Emergency actions must followOn Monday, the Bank of Korea (BOK) pushed the base rate to the untested level of zero territory — 0.75 percent — through a 50 basis-point cut in its first extraordinary move since the Wall Street meltdown in October 2008.
The cut was hastened by the U.S. Federal Reserve’s surprise cut of 1 percentage point in its target range on Sunday. Despite the stunning rate cut accompanied by quantitative easing from the U.S. central bank, panicky sell-offs persisted in the Korean market to push shares and currency lower on Monday. The BOK inevitably had to step in.
How much the rate cut will aid sentiment remains unclear, as domestic demand has not been able to pick up despite years of low interest rates. Pessimism has spread as borders are sealed for quarantine and global supply chains have broken from the epidemic. Skeptics expect an impact worse than the aftermath of the financial crisis of 2008-2009. The persistent “Sell Korea” underscores our economy’s vulnerability to global downturns as it relies heavily on exports.
The sense of urgency, however, cannot be felt in the Blue House or the government. In an interview, Kim Sang-jo, the president’s policy chief, claimed that quarantines can be the best economic policy. Kim Yong-beom, vice minister for strategy and finance, claimed that our economic fundamentals and financial system remain solid.
Such upbeat tones cannot hide the looming perfect storm. Moreover, unlike in the aftermath of the 2008-2009 financial crisis, there is little policy ammunition left. The interest rates were relatively high then, allowing the central bank to shave the base rate by 75 basis points, followed up by five more cuts. Currency swaps with developed economies like the United States and Japan also provided protection.
But the defense front is no longer that strong. Foreign exchange reserves are sufficient now, but cannot be guaranteed. Foreigners have sold off nearly $10 billion in Korean shares since the virus broke out late January in Korea. The crisis could go out of control if foreign exchange turns wobbly while the government relies on deficit-financed fiscal stimuli amid low interest rates and waning export competitiveness.
Deputy Prime Minister for the Economy, Hong Nam-ki, failed to demonstrate a strong command of economic affairs, wrangling with the ruling party head over a supplementary budget and dropping into a mask factory for a photo opportunity. The economic leadership must extend currency swaps as well as other emergency actions.