Beyond the ‘mini boom’

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Beyond the ‘mini boom’

There is good news on the economic front for the first time in a long time. The real estate market is warming up. Housing transactions have picked up and offers for new apartment units are coming from potential buyers after the key interest rate was lowered to below 2 percent. This spring, which is the traditional season for moving house here, the number of house moves is expected to be the highest in a decade. Life is finally back in the industries related to real estate: realtors, moving services, home repairs, interior design, home appliances and furniture retailers. Amid a rush of new construction of new apartment buildings and redevelopments, work is abundant for temporary workers.

The stock market has also gained. The benchmark Kospi has returned above the 2,000 threshold amid expectations that corporate earnings will be helped by the fall in oil prices and weaker local currency. Foreign investors have flocked back to the bourse, net buying 4 trillion won ($3.62 billion) worth of Korean shares since February. Brokers and dealers have become happier.

From such signs in the real estate and stock markets, the economy may be bottoming out. Data reflecting domestic demand will likely show recovery one or two months later. Conditions on the external front also have improved. The U.S. Federal Reserve said it won’t hastily move to raise interest rates. Central banks in the European Union, China, and Japan continue to supply ample liquidity to boost their respective economies. The Bank of Korea joined the global capital trend of ultra-low interest rates and prices - the so-called new normal - by cutting the key interest rate to a record low of 1.75 percent earlier this month.

The surprise move by our central bank provided traction for the stalled local economy. Its action was inevitable and appropriate. Conditions are ripe for an economic revival amid record-low interest rates, cheap oil and a weak won. The economy has gained the momentum needed to pick up speed for at least a year. If interest rates are kept at their current level, the stock and real estate markets will likely continue their bullish runs.

But the recovery should not interrupt the imperative task of structural reform. Without an overhaul of our fundamentals, we will enjoy a temporary boon that will eventually backfire. The government and legislature will be working against a deadline of a general election in April 2016. When that election is over, the government of President Park Geun-hye will become a lame duck and any drive for reform will lose steam.

Earlier this year Park told bureaucrats that the framework for economic renovation was built during the last two years and the remaining work is to lay the bricks to build a new structure. But she was wrong. There never was any framework construction. The government has wasted the last two years and achieved practically nothing. The Korean economy hangs upon a worn-out structural design and getting a higher profile entirely on borrowed money, which isn’t healthy. Since there is not much time before a new framework arrives, it would be better to start with the old one. But the nuts and bolts must be renewed and strengthened while a new structure is erected. Other countries are doing the same. Governments around the world are encouraging structural reforms to be ready for when the monetary easing ends and interest rates must go higher.

The Korean authorities know the work ahead of them very well. They have the outline laid out - the four reform targets of the public sector, labor, finance, and education - and they have specific action plans, too. When these are pushed ahead, the market will become a better place to do business generating decent-paying jobs. A pickup in corporate investment and consumer spending will naturally follow. But if the reforms are stalled or fail entirely, a tall building built on debt will crumble. There is already talk of a crisis in 2017.

The year to come is also crucial for households. Interest rates will head higher two to three years later. Now is the best time to move into smaller homes and invest in financial assets if people hope to plan for their old age with home assets. People who hope to buy homes should keep their borrowing within affordable limits and get a fixed interest rate for 20 to 30 years. Homebuyers must remember that they may no longer be able to profit from the rising value of their home assets. Those with floating rate mortgages should convert their loans to fixed-rate ones.

Everyone should remember the latter stage of the Kim Young-sam administration. The government then had promised reforms in the financial and labor markets through deregulations. But reforms failed and companies ended up with snowballing short-term, foreign-denominated debt. The country faced a financial crisis and had to get an international bailout. Our total household debt of 1,100 trillion won should raise similar alarm bells.

JoongAng Ilbo, Mar. 26, Page 28

*The author is the head of the JoongAng Ilbo Sisa Media.

by Kim Kwang-ki

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