Budget or no, we must address political crisis
Published: 02 Jan. 2025, 20:00
Amid unprecedented uncertainty, the Korean government unveiled its first economic policy direction for the year. Acknowledging the gravity of the situation, the government is considering the extraordinary measure of drafting a supplementary budget in the first quarter. While 67 percent of the year’s budget is set to be spent in the first half, it may not be enough to revive a sluggish economy. Acting President Choi Sang-mok, who also serves as deputy prime minister and minister of economy and finance, indicated yesterday that a supplementary budget could be in the cards, saying, “We will reassess the overall economic situation in the first quarter and consider additional measures to bolster the economy.”
The government has projected an economic growth rate of 1.8 percent for 2024. When compared to the United States, which is expected to grow at over 2 percent, Korea’s sub-2 percent growth underscores a severe economic slowdown. Exports, which have been the backbone of Korea’s economy, are now at risk as global conditions deteriorate. Despite extreme political turmoil last year, exports hit a record high of $683.8 billion, an 8.2 percent increase from the previous year, driven by semiconductors and automobiles. However, the landscape has shifted drastically. Protectionist policies in the United States, including tariff hikes, pose a significant challenge. Incoming President Donald Trump has pledged to impose a 10 percent tariff on all imports and a 60 percent tariff on Chinese goods immediately upon taking office on Jan. 20.
Domestically, nearly all economic indicators — including construction, private consumption, employment and financial and foreign exchange markets — have been flashing warning signs for some time. Now, even exports, once the cornerstone of Korea’s economy, are in jeopardy. Adding to the crisis is the heightened volatility of the foreign exchange market, exacerbated by the ongoing impeachment proceedings. If the exchange rate surpasses 1,500 won per U.S. dollar, fears of an economic crisis could become reality.
Domestic banks are also under pressure to manage their Common Equity Tier 1 (CET1) ratios, a key measure of financial health under Basel III standards. A steep decline in the won’s value inflates the won-denominated assets in banks’ portfolios, which could lower their CET1 ratios. Credit ratings agency Fitch has warned that prolonged political instability could lead to a downgrade in Korea’s sovereign credit rating. This grim outlook was reflected in Acting President Choi’s remarks at a cabinet meeting on Dec. 31, where he emphasized the need to “prevent an economic and livelihood crisis.”
To rescue the economy and protect livelihoods, resolving political instability must take priority. Bipartisan efforts are essential, and the proposed semiconductor promotion law should be a starting point for collaboration between ruling and opposition parties. Without addressing the impeachment turmoil, even a supplementary budget or other economic measures will fall short of pulling Korea’s economy back from the brink.
Translated using generative AI and edited by Korea JoongAng Daily staff.
The government has projected an economic growth rate of 1.8 percent for 2024. When compared to the United States, which is expected to grow at over 2 percent, Korea’s sub-2 percent growth underscores a severe economic slowdown. Exports, which have been the backbone of Korea’s economy, are now at risk as global conditions deteriorate. Despite extreme political turmoil last year, exports hit a record high of $683.8 billion, an 8.2 percent increase from the previous year, driven by semiconductors and automobiles. However, the landscape has shifted drastically. Protectionist policies in the United States, including tariff hikes, pose a significant challenge. Incoming President Donald Trump has pledged to impose a 10 percent tariff on all imports and a 60 percent tariff on Chinese goods immediately upon taking office on Jan. 20.
Domestically, nearly all economic indicators — including construction, private consumption, employment and financial and foreign exchange markets — have been flashing warning signs for some time. Now, even exports, once the cornerstone of Korea’s economy, are in jeopardy. Adding to the crisis is the heightened volatility of the foreign exchange market, exacerbated by the ongoing impeachment proceedings. If the exchange rate surpasses 1,500 won per U.S. dollar, fears of an economic crisis could become reality.
Domestic banks are also under pressure to manage their Common Equity Tier 1 (CET1) ratios, a key measure of financial health under Basel III standards. A steep decline in the won’s value inflates the won-denominated assets in banks’ portfolios, which could lower their CET1 ratios. Credit ratings agency Fitch has warned that prolonged political instability could lead to a downgrade in Korea’s sovereign credit rating. This grim outlook was reflected in Acting President Choi’s remarks at a cabinet meeting on Dec. 31, where he emphasized the need to “prevent an economic and livelihood crisis.”
To rescue the economy and protect livelihoods, resolving political instability must take priority. Bipartisan efforts are essential, and the proposed semiconductor promotion law should be a starting point for collaboration between ruling and opposition parties. Without addressing the impeachment turmoil, even a supplementary budget or other economic measures will fall short of pulling Korea’s economy back from the brink.
Translated using generative AI and edited by Korea JoongAng Daily staff.
with the Korea JoongAng Daily
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