Urgent efforts needed to boost exports, narrow deficits
Adding to the already beleaguered Korean economy, the nation's current account deficit climbed to a record monthly high of $4.52 billion in January. The snowballing shortfall has been mainly due to the dwindling exports of major items such as semiconductors of which outbound shipments have halved. Furthermore, the travel deficit tripled to reach $1.49 billion in the month from a year earlier, spiked by booming overseas trips, amid eased COVID-19 restrictions.
The abrupt bankruptcy of Silicon Valley Bank (SVB) of the United States is also intensifying anxiety over the possible weakening of investor confidence and an exodus of foreign capital from the domestic market.
The Yoon Suk Yeol administration appears full of expectations that the economy will soon enter into a recovery mode once the Chinese economy begins to pick up steam from the latter half of this year. Yet, it is not desirable for the government to depend on positive signs from external factors only.
Diverse challenges have been threatening the economy, such as high interest rates and surging commodity prices coupled with the depreciation of the Korean won against the U.S. dollar. Worse still, the dogged war in Ukraine and the consequential bottleneck in global supply chains have shown no signs of abating.
Given this, U.S. Federal Reserve chair Jerome Powell indicated a need to raise the benchmark interest rate further to tackle possible growing inflationary pressure. The Fed is expected to conduct another "big step" of hiking the basic rate by 0.5 percentage point on March 21. His remarks have sent the financial markets reeling since it was contrary to his statement on easing inflation only five weeks ago. The Korean won lost value, landing at the 1,300 won level per U.S. dollar.
Such a strong dollar could result in a capital outflow, prompting the need for the central Bank of Korea to raise the interest rate again. Now is the time for financial authorities to take measures in preparation for the prolonged trend of high interest rates alongside steps to tackle the adverse impact that can be caused by high rates on the national economy.
We should pay close attention to the widening current account deficit as it is closely relevant to the nation's external credibility. The financial crises in 1997 and 2008 were both triggered by account shortfalls. Korea posted a current account surplus of $29.8 billion last year, although it registered deficits in August and November.
The Yoon administration has been forecasting a surplus for this year. Yet the situation is not so favorable, especially considering the ongoing sluggish sales of chips in major overseas markets such as China, in particular.
The government has been in a dilemma amid mounting pressure to rejuvenate the sagging economy while taming consumer prices. Again it bears the brunt of controlling widening trade account shortfalls. It is time for the Yoon administration to double down on boosting overseas sales and promoting tourism by inducing more foreign travelers. It also needs to conduct a nationwide campaign to boost domestic travel and reduce energy consumption.
Besides this, the government should also take measures to beef up sluggish exports by nurturing businesses to expand investments. The government should also eliminate various regulations that stand in the way of investments regarding multiple societal issues such as labor, pensions and education.
Businesses, for their part, should concentrate on increasing investments in state-of-the-art technologies and fostering highly-skilled workers. The National Assembly needs to proactively support export companies in their bids to cultivate key technologies. Political parties should refrain from engaging in time-consuming political wrangling and focus on improving the people's daily livelihoods and buttressing domestic enterprises in order to survive the harsher-than-ever business environment.
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