Smooth path for Korean economy
A veteran Hong Kong-based regional economist I know recently made his annual research trip to Korea and declared that he now found the country to be “boring.” He wasn’t referring to the cultural scene or the nightlife, which he continues to enjoy. Rather it is the economic sphere that lacks excitement.
“Watching Korea used to be interesting, but it is just no fun these days. For an economist, Korea used to be the place in Asia that kept on giving, delivering financial sector blow-ups and massive currency and equity swings as regular as clockwork. But no more!,” my friend sighed as he drowned his sorrows with a bottle of soju.
His comments were surprising since he has a something of a reputation within the financial industry as a permabear: an analyst who is normally pessimistic about the future direction of the markets and economy.
But for Korea, he sees a relatively smooth path ahead despite the always looming presence in the background of eye-watering debt levels held by households and small businesses.
So what are the grounds for his optimism, I ask. What happens, for example, to Korea’s export machine if overseas demand dries up because of a slowing Chinese economy or the continuing European debt crisis?
No problem, he replies. The government has plenty of money to boost growth. Its budget deficit is expected to amount to a negligible 1.1 percent of gross domestic product this year. Public debt amounts to only 30 percent of GDP, one of the lowest levels among the advanced industrial nations. There is little to hold back the government from splashing out on stimulus measures if needed.
In addition, the central bank has the flexibility to cut the benchmark interest rate from the current 3.25 percent. In the last 18 months, the central bank raised the rate from 2 percent to curb inflation. But it doesn’t want to go higher. One reason is that the government fears that rates higher than the current level could trigger consumer defaults.
But more importantly, raising interest rates would attract foreign capital and consequently strengthen the won. That is something that the mercantilist mandarins in Seoul do not want to see happen.
It’s no secret that Korea has had a pretty good economic run compared to other countries since the global financial crisis erupted in 2008 because the outrageously cheap currency has boosted exports. The only downside is that Korean consumers have to bear the burden in terms of paying higher prices for imported goods from oil to Louis Vuitton handbags.
Korea also has managed to wean itself from its dependence on short-term foreign loans. Local banks have reduced their exposure to fickle foreign funding, making them less vulnerable to a flight of capital that triggered the 1997 financial crisis. External debt now accounts for 60 percent of exports in goods and services, down from 100 percent in 1997. Meanwhile, the current account was in surplus last year at 2.7 percent of GDP.
Consumers and small businesses are doing their part in keeping the economy on course by curbing further borrowing beyond that needed to roll over their already excessive debt obligations. Moreover, banks are reluctant to declare borrowers in default because of the resulting damage to their balance sheets. So they have adopted a culture of forbearance in dealing with delinquent loans.
Meanwhile, the chaebol are taking advantage of the low interest rates to invest heavily in production capacity, much of it overseas. This is providing the large business groups with the economies of scale needed to trounce Japan in electronics and the United States and Europe in automobiles.
Of course, potential economic problems remain. Consumers are having difficulties reducing their debt load because wages for many have stagnated, while interest payments are taking a bigger bite out of household incomes.
This is helping fuel the current debate about the growing income gap between the rich and poor, although Korea’s income equality ratio is better than many other advanced economies and ranks on a par with France. A global economic recovery would help alleviate the angst since real wages would likely increase.
But in the meantime public discontent with the Lee Myung-bak administration over its perceived favoritism to big business could lead to the liberal opposition parties gaining control of both the National Assembly and the presidential office of Cheong Wa Dae in this year’s elections.
Although President Lee Myung-bak has been a rather disappointing leader in achieving his reform agenda, his government should be given credit for shoring up Korea’s defenses against global economic mayhem.
Indeed, Korea’s successful struggle to achieve financial stability over the last 15 years since the 1997 crisis stands in sharp contrast to the current floundering by U.S. and European politicians in dealing with their respective debt problems.
If what my economist friend says is correct, then Korea may be living through a golden age of prosperity. We just haven’t recognized it yet.
John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant.