebuild its alliances, while maintaining its pressure on China. This is expected to force Seoul to stay away from Beijing, while making efforts to restore its relationship with Tokyo.
"Businesses that have relied heavily on the Chinese market will need to adjust their dependency," Jun said.
In addition, he advised Korean companies to focus more on environmental, social and corporate governance (ESG) principles because the Biden administration's economic team is ready to expand its investments in eco-friendly industries.
The U.S. rejoined the Paris Climate Accord on Biden's first day as president. His economic team also hired employees of BlackRock, the world's largest asset management company that has decided to prioritize the ESG principles.
"ESG should not be just regarded as fashion," Jun said. "Businesses should convert their thoughts toward that the ESG principles are the key factors for their decisions on important investments."
'Separate economy from politics'
The chairman suggested the Korean government's economic team avoid getting affected by political interests in the face of the new leadership in the U.S. and the final year of the Moon Jae-in administration.
"Government officials in charge of economic policies in the final year of the incumbent administration should focus more on reinforcing Korea's economic strength and revamping its economic structure from a long-term perspective, rather than pushing ahead with short-term policies," he said.
Jun admitted that expansionary fiscal policies are temporarily necessary to overcome the difficulties caused by the COVID-19 pandemic. But he emphasized the government should be wary of distributing money to all people, without sorting out the truly needy.
"The pace of the increase in the government deficit is too rapid, so if fiscal expansion is inevitable, money should be selectively invested in the right people and right places for better efficiency," he said.
