Great economic challenges will greet the new administration

Economy

Published: 10 Mar. 2022, 18:55 Updated: 10 Mar. 2022, 20:12

Great economic challenges will greet the new administration

Fine dust blankets Gwanghwamun, central Seoul, on election day March 9. President-elect Yoon Suk-yeol is set to face many economic challenges amid growing uncertainties. [NEWS1]

Yoon Suk-yeol is becoming president of Korea at a time of great turmoil.

Russia has invaded Ukraine, the price of oil is rising rapidly and interest rates are rising.

"The uncertainty surrounding the global and domestic economy is increasing," said Vice Finance Minister Lee Eog-weon on Tuesday.

In its Mar. 7 report, the Korea Development Institute wrote that "the economic uncertainty has risen due to concerns over the external circumstances."

Crude prices have been rising steadily since early 2020 and especially rapidly since Tuesday, following Washington’s announcement it will stop all imports of Russian oil, gas and energy.

Brent crude traded at about $128 per barrel on that day, the highest closing price since July 2008, before falling back to $108.7 Wednesday as the United Arab Emirates hinted at a possible production increase.

Goldman Sachs raised its 2022 Brent crude spot price forecast to $135 a barrel on Tuesday, from the previous outlook of $98. It is a three to fourfold jump compared to the previous year, the steepest pace since the oil shock in the 1970s.

If the crude price breaks the 130-dollar mark, this year's consumer price rise in Korea is forecast to reach four percent.

Just as it takes three to four weeks for fluctuations in global crude prices to be reflected in the domestic energy prices, the increase in raw materials prices is likely to hit the local market starting from mid-March.

The average price of gasoline at stations nationwide hit an eight-year high of 1,913.73 won ($1.56) per liter as of 4 p.m. Thursday, up 21.33 won from the previous day, according to Opinet.

The weakening currency is boosting inflation as well, since won depreciation may lead to more expensive imports. The won closed at 1,228 won against the dollar Thursday, down 3 percent from the start of 2022.

"There still remain factors such as Russia's possible default and the possibility of imports turning into deficit due to oil price hike," Mirae Asset Securities analyst Park Hee-chan said.

"The soaring price is because of increased liquidity driven by the Covid-19 pandemic response and external issues such as the Ukraine crisis," said Jung Kyu-chul, a researcher at Korea Development Institute.

Jung emphasized that "inflation is an important issue, which will inevitably impact the new administration's approval rate."

On March 3, Fed Chair Jerome Powell announced that rates would be increased by 25 basis points, or 0.25 percentage points this month. The rate increase is within the market expectations, but Powell added that the Fed is "prepared to move more aggressively" if inflation continues to build up.

The Bank of Korea moved up its benchmark rate in January by 0.25 percentage points to 1.25 percent, and the rate remained unchanged in February.

Average households will take the hit if the base rate rises in the future.

Household debt rose 7.8 percent on year in the fourth quarter last year, to a record 1,860 trillion won, according to the Bank of Korea. In the total loan balance, 76.2 percent has a floating interest rate, which means that the interest rates will change according to market fluctuations.

For corporate debt, 67.7 percent has a floating interest rate.

The national debt is set to break 1,064 trillion won in 2022. Even if the next government passes this year's second supplementary budget after the first one in February, its effect on economic stabilization may be limited due to the growing pressure on the national budget.

"There is little budget money left to use," said Dongguk University economics professor Kim Kap-soon.

Kim explained that an additional budget would only lead to an increased burden on the people.

"Scaling up the budget excessively might slow economic growth," said Kim.

The outlook remains uncertain. Policies such as lowering the base rate or liquidity provision, which were implemented during the early stage of the Covid-19 pandemic, will not be of help amid rising inflation.

"The next administration is facing challenges such as controlling the money supply while maintaining stability in the market, or rising the base rate while stabilizing economy and livelihoods," said Yang Joon-mo, an economics professor at Yonsei University.

BY CHO HYUN-SOOK, JEONG JIN-HO [shin.hanee@joongang.co.kr]