The South Korean economy confronts a toxic mix of high inflation, frothy asset prices and a volatile exchange rate, among other negative variables, amid concerns that the forthcoming launch of the new administration might exacerbate uncertainties.
For President-elect Yoon Suk-yeol, such dire conditions mean it’s no time to be self-congratulatory about his election victory. On Friday, he asked the presidential transition team to come up with a comprehensive road map to strengthen the economy, including price stabilization.
It is unprecedented for a president-elect to warn of economic risks and call for countermeasures before taking office. Yoon stressed that there are “clear signs of mixed risks and unstable prices,” suggesting that he is aware of the danger threatening the economy. Proactively perceiving the risks is laudable, but it remains to be seen whether Yoon can steer the trouble-laden economy out of the current rough seas.
The transition team held meetings with officials from the Bank of Korea and other key state financial agencies to check the latest market trends and discuss possible measures to handle supply chain disruptions and household debt.
Topping the agenda, of course, is runaway inflation, which could lower purchasing power and depress consumer spending. This scenario is by no means a welcome development for the new government, which wants to kick-start the nascent economic recovery coupled with the lifting of social distancing rules linked to the COVID-19 pandemic.
As part of efforts to rein in inflation and high household debt, the BOK raised the benchmark interest rate by a quarter percentage point to 1.5 percent on Thursday. It marked the fourth rate increase since August last year, when the central bank implemented its first pandemic-era rate hike.
In theory, a higher benchmark rate will lead to less liquidity circulating in the market, a condition that can keep inflation at bay. In practice, however, rate increases alone may not be enough to prevent prices from spiraling upward.
Korea’s consumer prices rose 4.1 percent in March from a year earlier, hitting above the 4 percent mark for the first time in more than 10 years, largely because crude oil and other commodity prices soared amid the war in Ukraine and pandemic-prompted lockdowns in China. Korea relies heavily on imports for most of its energy needs and China is its biggest trading partner.
Consumer inflation rose 4.1 percent in March from a year earlier, accelerating from a 3.7 percent on-year gain the previous month. The BOK aims to keep annual inflation at 2 percent over the medium term.
In February, the BOK forecast consumer prices would rise 3.1 percent this year. But it revised its outlook upward last week, saying inflation could hover around 4 percent for a while.
Rhee Chang-yong, the nominee to lead the BOK, also said Sunday the country was likely to face strong inflationary pressure for a considerable period.
But rate hikes down the road would translate into additional interest payments for those with loans. Given that household debt in Korea stood at 106.7 percent of the gross domestic product in the third quarter of last year, higher borrowing costs could dampen domestic demand, thereby weakening economic growth.
The BOK forecast Asia’s fourth-largest economy would grow 3 percent this year, but experts in the private sector foresee the growth rate to be in the 2 percent range. The Hyundai Research Institute, for instance, revised down its growth outlook for the country this year from 2.8 percent to 2.6 percent Sunday.
Tackling a complex web of economic risks is no easy task. What’s certain, however, is that the new administration should stick to its rightly chosen focus on inflation as the biggest risk, at least for now.
By Korea Herald (firstname.lastname@example.org