Heeding the markets

Lee Chul-ho
The author is a columnist of the JoongAng Ilbo.

Over the last two years, President Moon Jae-in repeatedly insisted that macroeconomic indicators have been “under control.” He reminded the country that the economy was growing at a faster rate than under the previous government, with exports reaching a record-high $600 billion. This year, he only speaks of inflation, unemployment and foreign exchange reserves to back the claim on macroeconomics.

But he leaves out — probably intentionally — more important indicators, such as the growth rate, exports and capital investment. The gross domestic product (GDP) in the first quarter performed its worst in a decade, contracting 0.3 percent on quarter. Facility investment plunged by 10.8 percent — the biggest fall since the financial crisis — and exports have been slumping for the five consecutive months.

President Moon clings to his belief that “the Korean economy is strong on the macroeconomic level.” He refuses to listen to economists’s warning that a self-deluded government poses a greater risk to the economy. He and his aides may fear they could be politically doomed the moment they admit to the failure in their signature income-led growth policy. They may be thinking that the economy can be sustained with heavy fiscal spending until next year’s general election. But they could face the global rating agencies before they see through their plan.

The government knows any negative review by international rating agencies can spook foreign investors and rock the vulnerable Korean capital markets. Shortly before receiving a routine visit by Moody’s Investors Service last month, Deputy Prime Minister for the Economy and Finance Minister Hong Nam-ki on April 24 announced the government will propose a 6.7-trillion-won ($5.6-billion) supplementary budget. The timing of his announcement reveals the nervousness of the government, although it was embarrassed by the Bank of Korea’s first quarter GDP data — the 0.3 percent contraction on quarter — which were released on the following day.

What local economists who had met with Moody’s interviewers sensed was a different mood from the rating agency.

Moody’s was less concerned about the North Korean nuclear threat. Instead, they were interested in whether South Korea can really achieve the government growth target of 2.6 percent and maintain fiscal integrity against murkier tax revenue outlooks. The interviewers also questioned what other industrial options Korea had to balance its over-reliance on semiconductors and why anti-market forces like the militant Korean Confederation of Trade Unions gained grounds in once market-friendly Korea.

After speaking with them, local economists did not believe Moody’s would downgrade Korea’s sovereign rating from current Aa3 to Aa2, but could lower the outlook from “stable” to “negative” to imply a downgrade move within six months if conditions do not improve.

Korea’s sovereign rating has been upgraded 12 times since February 1999 after the global financial meltdown. The rating has never gone down under both liberal and conservative governments. Yet the first downgrade in 20 years would be a devastating blow to the Moon administration, the local economists said.

A downgrade in sovereign credit rating would narrow policy maneuvering room for the government. If the government becomes more conscious of public finance integrity, it cannot easily increase fiscal spending. The central bank also cannot lower interest rates too much to stimulate the economy in fear of foreign capital flight from the depreciation of the won.

The signs are not good. Moody’s has downgraded its rating outlooks on household corporate names like Hyundai Motor, Samsung Electronics and SK Hynix from “stable” to “negative.” In March, it shaved this year’s growth estimate for Korea to 2.1 percent, raising concerns for sluggish investment, exports and employment as a result of sharp hikes in the minimum wage. In April, Standards & Poor’s visitors also warned that the side effects of the government’s income-led growth policy could work negatively on the Korean rating.

Moody’s releases its annual rating review on Korea next month. The won has been falling sharply against the dollar, and North Korea has renewed missile tests. The protracted trade war between the United States and China is also a concern. A wise government would swiftly work toward renewing a currency swap with Japan if one with the United States is difficult to achieve. Yet the Blue House and government are in no rush. They are busy trying to dig up positive data to make our economy look better than it is.

A lawmaker of the ruling party sighed that the real victims of income-led growth are the self-employed and low-income individuals, and the winners are the opposition Liberty Korea Party (LKP). The conservative party that looked irredeemable after the impeachment of President Park Geun-hye saw its approval rating shoot up in line with worsening economic data and now closely chases the ruling party. He advised the Blue House to recall the liberal party’s former President Roh Moo-hyun’s lament in May 2005, “The power has gone over to the market.”

“All the forces moving our society come from the market. The government’s role is to referee to keep the market fair,” he said 14 years ago. The government under his chief of staff, Moon Jae-in, meddled in the market to control prices, from the wages to housing prices to credit card fees. Roh’s words must have been forgotten by his followers in the administration.

JoongAng Ilbo, May 15, Page 31