The U.S. political deadlock over the 2014 budget proposal by the Obama administration would adversely affect the Korean economy and its financial markets should the government shutdown last as long as the 20-plus days experienced under the Clinton government.
The U.S., one of Korea’s top economic and political partners, this week shut down its nonessential services such as national parks and museums, forcing government staff at agencies, including the Department of Defense, to take unpaid holidays.
This resulted from the two major parties failing to reach an agreement over the budget bill as the Republican-led House of Representatives demanded delays in President Obama’s health care reforms.
|A protester covers his mouth with a dollar bill as he joins others in front of the U.S. Capitol in Washington, D.C., urging congress to pass the budget bill, Tuesday. (AFP-Yonhap News)|
Uncertainties are growing that the shutdown could last longer than expected as the U.S. is expected to face further political gridlock, this time over debt-ceiling negotiations.
The shutdown would lead to a decrease in federal spending, and thus private consumption, ultimately affecting the growth of the world’s largest economy as well as that of export-reliant Korea, the Ministry of Strategy and Finance said in a statement.
Moody’s Analytics estimated that a shutdown for two weeks could lower the U.S.’ annual gross domestic product by 0.3 percent, and by 1.4 percent should it last for a month.
There are no signs yet indicating that global investors are moving to draw their funds out of riskier assets and reallocate them to safer assets.
Analysts and government officials noted that U.S. government shutdowns usually lasted six days on average in the last 17 times since the 1970s.
The longest was 21 days in 1996, according to Woori Investment & Securities. The benchmark KOSPI lost about 9 percent on average during the 21-day standoff between the Republicans and Democrats over the U.S. federal budget.
The KOSPI closed at 1,999.47, up 0.03 percent, on Wednesday.
The latest shutdown and the expected tapering of the U.S. quantitative easing are emerging as a double threat to the Korean economy, analysts said.
Japan’s first sales tax increase in six years is also expected to affect the global economy.
The Finance Ministry said these various factors will “increase global market volatility and could further ignite capital outflow from emerging markets.”
The Korean policymakers and regulators are on alert with contingency measures prepared against further negative factors.
The U.S. government still needs to resolve matters regarding its debt ceiling, and the global financial markets are closely following the news of the Federal Reserve’s next possible chairman who can shed some light on the timeline of the central bank’s monetary policy normalization.
By Park Hyong-ki (email@example.com)