For a man who billed himself as the CEO president, Lee Myung-bak of South Korea sure seems to lack business sense. In February 2008, voters turned to Lee, the former chief executive officer of several Hyundai Group businesses, to see through the reforms needed to break the economic gridlock. Who better to drive change than a guy famed for bulldozing the competition?
Buyer’s remorse is setting in as Lee’s management proves to be more erratic than steady.
Koreans were patient when Lee’s missteps involved diplomacy. His move to reverse efforts by his two predecessors to negotiate with North Korea was a case in point. They also overlooked his support of the Bush administration’s foreign policy adventures and his steps to censor the Internet.
Yet tolerance is running thin as Lee misplays what should be his strong suit: promoting economic stability and accomplishing financial reform. If Lee doesn’t get serious about both, investors will hand down their own verdict, which won’t be good for the nation’s markets.
The first issue ― economic overheating ― is an immediate danger. On the surface, this seems more a concern for Kim Choong-soo, Korea’s central bank governor, than for Lee. Since the collapse of the global economy in 2008, central banks around the world have sought to maintain their independence from the politicians who need sound economic growth in order to stay in office. Korea is no exception as Kim struggles to tame inflation, at the same time offering up monetary policy that supports growth.
While Lee’s policy makers deny it, investors in Seoul believe the Bank of Korea is under intense pressure to leave interest rates low. Each time the central bank raises rates, the Korean won’s rise accelerates. This undermines key exporters like Samsung Electronics Co. and Hyundai Motor Co., making their products more expensive in overseas markets.
Inflation remains above Korea’s benchmark interest rate of 3 percent, and the 4.7 percent rise in consumer prices in March was a troubling sign that things might get away from the central bank. Too often in the past, low rates have fueled bubbles in asset markets such as real estate and led to runaway inflation. This is a risk for South Korea and it’s clear that Lee’s government hasn’t done enough yet to ring out the excesses.
The relationship between Lee’s team and the central bank has been inept, at best. It almost goes without saying that politicians who bend central bank policies to their own needs increase the odds of boom-bust cycles that hurt business.
The second issue ― financial reform ― is just as important. Nothing captures the collective sense of disappointment in Lee better than the saga of Korea Exchange Bank. In 2003, Lone Star Funds, a U.S. private-equity fund, grabbed a 51 percent stake in KEB amid the fallout from the Asian financial crisis several years earlier. Firms such as Lone Star were cast by policy makers as saviors for pouring cash into crippled companies. On the Korean street, though, they engendered hostility toward foreigners looking to turn quick profits from Korea’s pain. In Seoul, “private equity” became interchangeable with “vulture.”
For five years regulators have stymied Lone Star’s efforts to sell on the grounds that there may be doubt as to whether the original purchase was legitimate. It’s but one of Lee’s failings that he hasn’t championed a resolution of the matter, and led an effort to quell animosity toward overseas investors. Last month, regulators again delayed a decision on approving a transaction. The odd thing is the sale wouldn’t put KEB into foreign hands, but Korean ones. The latest bid ― $4.3 billion ― comes from Seoul-based Hana Financial Group Inc.
The longer this battle gets drawn out, the more damage it does to the image of one of the world’s most promising economies. And Korea has plenty of promise, so long as it doesn’t get complacent amid the competitive threats posed by China, India and Indonesia.
In April 2008, two months after taking power, Lee had this to say to investors in New York: “I am the CEO of the Korea Inc. I truly hope you will come on board by investing in Korea.”
Three years later, the CEO has yet to prove Asia’s fourth-biggest economy is truly open for business.
By William Pesek
William Pesek is a Bloomberg View columnist. The opinions expressed are his own. ― Ed.