The Korean financial market has been very unsettled because it has been relatively more exposed to foreign investment than any other emerging country, and foreign investment keeps recovering their funds rapidly in the process of re-capitalization and de-leveraging.
Especially, the Korean government is taking emergency measures as investors are increasingly concerned about excess liquidity conditions of Korean banks that have been expanding their credit rapidly for the last 2~3 years.
Global financial crisis and depression are going to be an enormous burden on the Korean economy.
The ongoing global financial crisis is spreading from developed countries to developing countries and it is also expected that the economy of developed countries will take a long time to recover from a depression.
The quake in the domestic financial market caused by the economic crunch in the global financial market is going to be the main cause for negative effects on domestic demand by way of consumption and shrinking investments.
At the same time, the global financial crisis is also going to be the main reason for a slowdown in Korean exports.
On the other hand, the falling prices of international oil and raw materials caused by the global financial crisis and depression might be positive factors for the Korean economy.
The falling prices of international oil and raw materials, which dropped to half of its highest price in July, are expected to help improve the balance of current accounts and provide a buffer against a sudden drop in domestic demand.
There are some risk factors in the Korean economy, but it seems that those risks could be manageable in the domestic market.
Though housing prices in Korea rapidly increased in some areas in Seoul after 2000, the rate of national housing price inflation was far less than in the US and developed countries in Europe. And the management system for mortgage loans has been under strict control compared to other nations.
It is a fact that house debt has rapidly increased since 2000, with most of the debt increased by high-income housing or rich. Therefore, the possibility of debt insolvency is relatively lower.
The overall financial conditions of companies are quite stable and delinquency rates of financial institutions are still low at this point in time.
Though the proportion of foreign investment in the stock market and short-term debt is relatively high, the total amount of foreign exchange holdings is enough to protect the domestic financial market from foreign financial crisis.
Taking into consideration all of these factors, it is necessary to promote economic policies that focus on the safe landing of the actual economy and financial market.
First of all, the financial system must restore its confidence and secure fluidity, and an effort to achieve the transparency of the overall financial market has to be carried out. Additionally, currency and financial policies should be promoted to ensure the preservation of the economy. Monetary policy is not enough to stabilize the economic situation while current economic concerns, caused by an immediate withdrawal of foreign capital, lead to a sudden rise in exchange rates. Therefore, until the pressure of withdrawal of foreign capital becomes stabilized, the burden on the monetary policy can be appeasedby way of progressive financial policies.
Along with promoting policies while reducing economic concerns, efforts should be made to reduce any longterm side effects on the economic system.
Macroeconomic policies such as financial and monetary policy should be promoted over rapid changes under microeconomic policies or institutional rule. It is also necessary to impose corresponding penalties to financial institutions which fail to manage their own risks and rely on the government in order to prevent the spreading of moral hazard. In addition, government should not intend to aid all the financial defaults during the restoration period; they should make an effort to maintain market disciplines to achieve the ongoing restructuring.
Economic forecasts in 2009
It is expected that global economic growth, led by the US and developed countries in Europe, will slow down. The global economic growth rate is assumed to record a middle 2% range in 2009 even though it was in the high 3% range in 2008.
Oil import unit price is assumed to stabilize around $70 per barrel in 2009 as it rapidly goes down from 2008. The Korean currency value, based on the Real Effective Exchange Rate (REER), will likely show a slow increase and will be recorded around the current level.
In contrast to the trend of Korean currency value (REER) rapidly decreasing over the second half of 2008, it is assumed to gradually go up in the second half of 2009. Therefore, the overall value should reach a level similar to that of early 2008. The growth rate of Korean GDP is expected to record a low 3% range in 2009, as the export growth rate has dropped sharply. It is expected that the growth rate will increase to a middle 4% range in the second half of 2009 as a financial crunch is being gradually relaxed after growth rate recorded a low 2% range in the first half in 2009.
Private consumption is expected to record around 2% annually as it is taking a slowdown in the first half and making a rebound in the second half of 2009.
The growth rate of equipment investment is expected to register around 2% as uncertainty grows due to the slowdown of domestic financial markets and global economies.
The growth rate of construction investment is forecast to remain around 2% as the recovery of construction is likely to be delayed. The current account is expected to maintain a balance for a while due to falling prices of raw materials and oil.
Goods accounts are expected to record around $24 billion sharply rising from 2008 values of $9 to $10 billion. Export growth is expected to slow down to around 3%, sharply dropping from 2008 (20%), as the global economic depression and the export unit price is forecast to fall.
Imports growth is expected to maintain a level similar to that of 2008 due to the rapid fluctuations of oil and raw material prices.
Service, income, and transfers growth are forecast at around $15 billion which reduces a deficit scale from 2008's $18 billion due to the slowdown of domestic demand.
The unemployment rate is forecast to increase affected by the slowdown of economic conditions, but it is likely to increase to around 3.6% due to growth in the non-active population.
The inflation of the Consumer Price Index (CPI) rate is forecast to record a middle 3% range, sharply dropping from the second half of 2008.
On the contrary, the core inflation is expected to record a growth rate around 4% as it is not affected by oil prices.
