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The Korean economy will experience a steady growth in 2014 with global economic recovery expected to gain momentum, according to economists.
However, risks such as the aftermath of the United States' tapering of its quantitative easing programs, the impact of the Japanese yen's fall on Korean exporters and the aging Korean society will persist.
At an economic roundtable hosted by The Korea Times recently, three economists warned of the long-term appreciation of the Korean won, saying the government's intervention in the foreign exchange market will have a very limited effect on the economic outlook.
2014 outlook
Park Sung-wook, director of the Macroeconomic & International Finance Division of the Korea Institute of Finance (KIF), said the global economy will rebound this year, with the International Monetary Fund's growth outlook being 3.6 percent, up from 2013's 2.5 percent.
"Advanced countries will lead this year's growth. This will have an influence on Korea's growth, and the KIF forecasts 2014's growth rate at 4 percent," he said.
This 4-percent figure is higher than the forecasts made by other research institutes, which are mainly within the range of 3.7-3.8 percent. Park said the figure can be achieved if the economy continues to grow at a rate similar to last year's.
While last year's growth was largely attributed to stimulus policies such as the government's extra budget and the Bank of Korea's base rate cut, this year's growth will be led by the improving global economy, Park said.
"As the global economy recovers, exports and facility investment will grow, which will lead the nation's economy."
He predicts a growth in domestic demand albeit at a pace slower than that of export. "Higher incomes will boost private consumption. But some issues including household debts and the aging population will prevent private consumption from growing as fast as other sectors of the economy."
Jung Sung-chun, research fellow at the Korea Institute for International Economic Policy's Department of International Economy, cites the U.S. Federal Reserve's recent decision to taper its monthly bond purchase programs, which is a signal of the U.S. economy's recovery and a good omen for the Korean economy.
"Economic recovery in advanced nations is usually a more bullish factor for Korea's export than that in emerging nations. The U.S. market's recovery will boost Korean exports to the country. It will also increase Chinese export to the U.S., which will then lead to growth of Korean export to China," he said.
But if the tapering is linked to a rapid capital outflow from emerging nations with weak fundamentals, it can result in a liquidity crisis in one or two of such countries and possibly trigger off a contagion that can engulf other emerging countries, Jung noted.
Foreign exchange risks
Some analysts are concerned that volatility in the foreign exchange market, as a result of the U.S. tapering, may cause capital outflow from Korea while Japan's continuous quantitative easing may damage the competitiveness of Korean exporters.
Park explained that the U.S. stimulus policies in part attracted a lot of foreign capital into Korea, which stands out among other emerging economies in Southeast Asia because of its solid economic fundamentals.
"But if foreign investors reduce investment in funds for emerging countries following the U.S.' winding down of quantitative easing, foreign capital will leave emerging countries, with Korea being no exception," he said.
Shin Min-yong, head of the Economic Research Department at the LG Economic Research Institute, said that in principle, a strong won decreases export and increases import, then the dollar rises and the won weakens again.
"The strong won will decrease export; however, will it increase import? Amid the retrenchment trend from the strong won, investment has shrunk and private consumption has declined. So demand is even declining rapidly and so is import," he said.
"If import declines more than export does, we may see a ‘recession-style surplus.' It is feared that we may have such an unusual, vicious circle of the strong won, current account surplus, and the stronger won," Shin said.
He warned of the weak yen, as Japan is likely to continue its quantitative easing policy at least through the first half of this year.
"The U.S.' tapering can make the won weak, but Japan's quantitative easing can make it strong. For such factors, the foreign exchange market will have high volatility in the first half of this year," Park said.
Jung expressed concern that Korea may go the way of Japan which experienced a long-term recession from the mid-1980s when the strong yen forced Japanese firms to cut costs.
"Cutting cost means not increasing labor costs, buying lower-priced parts for machines, etc. Such things reduce value added. So, these lowered domestic demand and made Japan's economy retrenchment-oriented," he said.
Jung said some of Korea's trading partners, including the U.S., complain of trade imbalance as Korea has seen a huge current account surplus. Despite these complaints, the government should not just let the won keep rising but try to stabilize it, he said.
"The government needs a stance to maintain a certain level of exchange rates, but the real matter will be ‘how?' If we just let the won rise as much as the market principle, it can lead Korea into a retrenchment-oriented economy like Japan," he said.
But economists also cautioned that the government's intervention in the foreign exchange market will be limited.
"The Korean market is an open one. Government policies may be effective for a short time but it's not easy to go against the global capital flow," Park said.
Jung also said countries check each others' foreign exchange policies, citing the U.S. Department of Treasury's October report that said the Korean government is intervening in the foreign exchange market to prevent the won's rise.
"In case of market volatility, the government says it is watching the market closely. But it is only a ‘verbal' intervention; it's not easy for the government to take a real ‘action,'" he said.