Efforts needed to revitalize investments, exports
The Korean economy faces a number of worrying signs, further darkening the prospects of a prompt recovery. For starters, the U.S. Federal Reserve froze its lending rates at a range of 5.25 percent to 5.5 percent on Wednesday, while sustaining a hawkish stance. Major global economic research institutes forecast the Korean economy will likely experience setbacks this year and display a lower growth rate than other countries.
Fed Chair Jerome Powell indicated the need to raise the rate again to tame inflation, which has shown no signs of abating despite a temporary lull. Prompted mainly by surging oil prices, U.S. inflation rose to 3.2 percent in July and 3.7 percent in August.
The Fed’s offensive pause will likely have a far-reaching negative impact on the already-staggering Korean economy, with signs already emerging in the stock and foreign exchange markets. The exchange rate of the Korean won against the dollar surged to 1,341 won on Thursday, although it began to gain a slight impetus later.
The Fed’s recent move has plunged the Bank of Korea (BOK) into a fresh dilemma. The BOK will likely follow the Fed’s lead, freezing the rate again, for fear of a further widening of the interest rate gap with the U.S. The BOK’s possible rate hike will accelerate the depreciation of the Korean won and trigger a possible outflow of foreign investments. Prolonged high interest rates will thus increase debts on insolvent businesses such as real estate project financiers and savings banks.
The financial authorities should double down on preventing the stringent U.S. policies from disturbing the financial markets in Korea. Adding to the concerns, household debt is ever increasing and oil prices are soaring. The government has been unable to employ pump-priming measures to instigate the economy, due mainly to the anticipated drastic decline in tax revenue by 59 trillion won ($44 billion) from a year earlier.
The OECD has estimated Korea’s economic growth rate at 1.5 percent this year, the same as it foresaw in June. In comparison, it forecast the global economy will grow 3 percent, up from an earlier projection of 2.7 percent. It said Japan will likely see 1.8 percent growth, half a percentage point higher than its previous outlook. The Asian Development Bank (ADB) also said on Thursday that Korea’s economy will likely grow only 1.3 percent this year.
The OCED pointed out that should high interest rates and soaring oil prices continue, they will intensify inflationary pressure. And this will cause further setbacks on the Korean economy, such as surging household debt, sluggish consumption and financial crunches for enterprises. It also cited a possible economic recession in China as a potential risk factor.
The Korea International Trade Association (KITA) said the Export Business Survey Index (EBSI) will reach only 90.2 in the fourth quarter, showing dark prospects facing Korean enterprises. An EBSI lower than 100 signifies that businesses with a gloomy outlook on future exports outnumber those with a positive view.
There are some positive signs such as a slight recovery in consumer sentiment paired with growing employment. Chinese tourists are coming back, while exports of some major products like semiconductors are showing signs of recovering.
Yet, many challenges overshadow the positive elements, such as, among others, surging consumer prices, which climbed to 3.4 percent in August. Soaring oil prices will likely add fuel. It is high time for the government to focus on revitalizing exports, investments and consumption.
It should step up efforts to eliminate various regulations standing in the way of investments and exports. Instead of rosy prospects, it should assess the current situation sternly. It should help enterprises, now suffering from high interest rates, to turn their attention to corporate restructuring. The International Monetary Fund (IMF) recommended in its 2023 annual report that Korea should accelerate much-touted labor and pension reforms.