Korean economy walking on thin ice

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Korean economy walking on thin ice

Economic conditions have become as unstable as walking on thin ice. Financial markets at home and abroad are shaking in the wake of the dramatic increase in the U.S. producer price index (PPI) and ongoing financial instabilities in the UK.

International Monetary Fund (IMF) chief economist Pierre-Olivier Gourinchas has warned, “The worst is yet to come” for the global economy. The U.S. has become strained by rapid rises in interest rates, China by a real estate market slump and Covid-19-related lockdowns, and Europe by the energy crisis. The troubles in the three largest economic zones have rattled emerging markets.

In its recent financial stability report, the IMF has raised concerns for debt risk in emerging markets due to inflation and tightening by developed economies. IMF loans to its member countries have stretched to a record $135 billion as of the end of September due to a spike in the number of countries in need of relief.

The minutes from a Federal Open Market Committee meeting in September suggest policymakers are determined to tame inflation even at the cost of economic growth. The market expects a fourth hike in 75 basis points in November, followed by another hike of 50 basis points in December and 25 basis points in January. The International Finance Center in Seoul predicts the Fed funds rate would peak at 4.50-4.75 percent in February and start easing in December with a cut by 25 basis points. Last week, the Bank of Korea delivered a second hike of 50 basis points in its unprecedented fifth uninterrupted raise to eventually lift the key rate to 3.5 percent.

Last month, foreigners withdrew a net 2.36 trillion won ($1.8 billion) from the Korean stock market and 915.3 billion won from the bond market. The Korean won has fallen 6.8 percent since September, steeper than the losses of 4.7 percent in the Japanese yen and 3.7 percent in the Chinese yuan.

On his way to work Thursday, President Yoon Suk-yeol told reporters that economic crisis should not be exaggerated or neglected. That is correct. The government must do its utmost to address the public’s “cost-of-living crisis” from soaring interest rates and inflation.

In macroeconomic terms, the government must pay heed to the British flops. Bloomberg reported that the British government bonds’ crash suggests the return of bond vigilantes, who threatens to sell — or actually sells — a large amount of bonds to protest or signal distaste with policies of the government. Korea incurred a deficit in its current-account balance in August. Its fiscal deficit reached a whopping 85.3 trillion won as of August. Vigilantes could come into force if the country gets mired in a twin deficit.
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