A series of blows to the Korean economy
Published: 19 Dec. 2024, 20:49
Bad luck never comes alone, and the streak has been merciless for the Korean economy. On top of political uncertainties stemming from the martial law blowout, the markets have taken another hit — this time from the United States. The U.S. Federal Reserve has signaled it may take a breather in its rate reduction campaign after the latest quarter-percentage-point cut, marking a combined 100 basis points lowered this year through three consecutive cuts. After the rate-setting meeting, Fed Chairman Jerome Powell warned of entering "a new phase," emphasizing caution over further cuts due to potential inflationary pressures in the coming year. The Fed’s December dot plot now projects only two additional 25 basis point cuts in 2025, down from the four anticipated in September.
The slowing pace of U.S. monetary easing has rattled markets. Korea’s main stock index fell nearly 2 percent, while the U.S. dollar climbed above 1,450 won during Thursday’s session. The last time the won breached the 1,450 threshold against the greenback was during the global financial crisis in 2009. Such forex turbulence rings alarms for Korea, having endured a near-default crisis in 1997 due to a shortage of foreign currency, although the country today sits on ample foreign-currency reserves and assets.
Headwinds from China add to the strain. For the first time on record, China’s 10-year sovereign bond yield has fallen below 2 percent, signaling alarming deflationary pressures and raising fears that the world’s second-largest economy may be on a stagnation trajectory akin to Japan’s. This weakening in Chinese benchmark yields also weighs on the value of both Chinese and Korean currencies, reflecting the close coupling of the two economies. Sluggish demand from China dampens Korea’s export prospects.
Korea’s economic troubles may not be short-lived, as its growth potential is steadily weakening. In a recent report, the Bank of Korea (BOK) projected that Korea’s growth potential rate would fall to 1.8 percent for the period between 2025 and 2030. Without aggressive structural reforms, this rate could drop below 1 percent by 2040.
For the time being, it is imperative to contain the spillover effects of political uncertainties on the economy and showcase the government’s crisis-management capabilities both domestically and internationally. Global credit rating agencies have warned that Korea’s sovereign credit rating could be downgraded if a political gridlock persists.
Aggressive fiscal and monetary policies are crucial in crisis. The BOK’s decision to further lower rates in January will hinge on the movements in the foreign exchange market and household debt levels. Given the constraint in monetary maneuvering, rivaling political parties must urgently discuss a pre-emptive fiscal stimulus through a supplementary budget. BOK Gov. Rhee Chang-yong has stressed the need for swift fiscal stimuli, while Gyeonggi Gov. Kim Dong-yeon, a former deputy prime minister for the economy, has suggested a supplementary budget package worth 30 trillion won ($21 billion).
Economist John Maynard Keynes famously likened financial markets to a beauty contest, where the winner is not the one judged most attractive but the one most likely to be deemed attractive by others. Similarly, Korea’s economy must appeal to foreign investors and global rating agencies. Legislative actions that bolster the business environment, such as the Special Semiconductor Act, must be expedited. Conversely, controversial amendments to the Commercial Act that could deter investment should be approached with caution.
The slowing pace of U.S. monetary easing has rattled markets. Korea’s main stock index fell nearly 2 percent, while the U.S. dollar climbed above 1,450 won during Thursday’s session. The last time the won breached the 1,450 threshold against the greenback was during the global financial crisis in 2009. Such forex turbulence rings alarms for Korea, having endured a near-default crisis in 1997 due to a shortage of foreign currency, although the country today sits on ample foreign-currency reserves and assets.
Headwinds from China add to the strain. For the first time on record, China’s 10-year sovereign bond yield has fallen below 2 percent, signaling alarming deflationary pressures and raising fears that the world’s second-largest economy may be on a stagnation trajectory akin to Japan’s. This weakening in Chinese benchmark yields also weighs on the value of both Chinese and Korean currencies, reflecting the close coupling of the two economies. Sluggish demand from China dampens Korea’s export prospects.
Korea’s economic troubles may not be short-lived, as its growth potential is steadily weakening. In a recent report, the Bank of Korea (BOK) projected that Korea’s growth potential rate would fall to 1.8 percent for the period between 2025 and 2030. Without aggressive structural reforms, this rate could drop below 1 percent by 2040.
For the time being, it is imperative to contain the spillover effects of political uncertainties on the economy and showcase the government’s crisis-management capabilities both domestically and internationally. Global credit rating agencies have warned that Korea’s sovereign credit rating could be downgraded if a political gridlock persists.
Aggressive fiscal and monetary policies are crucial in crisis. The BOK’s decision to further lower rates in January will hinge on the movements in the foreign exchange market and household debt levels. Given the constraint in monetary maneuvering, rivaling political parties must urgently discuss a pre-emptive fiscal stimulus through a supplementary budget. BOK Gov. Rhee Chang-yong has stressed the need for swift fiscal stimuli, while Gyeonggi Gov. Kim Dong-yeon, a former deputy prime minister for the economy, has suggested a supplementary budget package worth 30 trillion won ($21 billion).
Economist John Maynard Keynes famously likened financial markets to a beauty contest, where the winner is not the one judged most attractive but the one most likely to be deemed attractive by others. Similarly, Korea’s economy must appeal to foreign investors and global rating agencies. Legislative actions that bolster the business environment, such as the Special Semiconductor Act, must be expedited. Conversely, controversial amendments to the Commercial Act that could deter investment should be approached with caution.
with the Korea JoongAng Daily
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