Posted October. 01, 2008 03:00,
World stock markets plummeted Monday after the U.S. House of Representatives rejected a financial bailout bill worth 700 billion U.S. dollars. If Washington and Congress agree on a revised bill, the global economy could calm down. The U.S. financial crisis, however, is likely to continue at least through the first half next year. For global financial institutions, liquidity is at stake. Weaker consumer confidence triggered by financial instability is bringing on recession in the real economy.
The Korean economy is significantly vulnerable to external conditions. In the wake of the bailout bills rejection, the won-dollar exchange rate rose to its highest level in 64 months. This, however, can be seen as the weak won reflecting Koreas economic fundamentals. Bad forex management could lead to a huge flight of foreign capital from the country.
Moreover, Koreas exports have also sharply declined, leading to a record-high trade deficit of 4.7 billion dollars last month. Despite the shrinking economy and slowing growth, oil imports have increased 16.7 billion dollars to reach 43.7 billion dollars, increasing the current account deficit. In addition, the service account deficit including travel is also dampening economic fundamentals. Prices remain unstable, the domestic economy shows no signs of revival, and factory operating rates are continuing to slow down. If the trend continues, economic growth will decline to three percent in the second half this year, continuing a low growth trend.
More threatening risks are out there: those from real estate project financing by the non-banking financial sector; snowballing household debts; and unsold new apartments leading construction companies to the edge of bankruptcy. A preemptive response often stressed by the government is needed. No mistakes should especially be made in dealing with foreign exchange policy.
The Korean economy is teetering on the edge of a cliff with multiple disasters in both finance and the real economy and both external and internal risks. In the worst-case scenario, a small mistake can lead to the markets collapse. The government must focus on mapping out the best policies to stabilize the market and protect the economy. Politicians must also refrain from making emotional claims and work together in a bipartisan manner to overcome the crisis. Households must help alleviate the dollar liquidity crisis by saving energy and refraining from overseas travel.