Korean economy pushed closer toward 'perfect storm'

The Korea Times

The Korea Times

Finance

Sun, October 1, 2023 | 08:13

Economy

Korean economy pushed closer toward 'perfect storm'

Posted : 2022-06-24 16:36

Updated : 2022-06-26 10:49

First Vice Finance Minister Bang Ki-sun, second from left, presides over an emergency meeting of economy-related vice ministers at Government Complex in Seoul, Friday. Yonhap

By Yi Whan-woo

Korea is feared to be on the brink of a "perfect economic storm" that financial authorities have been warning about repeatedly for months, with the economy becoming more vulnerable amid the depreciation of the Korean won, plummeting stocks and soaring inflation.

Authorities and economists warn the serious nature of the Korean economy in 2022 is conjuring up deja vu of the worldwide oil crisis in the 1970s and the 2008-09 global financial crisis.

For instance, the Korean currency on Thursday fell below 1,300 won per U.S. dollar ― the weakest level since July 2009 in the midst of the global financial crisis.

The won-dollar exchange rate complicates problems associated with the triple whammy of a strengthening dollar, rising prices and interest rate hikes.

Among the problems are a sharper rise in import prices and widening trade deficit adding to the gloomy forecast on Korea's slowing growth. The year-on-year increase rate of import prices has been outpacing that of exports for 12 consecutive months.

Regarding stock markets, the benchmark Kospi and junior bourse Kosdaq hit new annual lows seven times in June alone.

The former closed at a 19-month low of 2,314.32 points, Thursday, while the latter is speculated to retreat to below 600 points compared to the 1,000-point level at the beginning of the year.

A signboard for currency exchange is seen at a tourist district in Myeong-dong, central Seoul, Thursday. Yonhap

"All these problems have existed but are becoming more complicated to heighten concerns over a perfect economic storm," Jun Kwang-woo, chairman of the Institute for Global Economics and former chairman of the Financial Services Commission (FSC), told The Korea Times, Friday.

Speaking at a meeting with chiefs of economic think tanks early this week, Financial Supervisory Service (FSS) Governor Lee Bok-hyun compared the downturn in this year's economy with that of the oil crisis.

Lee is the latest to join a string of financial authorities, including Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho and Bank of Korea (BOK) Governor Rhee Chang-yong, warning against the conditions of a perfect economic storm.

"This time we could face a more dangerous crisis with the global value chain more closely intertwined ― it could lead to an unprecedented perfect storm," Lee said.

Jun said the plunging stock market is "unlikely to bounce back in the short term" due to snowballing household debts and the BOK's accelerated hike in benchmark interest rate.

He noted that investors include young borrowers who suffered losses after taking out massive loans when the base rate was low and now are under mounting pressure to make repayments at higher rates. The benchmark interest rate was raised three times this year and stands at 1.75 percent, the highest level since the pandemic began.

Market observers say the Kospi may dip below 2,200 points in the extreme case, which will aggravate woes of the young borrowers.

Choi Hee-nam, a former deputy finance minister and also former Korea Investment Corp. chairman, also told The Korea Times that the household debt can hit the stock market harder.

"The stock market is closely related to the economic forecast, and considering household debt is a major threat to the Korean economy, failure to rescue young borrowers will deal a blow on the market."

For possible solutions, Choi suggested the finance ministry "capitalize on every possible policy tool."

Despite the fiscal deficit that spiked under the previous Moon Jae-in administration, Choi still said the government "can spare efforts to provide financial support for those who need it."

During an emergency meeting of economy-related vice ministers, Friday, First Vice Finance Minister Bang Ki-sun said the government will "work thoroughly to make exports increase and expand."

Asked whether the BOK should take a "big step" of raising the policy rate by 50 basis points to tame inflation, Hyundai Research Institute economist Joo Won said, "It should not be so drastic as to affect people's livelihood."

yistory@koreatimes.co.kr