Korean economy might stagnate

Despite massive money supply, corporations still are suffering from fund shortages, and facilities investment has been shrinking. The function of the financial market has been in ruin fundamentally, and traditional macroeconomic policy doesn't seem to work at all.

In fact, the government is experiencing a lack of proper policy to cope with the situation, so experts predict that the nation will fall into a prolonged recession.

According to the Bank of Korea and the Financial Supervisory Commission, the M1 money supply increased 21.4 percent in August, showing a rise of 21.01 trillion won from a year ago. The supply of M2, which is a combination of cash and deposits, increased 34.9 percent or 87 trillion won. However, the M3, the total money supply that is used as a barometer of the money market situation, has increased only 5.3 percent or 52 trillion won.

Also, the yield of BBB-grade corporate bonds, which are closely linked to the corporate financial situation, stands at an annual rate of 11 percent. Interest rates are high, while pressure for corporate restructuring is strengthening, so corporate investment in facilities increased by 18.9 percent in September, compared with 38.1 percent in August. Domestic construction orders decreased by as much as 18.4 percent.

Interest rates are not falling because corporate restructuring is not being carried forward properly. Companies are required to pay an interest rate that fits their ratings for the bonds they issue. If it is hard to distinguish between blue-chip companies and insolvent ones, all companies are considered as insolvent firms in the market. It is because the market does not want uncertainty. For this reason, even healthy companies are unable to issue corporate bonds. Such a phenomenon is referred to that the market is crippled.

The idle funds tend to be invested in national bonds, which are considered as no-risk assets. The yield of national bonds hit a yearly high of 7.05 percent Nov. 13. The bond yield of companies with high A-grade rating is 8.26 percent, compared with the yield of 11 percent for most corporate bonds.

These days, the Korean economy has fallen into a sort of liquidity trap.

Kang Suk-Hoon, economics professor of Sungshin Women's University, warned that there is a possibility that the Korean economy could fall into the situation that is a combination of Japan and South American countries. Japan is suffering from excessive financial deficit, and its financial policy doesn't work because interest rates already are effectively zero, so the nation has been suffering from a recession for almost 10 years now. Central and South American countries are experiencing economic crises every two or three years.

Chung Kun-Yong, vice chairman of the Financial Supervisory Commission, speculated that the current economic situation cannot be solved through traditional macroeconomic policy. What is needed is solid restructuring, but that conflicts with the labor sector's demand for the right to a minimum standard of living.

The moral hazard of the financial circle is a stumbling block, Chung said. He stressed that political leadership is necessary to overcome such a problem.

Chung Ki-Young, president of Samsung Finance-Economy Research Institute, said that the government needs to devote public funds as soon as possible. He explained that the loan market and corporate bond market can be restored through speedy restructuring with the input of public money.