2011 Year of Economic Challenges.
 Korea seeks to show resilience amid global rebalancing The year 2011 will be a watershed for the Korean economy, as it has to stand on its own without any external support, with the effect of the government’s stimulus waning and the developing world recovery set to stay muted next year. The economic recession is surely over, but not everyone here feels the change as Korea has yet to show a sustainable recovery. Some industries and regions continue to suffer amid lingering uncertainties both at home and abroad. Despite the government’s rosy outlook over the next year, there are a myriad of challenges surrounding the Korean economy. Unless the country tackles such them, it is inevitable that the economy will enter another downturn before it sees a full recovery. For Korean policymakers, it is not an easy task to deal with the challenge as they are all interrelated and are coming from both inside and outside at the same time. On the Chinese lunar calendar, next year is “the year of the rabbit,” but from an economic viewpoint, it can be labeled as “the year of challenges.” The following are the top 10 economic trials facing Asia’s fourth largest economy next year. Geopolitical risks Among many challenges, the geopolitical risk associated with North Korea’s brinkmanship is the biggest threat to the economy. Tension is likely to remain on the Korean peninsula as military episodes will increase in the next two years due to a power transition in North Korea. The North Korean shelling of South Korea’s Yeonpyeong Island near the disputed maritime border last month killed four people and left scores of houses destroyed. South Korea also holds North Korea accountable for the sinking of its warship, Cheonan, in May, which killed 46 sailors. Analysts point out that should the military clashes continue without a breakthrough in resolving the conflict between the two countries, the negative effects on the Korean economy could amplify, scaring away foreign investors. ``It is highly probable that heightened geopolitical tensions following the North Korean shelling of Yeonpyeong Island could send foreign investors scrambling for an exit from the country and expand the `Korea Discount’ on the stock market,” said Lee Chang-seon of the LG Economic Research Institute (LGERI). ``The year 2011 will be a crucial period in determining the geopolitical situation on the Korean Peninsula, as well as the effect on the South Korean economy and financial markets,’’ he added. Household debt Household debt is expected to remain as one of the biggest headaches for policymakers, as snowballing debt and rising interest rates are expected to combine to become a toxic cocktail for the economy, hurting financial soundness of both households and banks. The country’s household debt has been rising at a rate of 12 percent per year since 2000 to reach 770 trillion won (about $670 billion) at the end of September this year. In October, household debt rose by 5.3 trillion won. The nation’s individual debt-to-income ratio shows the seriousness of household debt. The ratio reached 153 percent at the end of 2009, well above that of advanced nations including Canada, the United States, Japan and Germany. What is of more concern is that the Bank of Korea (BOK) is likely to raise its key interest rates on a continuing basis throughout this year to normalize the rate, which many believe will see the financial burden on many over-leveraged households snowball, thus hurting the financial health of local banks. A one-percent rise in the key rate is estimated to increase individuals’ interest burden by 5.4 trillion won, according to LGERI. “Korea is one of the countries highly exposed to household debt crisis. This, combined with spiraling house prices, can become a ticking time bomb for the Korean economy,” a senior BOK economist said on condition of anonymity. Rising inflation Inflation has emerged as the major stumbling block preventing the economy from fully recovering from the economic slump, as commodity prices are skyrocketing while food prices are not declining. According to the Korea National Oil Corp. Thursday, Middle East crude for sale to Asia recently climbed to its highest level in almost 27 months as futures in New York rallied on expectations that demand growth will accelerate. Korea, which relies almost entirely on imports for its oil needs, is the world’s ninth-largest oil consumption country. The problem is that hikes of commodity prices will cause a domino effect on local consumer prices as they are translating into domestic gas prices and other basic costs. Korea’s prices of imported goods and raw materials climbed 8.2 percent in November from a year earlier, the fastest growth since an 11.3 percent rise in May. In its recent report, the central bank expressed concerns that consumer prices will be under upward pressure due to the high-flying costs of oil, forecasting the prices to grow in the mid-3 percent range for a considerable period of time. "As the global economy recovers, raw material costs will continue to rise and a pick-up in China's inflation is expected to exert pressure on Korea's consumer prices to increase as well," it said in a statement. At a meeting with foreign correspondents here, BOK Governor Kim Choong-soo warned of the so-called Chinaflation, inflation triggered by price hikes in China, saying, “Wage hikes and rising prices in China will exert upward pressure on domestic prices.” Market volatility Currency fluctuation may be another hurdle in the way of the full recovery of the Korean economy. The Korean won is highly likely to gain more ground against the U.S. dollar due to the weakening of the greenback. The won-dollar rate is forecast to drop to around the 1,000 won level by the end of 2011, eroding the competitiveness of local exporters. In particular, the Korean won is highly vulnerable to the movement of foreign funds as recent rallies in the local equity and bond markets have been mostly boosted by foreign investors. Therefore, if these investors leave the country en masse due to unexpected shocks abroad, it can deal a blow to the local financial market. The global financial market is expected to remain unstable next year due to debt trouble in Europe, continuing deleveraging in the United States and China’s tightening policy. Jobless growth The Korean economy has been undergoing jobless growth _ economic expansion with no job creation. The concern has been easing in line with a mild recovery in the local job market fueled by a fast economic rebound. However, the country is faced with another malaise in the job market _ youth unemployment. Joblessness among young adults has continued on an upward spiral despite a slight recovery in the overall job market. This is seen as a serious problem for the economy as the problem has a lasting impact on the entire economy through multiple channels. According to Statistics Korea, the employment rate among those aged from 15 to 29 logged 40.4 percent for the first 11 months of this year, below the pre-crisis level of 41.6 percent in 2008. It was even lower than the 40.5 percent in 2009 when the economy was at the center of the global crisis. If the job market remains at this level next year, it will lead to sluggish consumption due to income decreases and slow corporate investment, which could be another threat to economic recovery in 2011. Two-track recovery One of the major threats to the Korean economy is the global economy facing a patchy recovery due to continued stiff head winds, such as global rebalancing, high-flying commodity prices, and currency disputes among advanced economies. Global economies will continue to fall into two distinctive camps dubbed the “two-speed world.” Western economies and Japan will undergo a slow recovery mode, while developing economies, including emerging market economies, will continue to enjoy robust growth. Under this new trend, the Korean economy and companies should shift their focus to emerging economies from developed countries to capitalize on the upcoming change triggered by the outcome of the global financial crisis. “We expect the global recovery to remain a two-track one, with the emerging economies growing much faster (6.6 percent after 2010’s likely 7.4 percent) than the developed world economies (2.2 percent after 2.6 percent),” Nomura Securities said in its 2011 outlook report. “For the developed economies, the post-crisis world likely means prolonged anemic growth.” Global rebalancing Following the global crisis, one of the main transitions happening in the world is global rebalancing. This change, which will undoubtedly create some volatility, but also some extraordinary business opportunities are unlikely to undergo a soft landing next year. “The post-crisis global economy is struggling to rebalance smoothly. The tensions and imbalances in the global economy are likely to remain sources of market volatility and downside risk to the economic outlook,” Nomura said. “Output gaps in many emerging economies, some very small to begin with, have closed or are closing way ahead of those in developed economies, and high growth in the former is likely to continue to attract strong global capital flows, complicating policy management and raising risks of overheating and policy errors,” it added. Lingering woes in Europe With Ireland’s debt trouble showing signs of spilling over into other European countries, debt trouble in the region still remains as one of the main threats to the economy. ``Among the PIIGS (Portugal, Italy, Ireland, Greece and Spain) nations, two countries (Greece and Ireland) are already receiving European Union financial aid, and all eyes are now on Portugal and Spain … It’s unlikely that the eurozone will be able to regain the confidence of the market in 2011 and the financial instabilities are likely to continue,’’ Lee of LGERI said. ``Europe’s ongoing financial troubles will obviously have a major impact on the global economy and financial markets, and could also shake Korea’s financial markets severely. A crisis in Europe could also lead to a retreat of the massive amount of Europe-based capital currently in Korea. Korea could also lose a chunk of its foreign investment money should investors move increasingly toward `riskless’ assets.’’ China’s tightening policy China’s move to tighten credit is also likely to be a drag on the Korean economy, as a slowing Chinese economy means less exports for Korean companies. China is the nation’s largest trading partner in the world. China's central bank, the People's Bank of China (PBOC), announced on Dec. 25 that it will raise the one-year lending and deposit rates for the second time this year, as the country continues its battle against inflationary pressure. The timing of the second rate hike announcement came as a surprise, although the markets had been expecting China would take additional tightening measures after its consumer price index (CPI) for November was released earlier this month. “The rate hike by China’s central bank was seen as a warning toward inflation expectations for the new year,” the BOK senior economist said. "A number of quantitative tightening policies, such as raising banks' reserve ratios, did not work as effectively as the central bank wanted," he added. "That is why the Chinese authorities made a surprise move on Christmas Day, in order to curb the market speculations about inflationary pressure." Currency dispute Although leaders of the Group of 20 (G20) member nations reached a compromise on currency and trade issues at the G20 Seoul Summit in November, chances are still there that currency tensions will deepen again as the agreements were too vague. On the surface, currency tensions are expected to ease with the agreements but there are still high risks of foreign exchange disputes between major countries turning into currency wars as diplomatic wordings in the statement are not binding and specific. “I don’t think the G20 made meaningful progress to solve the global imbalance at the Seoul summit. By failing to agree on specific proposals for reducing the imbalances the declaration may have increased the likelihood of a currency war. I expect the U.S. Treasury now will be forced to name China a currency manipulator,” ING Group senior Asia economist Tim Condon told The Korea Times. |
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