Specter of ‘perfect storm’ looms over Korean economy

Incoming gov’t urged to take preemptive measures against worst-case scenario

The Korean economy should preemptively combat the possible repercussions of a “perfect storm” of rising inflation, plummeting stock prices and a heightened risk of global supply disruptions, and focus on ensuring corporate resilience, experts said Wednesday.

Coupled with the multiple risk factors, the economy is also widely forecast to slow down this year. In February, the Bank of Korea (BOK) presented Korea’s 2022 GDP growth outlook of 3 percent, but the central bank is likely to revise down the forecast this month on such pessimistic external signs.

The economy also stands at a critical juncture ahead of President-elect Yoon Suk-yeol’s inauguration on May 10. As the U.S. Federal Reserve is taking a very big step toward a rate hike, investors are less likely to invest in stocks in emerging markets.

The BOK is also widely expected to keep increasing the key rate throughout this year. Korea has already pushed for a preemptive set of rate hikes to 1.5 percent. In its latest report Tuesday, JP Morgan said it expects the BOK to carry out consecutive 25-basis-point hikes over four meetings by October to preemptively tame inflationary pressure.

Experts warned that Korea should brace for the perfect storm, which is a term often used to describe rising inflation, rate hikes and tax hikes.

“The Korean economy is grappling with multiple risks of widening financial uncertainties, stagflation and the depreciation of the local currency against the U.S. dollar,” Yonsei University professor Sung Tae-yoon said.

Korea is faced with a steep increase in inflationary pressure. According to Statistics Korea, the consumer price growth in April reached 4.8 percent, which is the highest level seen since October of 2008. The incumbent administration also raised the maximum corporate tax rate to 25 percent during the past five years.

The won-dollar exchange rate also soared to the 1,270-won mark at one point in April, a level seen only during the global financial crisis and right after the outbreak of the COVID-19 pandemic. The local currency is expected to keep losing ground against the dollar amid the Fed’s aggressive rate hikes.

The local stock market is also plunging. The country’s main KOSPI index dropped by around 10 percent so far this year, and compared to a peak of 3,316.08 points achieved last year, it fell by around 19 percent. Foreign investors have been dumping Korean stocks in droves. They net sold 5.1 trillion won worth of stocks on the KOSPI in March, and continued to sell 4.9 trillion won worth of domestic shares in April.

The current economic condition is adding pressure to the incoming administration of Yoon Suk-yeol. Reflecting the sense of emergency, the transition team put economy-related policies at the top of its 110 key tasks announced on Tuesday.

Economists say that the incoming administration should guide each sector of the economy to take preemptive measures, preparing against the worst case scenario.

“As the global economy entered a cycle of monetary tightening, each company needs to secure more liquidity, and financial institutions are also advised to increase their allowance for bad debts,” Sung said.

The nation’s four major commercial banks said they set aside a combined bad debt allowance of 185.2 billion won ($145.9 million) in the first quarter of this year, down 12.8 percent from the previous year.

But the lenders face growing calls to increase the allowance to proactively deal with a possible economic crisis, especially as they enjoy robust earnings. The four lenders’ net profit during the January to March period reached 2.6 trillion won, up 34.5 percent from a year earlier.

Sejong University professor Kim Dae-jong also urged companies to increase their cash reserves due to the escalating external uncertainties.

“We can say that the Korean economy will face a perfect storm soon after the Fed starts its big rate hikes,” he said.

“Companies are on track to raise their cash reserves amid fears of weakening investor sentiment, and those which have not done so are also advised to secure more liquidity amid escalating concerns over the external financial shock,” he said.

Kim also called for the urgent need to sign a Korea-U.S. currency swap deal after the incoming administration takes office.

“To minimize any financial shock stemming from the volatile exchange rate, signing a currency swap agreement with the U.S. should be a top priority for the incoming government,” he said.

The two countries signed a swap deal worth $60 billion back in March 2020 amid the outbreak of the COVID-19 pandemic, but it expired at the end of 2021.

The incoming administration is holding internal discussions on whether to raise the agenda during the upcoming summit between Yoon and U.S. President Joe Biden scheduled for May 21.