Tightening the safety belt

The global financial market has become jittery on the anticipation that monetary tightening in the United States could stay long. The 10-year U.S. treasury yield hit 4.7 percent on Monday, the highest in 16 years. After the manufacturing index came out better than expected, the market bet on the low possibility of the U.S. Federal Reserve shifting its policy to lower interest rates next year.

Bond and stock prices have been falling on the hawkish tone from the Fed chair last month, who suggested a further rate hike this year despite a freeze in September. JP Morgan Chase CEO Jamie Dimon projected that the benchmark rate could top 7 percent if inflationary pressures are entrenched.

The rise in the market yield and the possibility of another rate hike by the Fed would pressure Korean financial authorities to lift the base rate, as the gap has already widened to 2 percentage points. A wider gap could prompt foreign capital to leave the Korean market and rock the foreign exchange market. Many institutions forecast that the Korean economy will squeeze out growth in the 1 percent range next year following this year. The Bank of Korea would have to weigh a rate hike although the economy is in slow motion.

The high interest-rate environment is pushing the leveraged sector to the corner. Household debt is growing. According to the BOK, the debt is estimated to have exceeded the GDP by 101.7 percent in the second quarter, up 0.2 percentage points from the previous quarter. Zombie companies who cannot finance debt interest with their earnings for more than seven years topped 903 last year.

Prospects for the Asian economies, including China, for next year are dim. The World Bank recently lowered next year’s growth rate forecast for China to 4.4 percent from 4.8 percent. Growth estimates for Southeast Asian countries also have been lowered. Shipments to the U.S. through Southeast Asia in place for China due to the deepening Sino-U.S. conflict could be hit by heavier protectionist barriers in America. Meanwhile, the U.S. dollar rose near the psychologically important threshold of 150 yen. Further weakening of the yen can worsen the export prospects of Korean brands.

Our financial authorities must defend against the economic slowdown despite high-interest rates and reinforce exports in the face of worsening trade conditions. The government must raise vigilance so that international shock markets do not shake the local market. Public finance must act as the fortress to a small open economy like ours. Fiscal integrity must not be compromised during the budgetary review process. Households and companies also must carry out deleveraging efforts regardless of the painful process.