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`Korean Economy Has Not Bottomed Out Yet`

Posted May. 08, 2009 08:18,   


The government yesterday announced a cautionary response to projections that the Korean economy has bottomed out based on several economic indicators.

An official said, “Risk factors remain in the Korean economy.” Given the possibility that liquidity injected in the market for economic boost could end up in the stock and real estate markets instead of flowing into new investment and production, the government decided to keep a close eye on capital flow to prevent negative side effects.

President Lee Myung-bak chaired a meeting for emergency economic measures at the government complex in the southern Seoul suburb of Gwacheon.

An official said, "Expansionary macroeconomic measures have put the brakes on rapid economic decline, but recovery is not strong enough and it’s too early to conclude that economic recovery will continue due to uncertain external conditions.”

President Lee also cautioned against early hopes, saying, “The Korean economy a decade ago was criticized for popping open the champagne too early during the Asian financial crisis. We shouldn’t repeat the mistake.”

○ Spontaneous private recovery still "weak"

Positive signs have appeared, such as higher mining and manufacturing production month-on-month for three straight months and slowing export decline. The government, however, stuck to a cautionary stance since economic players can be misled into believing that the effect of macroeconomic policies such as more fiscal spending is a recovery sign.

Yoon Jong-won, economic policy director at the Strategy and Finance Ministry, said, “Though the public sector contributed 1.5 percentage points to economic growth in the first quarter, the private sector’s contribution was a disappointing minus five percentage points. The growth rate consequently stood at minus 4.3 percent from the same quarter last year.”

In other words, spontaneous economic recovery from the private sector, which excludes the impact of government spending, remains far from enough.

Another factor dampening recovery prospects is the high business and household debt ratio relative to advanced economies. At the end of last year, the business debt-to-GDP ration was 112.8 percent, higher than those of the United States (77 percent), Japan (102.1 percent) and the United Kingdom (112.9 percent).

Yoon said, “Companies in other countries have streamlined through restructuring after experiencing the economic crisis. In contrast, Korean companies might’ve done relatively little to improve their health by riding on the weak won and financial support from the government.”

Consequently, the government decided to continue with its expansionary macroeconomic policies such as more spending and early budget execution until the private sector shows independent signs of recovery. Seoul will also push ahead with an "exit strategy," or taking back excessive liquidity after the market shows visible signs of recovery.

○ Stronger monitoring of capital flow

Improvement in U.S. dollar supply and the stock market rally have rapidly calmed the Korean financial market, but the government believes a sigh of relief is premature due to external uncertainty that can potentially send shockwaves, such as the possible bankruptcy of General Motors and the stress test results of U.S. banks.

Another fear is fluctuation of asset prices amid excess liquidity flowing into the real estate and stock markets. Instead of immediately taking back the liquidity due to the economic downturn and cash-strapped small and medium-size enterprises, the government has decided to closely monitor capital flows.