The new economic team of the Yoon Suk-yeol administration is confronted with a crisis from the very beginning of its term. The continued rise in inflation, interest rates and the US dollar -- the so-called “three highs” -- pose a grave threat for the South Korean economy.
For Deputy Prime Minister and Finance Minister Choo Kyung-ho, the three highs are only one of the serious risk factors he has to tackle. Although the COVID-19 pandemic is receding, an economic recovery is so fragile that a careful approach is required to navigate the rough path ahead.
First, boosting the economy shouldn’t undermine the country’s fiscal integrity. The country faces twin deficits in its fiscal and trade balance. Fiscal soundness is already at risk largely because the former Moon Jae-in administration expanded national debt recklessly. Trade deficit is widening as a sharp increase in imports outpaces even a respectable growth in exports. Practical measures to minimize the twin deficits are in order.
Second, enough attention should be paid to monitor external factors and weigh their potential impacts. The US Federal Reserve is set to raise interest rates to tame high inflation, pressuring other nations including South Korea to follow suit. Energy prices have been on the rise after Russia invaded Ukraine, translating into higher import prices. Lockdowns of major cities in China over COVID-19 are taxing the already clogged global supply chains. The hostile external conditions are bad for the country dependent heavily on exports for its growth.
Third, Choo and his emergency task force team at the Finance Ministry should take steps to calm fears about stagflation, a mix of runaway inflation and slumping economic growth. This is no easy task. The International Monetary Fund recently downgraded its estimate for Korea’s economic growth to 2.5 percent but raised its inflation forecast to 4 percent this year.
All these worries are turning investors jittery. On Thursday, the main Kospi closed down 1.63 percent, hitting an 18-month low since Nov. 20, 2020, and the US dollar rose above 1,290 won level before ending at 1,288.6 won. Volatility is expected to last for an extended period.
What should be done first to help the nation avert a looming economic crisis? Above all, Choo’s economic team should make efforts to avoid fanning inflation. The country’s inflation soared 4.8 percent on-year in April, accelerating from a 4.1 percent gain in March. Considering the US is expected to keep raising rates and high inflation shows no sign of abating here, the Bank of Korea is likely to hike interest rates in the coming months. What Choo should consider is that if the state spends too much money to drive growth, it will have an adverse impact on the central bank’s battle to rein in inflation.
The government drew up an extra budget proposal estimated at 34 trillion won ($26.4 billion), including a cash handout of 6 million won each for some 3.7 million self-employed people and small merchants hit by the pandemic. The plan will be submitted to the National Assembly Friday. This extra budget may be inevitable. But Choo should keep in mind that fiscal spending -- in the form of issuing additional state debt -- needs extra caution.
The economic task force team should map out plans to bolster the country’s weak economic fundamentals in the face of warning signs. As of May 10, for instance, the accumulated trade deficit ballooned to nearly $10 billion this year, up from around $8 billion a year earlier.
President Yoon Suk-yeol laid out his vision for the country’s economic growth powered by science, technology and innovation in his inauguration speech Tuesday. But Yoon’s vision will take time to materialize. For now, Choo should ponder policy priorities to help steer the nation’s wobbly economy forward.