Korea's economic frog

By John Burton

I spoke recently with a former presidential economic advisor who compared the economic situation in 1997 with the current one. While the corporate debt crisis in 1997 led to a sudden economic implosion, he predicted a gradual deterioration in economic conditions this time. "It's like the famous story of the frog being slowly boiled alive in a pot of water. He only realizes too late what is happening."

If that is the case, then we should recognize that the heat of the water has just gone up a few degrees. The crisis facing the shipping and shipbuilding industries is a clear warning that Korea is beginning to be boiled alive as the global economy slows down. That, of course, is not the only economic challenge facing the country. There is climbing youth unemployment, eye-watering household debt, unaffordable housing and a growing number of the elderly who appear to be heading for poverty because they lack adequate pensions or savings.

In dealing with these issues, the political class appears to be largely clueless. The candidates and parties in the recent parliamentary elections offered few concrete policies to solve these problems, and appeared to be more interested in protecting their own political careers. That is a recipe for growing public dissatisfaction that could force politicians to adopt crowd-pleasing but ineffective economic measures in the future.

It is unlikely that the Park administration will produce a coherent response to the economic woes during the last two years of its term, having been severely weakened by its defeat in the National Assembly elections. Moreover, the rival political parties are now fixated on winning the presidential election next year. There is little chance of seeing significant reforms or changes in economic policy in the short-term.

Rather, the focus will be on coming up with patchwork solutions to keep the economy afloat. Take the shipping and shipbuilding industries as an example. Hanjin Shipping and Hyundai Merchant Marine have applied for debt workout programs with creditors. Meanwhile, shipbuilders Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding and Marine Engineering are struggling after suffering a combined loss of $7.2 billion last year because of increased competition from China, which has become the world's largest shipbuilder. The crisis facing these two related industries threatened to cause massive unemployment, particularly in southeast part of the country, where the troubled shipbuilders are located.

The chaebolowners of these companies have appeared unwilling to accept radical measures. For example, Cho Yang-ho, the Hanjin Group chairman, is asking for assistance from creditor banks without contributing some of his assets to bail out Hanjin Shipping despite having personally managed the company since 2014.

He also called on other Hanjin subsidiaries, including Korean Air, last year to help support Hanjin Shipping in maintaining its cash flow. To add insult to injury, his daughter-in-law, who formerly ran Hanjin Shipping, is being investigated for alleged insider trading after she sold her shares in the company just days before it applied for its debt workout program. These practices are reminiscent of those that accompanied the corporate debt crisis that fell many of the chaebol in the late 1990s.

The government is also reluctant to perform deep corporate surgerybecause it would lead to large job losses and hurt the ruling party's prospects in next year's presidential elections. Officials, for example, have ruled out merging troubled companies in restructuring the shipping and shipbuilding industries, which will likely result in layoffs.

Instead, like China and Japan, Korea appears determined to keep "zombie" companies in business, creating moral hazard. The government prefers that the state-run creditor banks, Korea Development Bank and the Export-Import Bank of Korea, should continue to provide funding while supervising the restructuring of the companies.

President Park has proposed a "Korean-style" quantitative easing to recapitalize the state banks so that they have the funds needed to restructure the shipping and shipbuilding companies. There is growing opposition to this proposal because it would use public funds to save specific companies and could be seen as a covert form of subsidies that violate international trade agreements.A policy of QE would also have a wider economic impact since it could lead to the weakening of the won and increase inflation risks.

In pursuing this strategy, the government may be hoping for a sudden change in global economic fortunes. Korea's shipping companies have suffered losses because of slowing international trade, while the shipbuilding industry has been hurt by a fall in oil prices that have led to the cancellation of orders for tankers and offshore oil drilling ships and rigs.

But few economists believe that a global recovery is likely in the near-term. If a similar approach is adopted for the other industries that the government wants to restructure ― steelmaking, petrochemicals and construction ― then the country may see its hopes of a revival of Korea Inc. being boiled away.

John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant. He can be reached at johnburtonft@yahoo.com.