Yim Jong-yong says Korea’s economy on thin ice

Yim Jong-yong, chairman of Financial Services Commission, speaks during an emergency meeting on Monday at the central government complex in central Seoul. [NEWSIS]

Finance Minister nominee Yim Jong-yong held an emergency meeting Monday and announced that the government will heighten its monitoring of financial markets, including foreign exchange transactions, as he considers the current economic situation close to a crisis.

“Our economy and the financial market is faced with difficult circumstances,” Yim, comparing the situation to waling on thin ice. “The situation that our economy faces today is different from that of 1997 or in 2008 … but if there is even a small crack in our risks management, our economy and the financial system will suffer a substantial impact.”

Yim, who remains Financial Services Commission Chairman, held the emergency meeting as concerns grow over paralysis in government due to the Choi Soon-sil scandal on top of other uncertainties such as the U.S. presidential election, mounting debt and lagging exports.

Yim has yet to take over the finance ministry and no coordination with the incumbent Finance Minister, Yoo Il-ho, has taken place.

It isn’t even clear if Yim will succeed Yoo as opposition parties have not approved the newly appointed Prime Minister, Kim Byoung-joon. Although the Finance Minister doesn’t have to be approved by lawmakers as the prime minister does, President Park Geun-hye hasn’t finalized Yim’s appointing with the Prime Minister situation unresolved.

Park’s government has been paralyzed since the scandal erupted on Oct. 24 when broadcaster JTBC uncovered presidential friend Choi’s meddling in state affairs. The scandal has yet to subside despite Park’s two attempted apologies.

Major government projects, including next year’s economic direction, have been left hanging.

“We’re not sure what to do at this point,” said a government official who requested anonymity. “All projects are on hold when there are still tons of priorities, including follow-ups to recent policy announcements in the real estate market as well as negotiating with lawmakers and unions on labor reform bills. It seems all engines are on hold.”

The government’s economic policy for next year, which should be announced next month, could miss its deadline if Yim continues to remain a nominee. Even Yim succeeds Yoo Il-ho, he doesn’t have much time to implement new ideas.

The lack of decisions is affecting state-run institutions. Some 39 of them will lose their top management by the end of the year. Already the CEOs of 21 agencies have seen their tenure end last week, including the Korea Securities Depository and Korea Institute of Energy Research.

“Even if those whose tenure have ended remain at their desks, there’s not much that they can do [regarding next year’s projects],” said a public institution official who requested anonymity. “Every project that is planned for next year will be on hold until a successor is decided, which at this point seems unlikely anytime soon because of the political paralysis.”

The benchmark Kospi has been retreating since Oct. 24. The Kospi retreated 2.4 percent in the last 10 trading days. On Nov. 2, the Seoul primary market fell below the 2,000 mark for the first time in seven weeks.

Although the Kospi turned around slightly Monday, it is likely to fall back further if the situation continues.

Global think tanks said the Choi scandal will have limited effect on the financial markets, but it is a downward risk for the nation’s economic growth. Citigroup said in a report the situation will likely speed up the deceleration of the nation’s fourth quarter growth as consumer sentiment will contract.

Citigroup has lowered its outlook for this year’s growth from 2.8 percent to 2.5 percent. Korean think tanks, including the state-run Korea Development Institute (KDI), are also lowering this year’s forecast to the mid-2 percent range.

The KDI on Sunday projected this year’s growth at 2.6 percent.

“Internally and externally we’re not sure what impact the Choi Soon-sil scandal will have on the economy and there are huge external uncertainties such as the U.S. election and the Fed’s interest rate decision in December,” said Kim Seong-tae, a macro-finance economic researcher at KDI. “If the situation continues there’s a possibility that economic growth could be readjusted 0.1 percentage points to 0.2 percentage points from the government’s outlook of 2.8 percent.”

Major economic indicators haven’t been favorable, as quarterly growth in the third quarter continued to remain below 1 percent. Economic quarterly growth has been less than 1 percent for four consecutive quarters. Investment has also been falling.

Mirae Asset analyst Suh Dae-il predicted that government spending, which has contributed in preventing the economy from falling further, has reached its limits.

“Around 80 percent of this year’s supplementary budget was already spent in September,” Suh said, “and thus any impact of the leftover budget on the fourth quarter growth will be negligible.”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]