[Editorial] Winds of uncertainty

The global market received a much-needed reprieve on Thursday after US President Donald Trump unexpectedly put his extreme "reciprocal" tariffs on pause for 90 days. As with other nations, however, South Korea still faces multiple challenges, including a ballooning fiscal deficit, dizzying gyrations in the local currency and negative economic projections.

South Korea’s stock market, which plunged into a tailspin this week, rebounded on the news of a delay announced by Trump, but given the US president’s unpredictable policy-setting style, it’s too early to conclude that the crisis is over. After all, Trump has maintained a 10 percent universal tariff on all American imports.

One particular concern for South Korea involves the weakening of the won against the US dollar. On Tuesday, its value nose-dived to hit 1,486.5 won against the greenback. Experts said the Korean currency could test the much-dreaded 1,500 won level if things worsen further.

It is worrisome that South Korea’s currency seems to be linked with the Chinese yuan. Trump raised tariffs on China to a whopping 126 percent after China increased its levies on US goods to 84 percent. The intensifying tit-for-tat between the US and China is feared to push the Chinese government to devalue the yuan, which in turn could undercut the value of the Korean won.

Last year, the US and China combined to account for 38.2 percent of South Korea’s exports. An escalation of the trade battle between the two countries is likely to hit South Korean exporters in various ways.

A disturbing factor to consider is that the South Korean government has to deal with a growing list of risks hindering its efforts to prop up a sluggish economy. One of the problems is the country’s growing fiscal deficit that surpassed 100 trillion won ($69 billion) last year, according to the Finance Ministry.

The main reason for the shortfall has been decreasing tax revenue as a result of a drop in corporate income tax collections. The government’s fiscal balance logged a deficit of 104.8 trillion won in 2024, up from the initial estimate of 91.6 trillion won in deficit.

The outlook for this year’s fiscal balance remains bleak as well, as Korean companies have to face an uphill battle to secure profits in the face of the sweeping tariff turmoil from the US as well as sluggish domestic demand.

The continued shortfall of tax revenue makes it difficult to implement state projects aimed at bolstering the domestic economy at a time when the country needs more state-led economic support policies.

On Tuesday, global investment bank JP Morgan cut its forecast for South Korea’s economic growth this year to a mere 0.7 percent. This marks its fourth downward revision since November, and comes just a week after it had already trimmed its estimate from 1.2 percent to 0.9 percent. The latest downgrade factors in unexpectedly steep US tariffs and increasing uncertainty in domestic policy.

JP Morgan’s grim projection should not be lightly dismissed. It reflects a growing chill among global financial circles toward South Korea’s economic prospects. Capital Economics, a London-based economic research firm, similarly slashed its forecast to 0.9 percent last month, also citing a weakening outlook.

Although Trump has abruptly reversed course on sky-high global tariffs, Korean exporters must brace for higher tariffs that would erode their competitiveness, squeeze margins and crimp growth. In addition, lingering political uncertainty, even after impeached President Yoon Suk Yeol was formally ousted last week, could only exacerbate the negative situation.

With the presidential election set for June 3, the siren call of populism will grow ever louder. Both policymakers and candidates must resist temptations such as fiscally reckless giveaways and instead focus on tackling high-stakes economic challenges at home and abroad.