Economic policymakers are poised to unveil a stimulus package after the weeks-long campaign for the 20th general election ended last Wednesday. Simultaneously, doubts in the market over the efficacy of the coming policy are also mounting, as the ruling Saenuri Party suffered a surprise rout in the election.
As a result, the Ministry of Strategy and Finance is assumed to have become more prudent in fine-tuning its policy direction before unveiling it. An ineffective package or a stopgap measure to boost the economy could deal a fatal blow to the ruling party and President Park Geun-hye in terms of administrating state affairs.
Following its election humiliation, the Park administration should review whether it is keeping its previous promise of youth job creation amid the spiraling jobless rate among those in their 20s and early 30s. It should also pay attention to the widening income gap between regular and nonregular workers.
In addition, it has to suggest practical ways for ordinary households to scale back their debt. There is little room for the household sector to cope with the debt time bomb.
While the government has continued to strive to vitalize consumer sentiment, a structural barrier is hampering the move: Domestic demand has been trapped in a vicious circle in which quite a few citizens have little capacity to spend. The young have no regular income and the middle-aged are saddled with interest and principal-payment burdens.
The record-low interest rate era has created risks in society overall during the past few years. Middle-income households have actively purchased apartments via risky mortgages on low rates, while college students and low-income households took loans on high rates from second- and third-tier financial firms, as they were rejected by first-tier banks.
Despite the serious situation, some government officials, in a low-key manner, are touting further rate cuts during the second quarter. Some Saenuri lawmakers are also pushing for quantitative easing.
For the sagging export sector, the government has to closely monitor volatile foreign exchange rates and international crude prices. The Korean won has posted extraordinary fluctuations against the U.S. dollar amid a variety of global uncertainties. And it is not easy to predict the direction of the Japanese yen, which has rapidly gained against major currencies.
On Sunday, 18 oil producers including Saudi Arabia, Russia and Venezuela failed to reach an agreement on freezing monthly petroleum output until the latter half of the year though they gathered in Doha to overcome the diminishing profitability from low crude prices. As widely expected, Iran, whose global economic sanctions have been lifted, did not participate in the meeting.
The breakdown of oil price normalization efforts is not good news for Korea, which had hopes for higher export prices of petrochemical and refined oil products. On the other hand, an oil supply glut could also be positive as higher prices from an output freeze would harm Koreans’ purchasing power.