It’s horse, then cart
The author is a columnist of the JoongAng Ilbo.
Last week, the opposition Liberty Korea Party claimed “the economy is peace” in response to President Moon Jae-in’s remarks in his Aug. 15 Liberation Day speech, in which he said, “Peace is the economy; peace and the economy are synonymous.” An opposition party official said that the party wants to refute the president’s placement of a priority on peace over the economy. On Nov. 1, Moon spoke at the National Assembly and stressed once again that “peace is the economy.” I have no intention of taking a side between peace and the economy. But let’s do some calculation.
“Peace is the economy” is a defendable claim in every way, especially considering the geopolitical situation of South Korea. The North Korean nuclear risk affects our sovereign credit rating in a big way. It is no secret that the top three credit rating agencies always meet with the National Intelligence Service’s North Korean affairs officials when they visit south Korea to evaluate its economy. When the security risk decreases, the Korean economic risk also decreases. But peace alone cannot keep the economy running. Our stock market is a living witness, as it reflects the economy.
Last month, the Korean stock market plummeted by the biggest margin among all markets in the world. It fell more than Taiwan’s, which is more affected by the U.S.-China trade war than South Korea is. Local companies are selling for unprecedentedly cheap prices. As of the end of October, the Korean stock market’s price-to-earnings ratio was 8, and its price-to-book-value ratio was 0.9, which were similar to the ratios of Turkey and Russia. Does it make sense that Korea’s companies are on the same level as Turkey’s, a country on the verge of a currency crisis? That’s inconceivable if peace really is the economy. The government claimed that inter-Korean relations and the prospects for peace have never been so good.
The government insists that our economic fundamentals are solid, but cannot explain why foreign funds are leaving. The financial industry sees things differently. It says that investment psychology is dead. A CEO of an asset management company said, “Not to mention the foreigners, rich Koreans are leaving too. They sell their businesses and Korean stocks and buy real estate and U.S. stocks. Even the National Pension Service, the largest institutional investor in South Korea, shies away from investing in local stocks. That means there is no future for Korean companies and the Korean economy.”
The stock market is a place to buy into the future. If companies can’s earn profits in the future, there’s no reason to buy stocks. This year, Hyundai-Kia Motors’ operating profit was one tenth of its heyday. The semiconductor industry’s boom is about to end. The operating profits of top 30 companies (excluding semiconductor companies) in the first quarter fell by a whopping 16.3 percent from last year. Next year, the government-enforced 52-hour workweek will be implemented, and the minimum wage will rise by 10 percent. Companies must spend more: it would be strange if they do not take money out of this lethargic stock market.
Putting all our chips on North Korea does not guarantee peace. The U.S. Department of Treasury warned South Korean banks not to violate sanctions on North Korea and the U.S. Embassy in Seoul also asked South Korea’s top five conglomerates to control the pace of possible North Korean projects. The Treasury and the embassy contacted them directly, bypassing the Korean government. Ri Son-gwon — who is about 100th in the power ranking in North Korea — even threatened South Korea’s top businessmen while they were eating cold noodles in Pyongyang when they accompanied President Moon on his trip last month for the third summit with North Korean leader Kim Jong-un. Now, foreign investors understand that the centripetal force of the Moon administration wooing the North is acting as a centrifugal force pushing away the decades-old Korea-U.S. alliance.
Resentment in the stock market over the idea that “North Korea comes first” and mordant jokes like, “Is it a goal to bring the South Korean economy down to the level of North Korea?” should not be treated lightly. The government could believe that these criticisms are unfair or at the least premature. But let’s take a deep breath and think what provoked these harsh sentiments. The stock market only hopes for one thing: reviving an economy that continues to slow. It’s asking to put the horse back in front of the cart. Is that so hard? All it takes is to say that the economy comes before North Korea.
JoongAng Ilbo, Nov. 8, Page 30