[INTERVIEW] Korea urged to brace for employment and consumption challenges posed by sluggish exports

Lee Yong-jae, president of the Korea Center for International Finance (KCIF), speaks during a recent one-on-one interview with The Korea Times at the center's headquarters in Seoul. Courtesy of KCIF

Monitoring global finance on the front line

By Anna J. Park

Out of the Korean economy's major macroeconomic risk factors ― notably inflation, high interest rates, high foreign exchange rates and sluggish exports ― Lee Yong-jae, president of the Korea Center for International Finance (KCIF), pointed out that the country's weakened exports could pose the biggest challenge.

During a recent one-on-one interview with The Korea Times, the chief of the financial research institute highlighted that Korea is an open economy that is highly dependent on international trade and that poor trade performance negatively impacts the overall economy.

"Sluggish exports will have adverse effects on the entire economy, as they affect corporations' employment, investment plans, household income as well as private consumption directly and indirectly," the KCIF leader told The Korea Times during the interview at the institute's headquarters in central Seoul.

He went on to say that due to the poor exports and steadily strong imports, mostly from price hikes in raw materials, this year's growth rate of the Korean economy is expected to be considerably lower compared to last year when it stood at 2.6 percent. In their latest figures, the Bank of Korea (BOK) and the OECD projected the Korean economy to grow 1.6 percent this year, while the International Monetary Fund (IMF) forecast a 1.5 percent growth. Global investment banks have projected 1.2 percent growth, on average.

"Since major countries' interest rates started hiking last year, global economic growth has slowed, resulting in weaker demand. As the volume of global trade in goods peaked in the third quarter of last year and went down in subsequent quarters, the downward pressure on Korean exports, which is more concentrated on goods rather than services, is somewhat unavoidable," Lee explained.

He added a global cyclical downturn of semiconductors, one of the main export items of the country, is also adding to downward pressure on the weakened exports. Yet, economic conditions are expected to ameliorate by the end of this year, as the cyclical global demand for chips is likely to pick up as early as the second half of this year, in addition to China's solid performance following reopening.

Besides managing the risks of sluggish exports, Lee emphasized the financial research institute's close monitoring of both global and local financial markets amid multi-faceted fear factors.

"The financial authorities should employ a belt-and-braces approach when it comes to prepping for any potential risks of contagion from major countries' financial instability. Latent risks in the real estate market and household debts should also be closely monitored," Lee stressed.

Lee Yong-jae, president of the Korea Center for International Finance (KCIF), speaks during a recent one-on-one interview with The Korea Times at the center's headquarters in Seoul. Courtesy of KCIF

Systemic risk factors stably managed

When asked about the possibility of a major global financial crisis in the near future, the chief of the financial research institute showed a hint of optimism.

"Looking back through history, a crisis takes place either when it could not be predicted, such as war, or when authorities fail to take proper policy responses," Lee said. "While a huge shock could come from such unpredictable factors, most systemic risk factors are being managed and prevented in a sophisticated manner, as market information is circulated at a much faster rate. The government and financial authorities are also monitoring markets, responding immediately to any major risk factors."

Lee explained that now markets have an improved capability for correctly assessing cyclical economic events, and the government and the financial authorities have built a firm response mechanism against market risks. Financial firms are also keeping a close watch on their soundness with various stress tests. That is why he remains positive that systemic risks can be manageable under the current market framework.

"The government has been operating an emergency response system, and the KCIF is also holding conference calls with the finance ministry, the BOK as well as financial regulators every day. Unpredicted risks can come, but most systemic risks can be preventable with strengthened policy measures," he explained.

Lee took the helm of the research center in mid-September last year for his three-year term until 2025. He spent nearly three decades as an elite economic bureaucrat. He also worked at the International Bank for Reconstruction and Development (IBRD) and the World Bank during his service with the government.

The KCIF was established in 1999, shortly after the Asian financial crisis in the late 1990s, with an aim to prevent another financial crisis from wreaking havoc on the country. Founded with the auspices of the BOK, the research center is now supported by major financial firms as well.

Loyal to the center's main responsibility of closely monitoring movements of the international financial markets and the global economy, the research center publishes daily and periodic analysis reports and monitoring on every major financial risk, issuing early warnings when necessary. The center also makes policy proposals to the government and the financial authorities at the frontline of financial risks.

"Markets become unstable due mainly to anxiety stemming from lack of correct information. The center provides information in a speedy manner, helping market participants to stay away from unreasonable herding behaviors," the chief of the research center highlighted, adding that the public can have easy access to most of the center's reports through its website and mailing service.