[EDITORIALS]Global economy out of whack“Earnings shock” is hitting Korean businesses and investors.
Samsung Electronics Co. reported earnings of 2.15 trillion won ($2.1 billion) for the first quarter ― a terrible shortfall from its expected 2.4 trillion won. The company says it could have earned 900 billion won more, had the currency exchange rate been favorable. This points squarely at the strengthening won against the U.S. dollar as the main culprit. Hyundai Motor Co. also saw its first quarter earnings fall below 300 billion won for the first time in four years. Last year’s sharp drop in the exchange rate seems to have affected Korean firms’ profits this year in a “J-curve” effect.
Meanwhile, the International Monetary Fund’s managing director Rodrigo Rato has warned that financial markets could suffer an “abrupt correction” if imbalances in the world economy persist. The G7 finance ministers and central bank governors have pointed to high global oil prices, China’s yuan-dollar currency peg and the U.S. twin deficit as the three biggest factors unbalancing the global economy. China was, implicitly, the main target, with G7 economic policy-makers and IMF officials continuously calling for it to relax its yuan-dollar currency peg.
There is nothing we can do if the “earnings shock” of our companies continues and the yuan is revaluated. Last year, the central bank tried to stem the won’s gains at the cost of losing 10.2 trillion won ― but to no avail. The bank will find it difficult to lower interest rates any further. Doing so would be less likely to stabilize the currency rate than to encourage a bubble in the real-estate market. In the end, our only solution is for businesses to lower their costs and raise their product quality at the same time. We can only wait for the dark clouds in the world economy to pass without a storm.
The imbalances in the world economy must be set right. China cannot keep its yuan pegged forever while the G7 should not blame China alone for sluggish growth. Given China’s status in the world economy, it should join the G7’s circle and participate in discussions as a responsible player. If the tension between China and the G7 circle leads to an “abrupt correction,” it would dent the world economy the way the Plaza Accord of 1985 did.
To prevent such a disaster, all parties should focus on correcting the imbalances in an orderly manner while concentrating, above all, on sharing the burdens in a fair and equal way.