SEOUL – Few countries have benefitted from being as hard-wired into the global economy as has export-focused South Korea, but this high exposure is a two-edged sword – and currently is proving to be more liability than asset.
The manufacturing colossus is at the mercy of high commodity prices, troubled global supply chains and negative sentiment surrounding both the state of the global economy and expectations of austere policies to come from the US Federal Reserve.
As a result, its domestic economy is being buffeted by a double whammy of economic tribulations: financial and market jitters, combined with real-economy fallout from a week-long truckers’ strike.
At a time when North Korea is widely expected to raise regional tensions with an imminent nuclear test in the near future, this mounting package of problems is proving to be the first serious test of the leadership of President Yoon Suk-yeol, who assumed office in May.
Global ripples, local waves
There are widespread expectations that the US Federal Reserve – facing the fastest inflation the US has experienced in 41 years – will conduct a higher-than-planned rate hike this week. A collateral fear is that essential prudent steps the Fed is expected to take will cool off the world’s largest economy and tip it into recession.
But while the fear and loathing over the Fed’s upcoming moves are short term, there are longer-term global trends at play that are dragging down the values of both the national currency and Korean stocks.
These trends include the jittery state of a global economy that was massively pump-primed during a pandemic that was unprecedented in modern times; international supply chain snafus that resulted from Covid-19 many disruptions; soaring commodity costs stemming from the Ukraine War; and related inflationary pressures.
The Korea currency, the won, has – like many currencies – dropped in value against the dollar as the Fed rolls back pandemic emergency stimuli and started to tighten. It has declined almost 8% against the greenback in 2022 thus far.
In this nerve-challenging environment, and due to the South Korean economy’s strong reliance upon global markets, Seoul stocks have also been taking a hammering. The benchmark KOSPI index has fallen below the psychologically important 2,500 level for the first time in almost 20 months.
“The government needs to take actions to prevent market jitters from sharply rising due to excessive herd behavior in the FX market and review contingency plans that can be mobilized at any time,” Finance Minister Choo Kyung-ho sternly told officials today.
That was a clear verbal intervention. But the government also holds the keys to the national war chest, and is poised to spend around $5 billion to buy both won and Treasury bonds as stabilizing measures, according to reports.
A weak won may please Korea’s powerful portfolio of national exporters. But at a time of high global commodity prices – and especially energy prices – it is going to hurt Korea Inc, which is a net energy importer.
And amid domestic inflation, it is also going to hurt the average Kim. Local media reported that consumer prices shot up 5.4% in May – the fastest inflation rate since August 2008.
In April, the country had suffered its first current account surplus in two years. That was largely due to high costs of imported commodities, although the Bank of Korea expects the account will return to a surplus for May, citing the seasonal April factor of high overseas dividend payouts. May’s current account is still being calculated.
Korea is facing domestic problems, too – but even those have overseas root causes.
Road haulage comes to a halt
Thousands of truck drivers extended their strike into its seventh day today.
Their action’s impact on the national logistics net is hitting auto, steel and cement manufacturers, to the tune of some $1.24 billion thus far, according to government data.
Among the blue chips taking a hit are leading national auto-maker Hyundai Motor, which is facing a components shortage on top of the auto semiconductor shortage that it, like its global competitors, has long been suffering. The strike is reportedly delaying the finishing of some 5,400 vehicles.
And today, it was reported that leading steel maker POSCO is halting operations at some mills, as it has no remaining space to store finished products.
The 22,000-strong Cargo Truckers Solidarity is demanding that Seoul adjust the national freight rate system, which would guarantee their incomes in the face of soaring fuel costs.
However, government-union talks have broken down, and strikers today vowed to intensify their struggle.