The Korea Herald


Korean economy at crossroads amid leadership vacuum

By Park Ga-young

Published : March 12, 2017 - 20:27

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The ouster of former President Park Geun-hye has cleared political uncertainty in South Korea, but growing external risks might pose threats to the nation’s economy amid the two-month leadership vacuum leading up to the next election, the central bank and local economists warned Sunday.

Following Park’s impeachment Friday, Korea’s economy now faces five major threats, according to the Hyundai Research Institute: uncertainty over US President Donald Trump; retaliation over the deployment of a US anti-missile system here; the onset of a collapse of the EU triggered by Brexit; North Korea’s provocations; and household debt issues.

“It is time to focus all the attention on the economy and the government should put utmost efforts to curve external downside risks,” said Ju Won, chief economist at Hyundai Research Institute.

Yim Jong-yong (2nd from R), chairman of the Financial Services Commission (FSC), speaks during a meeting with senior officials from related agencies in Seoul, on March 12, 2017. (Yonhap) Yim Jong-yong (2nd from R), chairman of the Financial Services Commission (FSC), speaks during a meeting with senior officials from related agencies in Seoul, on March 12, 2017. (Yonhap)

As part of attempts to ensure market stability and fend off any fallout from Park’s impeachment ruling, the nation’s financial authorities gathered Sunday to check on the financial market. Yim Jong-yong, chairman of the Financial Services Commission, the country’s top financial regulator, said the financial market remained calm after the impeachment ruling, but the economy still faces a growing trade dispute and a much-anticipated rate hike in the US.

The Bank of Korea also raised concerns over the planned US rate hike as the Federal Reserve is highly likely to raise key rates during its policy meeting this week. This has fanned concerns here over household debt and a possible exit of foreign capital.

South Korea’s household debt reached an all-time high of 1,344.3 trillion won ($1.15 trillion) as of the end of 2016, or 83 percent of gross domestic product, data from the central bank showed.

With an interest hike, household debt might balloon and weigh down on already tepid consumption. It could also lead to an outflow of foreign capital seeking higher yield in the US.

Concerns are also growing over the Trump administration, as it might seek to renegotiate a free trade agreement with South Korea and designate the country as a currency manipulator.

Meanwhile, a diplomatic row with China over the deployment of the anti-missile system here, has now turned into an economic risk. According to a survey conducted on 597 firms in the content, tourism and retail sectors between Tuesday and Friday by the Korea International Trade Association, a majority of businesses see a negative impact from China’s apparent economic retaliation. A combined 89.1 percent of respondents said their business has already been negatively affected by China’s economic retaliation or would feel the pinch of those measures in the next three months.

As part of a countermeasure, Yim of FSS said that the government will extend a policy loan worth 200 billion won to local tourism and related firms whose business has been hit by China’s economic retaliation.

Despite government efforts, however, concerns have been raised over the leadership vacuum here, as the president was impeached at a critical time when the nation is facing many internal and external risks.

“There is no problem with conducting daily tasks as usual but when it comes to setting a policy direction and making a swift decision on important matters, it won’t be easy (without a leader),” a government official said.

Corporates are also cautious about hiring and investment decisions at a time of shifting political leadership as they await for the new government’s policy direction.

“Because of political turmoil, major business activities have been on hold since the end of last year,” an official from a conglomerate said. “As we will probably (only) have a clear picture of the new government’s policy direction in the third quarter of the year at the earliest, we can’t help but operate business defensively.” 

By Park Ga-young (