[Interview] Volatile climate puts global economy at risk, warns S&P economist
Published: 23 Sep. 2023, 06:00
Updated: 25 Sep. 2023, 09:37
- JIN MIN-JI
- [email protected]
An abnormal climate is a threat to the global economy that could cause tremendous economic losses, including inflation and supply chain disruptions.
Its impacts are projected to be particularly intense this year, when El Nino recurs in the fourth quarter, according to Diego P. Iribarren, economics director at S&P Global Market Intelligence.
El Nino is a climate pattern that describes the above-average sea-surface temperatures that periodically develop on the surface of waters in the eastern Pacific Ocean. It usually occurs every two to seven years, and it is expected to occur from the fourth quarter to at least the first quarter of next year.
“The Korean economy would be exposed to potentially higher prices because it heavily depends on imports,” said Iribarren about the impacts of climate change during an interview with the Korea JoongAng Daily at the company office in the Seoul Finance Center in central Seoul on Sept. 19.
“Higher inflation almost always leads to devaluation of currency because it takes away the purchasing power of the currency. Obviously, an extreme example of this was Argentina.”
He added, “the policy rate is going to go up. We estimated that increase in around five to 10 basis points” as a result of the inflationary pressure and devaluation of the Korean won.
Below are edited excerpts from the interview.
Q. How does abnormal climate, like El Nino, affect the global economy?
A. Inflation is one area where El Nino will have an impact. It can create extreme weather events, like droughts and excess rain that cannot be absorbed by the ground. They can certainly damage crops. We have learned from history that countries hit hardest are Australia and India, which both are major commodity producers.
It can also create supply chain disruptions. One of the effects of El Nino is that it increases the intensity of storms, which can shut down ports. It can also raise the cost of doing business as well because a lot of commodities are bought at future prices.
A third area, which is a little bit outside the scope of economics, is social tension due to higher prices. There will be a lot of hungry people in some parts of the world that may be facing a lack of supply of basic commodities. It can create a reaction, whereby the protesters demand the government solve the problem and the government may not have a solution. That may or may not happen but it is certainly a possibility.
Q. What particular impacts will the upcoming El Nino have on the Korean economy?
I think it’s going to be translated into higher import prices for commodities, including wheat, soybeans and corn, which are directly used for the production of food. Also, because Korea depends a lot on imports in general, it could be exposed to disruptions in supply chains that may delay or may make [imported products] more expensive.
There will be a slight devaluation of the won and the policy rate, as you would expect, will go up. We estimated an increase of around five to 10 basis points.
What measures can the Korean financial regulators take to respond to these issues?
There are two things that governments typically do. One is to provide incentives for self-sufficiency, or domestic production. The other one is to create stocks for nonperishable goods. In the case of an event, at least you will always have a window where the domestic market will continue to be supplied.
The problem is going to be fixed at some point because the population will peak and then start to decline at some point. When that happens, there will be less demand for all the things that are negative to the environment, including meat.
Apart from the abnormal climate, what other risks does the Korean economy face? What are some of the short-term risks?
Short-term risk includes the Chinese economy not fixing issues around debt, as they have problems on the overleverage of banks to construction companies and the private sector in general. That is a very big problem because that is already creating a lot of problems with uncertainty that is withholding decisions to invest and consume, taking away sources of growth. That could potentially lead to lower demand for Korean exports to China, particularly in the semiconductor sector. There is also a structural problem of the declining population in China, which will make the country grow at slower rates.
Reporter’s note: China’s total debt, combining the household, corporate and government sectors, rose to a record 281.5 percent of gross domestic product in the second quarter, according to Bloomberg’s calculations based on data from China’s central bank and the National Bureau of Statistics.
China’s population fell for the first time in 60 years in 2022, with the national birthrate reaching a record low of 6.77 births for every 1,000 people in the same year.
What are long-term risks?
The world is being fractured into two camps with one led by the United States and Europe, and the other by China and Russia. That fracturing means China’s economy is being decoupled from the U.S. economy. Therefore, the guarantee of U.S. demand for Chinese products — which guarantees the demand of China for Korean products — might be put at risk. The market would probably be more limited than the current market and, along with a realignment of the world, that could also be a source of risk to the Korean economy.
BY JIN MIN-JI [[email protected]]
with the Korea JoongAng Daily
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