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Posted : 2011-12-30 18:05
Updated : 2011-12-30 18:05

[Korean economy] Three key risks for Korean economy


By Oh Suk-tae

The Korean economy is likely to experience a mild slowdown in 2012, and the GDP growth rate would fall to 3.0 percent from 3.5 percent prior.

European sovereign debt crisis will affect both exports and domestic demand. But the strength of emerging market economies will underpin exports, and consumption will be supported by the resilient job market and household credit growth.

Inflation will no longer be a key issue, as the headline inflation would fall to 3.0 percent from 4.0 percent thanks to stable food and energy prices. However, policy makers will not be active in boosting growth.

We expect only a nominal rate cut by 25 basis points by the Bank of Korea (BOK) as the monetary authorities would not completely give up the goal of interest rate normalisation. The chances of a significant fiscal stimulus are rather slim considering the sustained emphasis on fiscal prudence.

The European crisis will continue to be the key risk factor. Direct impacts from Europe’s economic troubles on Korea’s exports will be limited, as those to Europe explain only 10 percent of total outbound shipments.

We actually worry more about the deterioration of external liquidity conditions due to the withdrawal of foreign currency lending by European banks.

Of course, the ratio of short-term debt to foreign exchange reserves, a widely-accepted indicator of external vulnerability, has declined significantly since the 2008 crisis.

Korean banks successfully secured foreign exchange liquidity from non-continental-European banks in the second half of 2011 under a considerable stress in global markets.

The expansion of official foreign exchange swap with Japan and China also strengthened the second line of defence in case of emergencies. But we should continue to monitor developments of the European saga and its impact on foreign exchange liquidity and to prepare against the worst-case scenario like the bankruptcy of Lehman Brothers.

On the domestic side, the high ratio of self-employed people appears to be the Achilles’ heel of the Korean economy.

The share of self-employed people among the total workforce is much higher than in developed economies. We have long held the view that self-employed people are largely responsible for Korea’s household debt problems.

This was confirmed by the recent Household Finance Survey, which showed that the household debt-to-income ratio is twice as high among the self-employed as among wage-earning workers. Household debt growth was also much higher among the self-employed than among wage-earners. Self-employed people tend to borrow more from riskier non-bank institutions, while salaried workers usually depend on banks.

Moreover, the recent strength in the labor market can be partly attributed to the rebound in the number of self-employed business people after a decline in the past five years. We should closely monitor the behavior of this group, as it appears crucial to jobs and credit, the two main drivers of domestic demand.

Last, but not least, the rise of medium-term uncertainty on the Korean peninsula due to Kim Jong-Il’s death should not be ignored. Admittedly, the apparent succession of power to Kim Jong-Un will lower uncertainty in the very near term. But it is natural to expect a transition period of at least a few years, with a relative “power vacuum” in North Korea.

The possibility of market-unfriendly events like limited military attacks on the South could increase, while chances of any improvement in the relationship with North Korea are low.

Politics will be one of the key factors in the global economic outlook in 2012; Korea will not be an exception, given the geopolitical risks surrounding North Korea as well as two key elections in the South.

Oh Suk-tae is the regional head of research at Standard Chartered First Bank Korea.
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