SEOUL – The Bank of Korea’s rate rise yesterday – its ninth since last August – combined with downgrades to growth forecasts for 2022 are setting the stage for a grim year-end.
The central bank lifted the benchmark seven-day repo rate from 3% to 3.25% in a bid to contain inflation that is putting a squeeze on Korean households. Last month, consumer prices jumped 5.7%, far beyond the BOK’s 2% inflation target.
“The board judges that the policy response to ensure price stability should be continued, as inflation has remained high,” the BOK’s Monetary Policy Board announced in a statement covered by Yonhap News Agency.
Like other central banks, the BOK is required to monitor the US Federal Reserve, which remains in rate-hiking mode. If the interest rate gap widens, foreign investment could exit South Korea for the higher rates offered in the US market.
The US Fed’s position is just one metric considered by Seoul. Trade-reliant South Korea’s fortunes and misfortunes bear watching, for the nation is deeply integrated into regional and global supply chains.
These factors and Korea’s status as a net energy importer make it acutely vulnerable to external risk factors. Those include soaring commodity prices driven up by the war in Ukraine and slower-than-expected economic growth in lockdown-stricken China.
Further issues hover over the country’s most valuable export item: semiconductors.
While Seoul may have a voice at the table, the likelihood of it influencing a Washington determined to suppress chip supplies to China – respectively, Korea’s biggest export and its biggest market – is questionable, generating massive risk looking ahead into 2023.
Adding further gloom to the chip sector, which kept the Korean economy buoyant throughout the Covid era, the semiconductor super-cycle for memory turned down this summer. That season, it is now clear, was the turning point for overall growth prospects.
“Among South Korea’s 20 major export products, computers, mobile phones (and parts) and petrochemicals all recorded a double-digit year-on-year decline in August,” the Economist Intelligence Unit noted in September. “This was the latest signal of waning global consumer demand, particularly for electronic devices, which will have knock-on effects on domestic industrial activity.”
As a result, the EIU expects “a period of slow growth to prevail in South Korea for the remainder of this year and into 2023.”
These trade issues mean that, beyond imported inflation, there are far broader macro issues to keep Korea’s economic mandarins up at night. These issues are clear in the data: Exports shrank 5.7% year-on-year in October, marking a seventh straight month of trade deficits.
Amid this flurry of bad news, Korea’s GDP growth forecasts are being revised downwards. The OECD has cut its projection for South Korea from 2.2% to 1.8% while the BOK – which has customarily been more bullish than external bodies – has also slashed its figure from 2.1% to 1.7%.
Yet another risk is an ongoing trucker strike that is halting road transit of cement and steel – essential for the construction industry, one of the few domestic macro drivers of the export-led economy. The current strike – the second truckers’ walkout this year – started last week.
President Yoon Suk-yeol is threatening to intervene if the truckers don’t return to the roads. That could be a politically dangerous move for a leader whose ratings are already perilously low due to numerous gaffes, misjudgments and the Halloween crowd-crush tragedy.
Markets tell their own story: The benchmark KOSPI index is down 16.8% this year while the tech-heavy KOSDAQ board is down a staggering 27%.
The only good news is the strengthening won. The currency plummeted to an annual low of 1,443 to the dollar in October but has since strengthened to 1,339, alleviating certain forex worries.
“Internationally, with global inflationary pressure continuously rising, financial market volatility and global economic downside risks grow due to major economies’ rapid interest rate increases, concerns about the expansion of the Russia-Ukraine war and China’s lockdown measures,” the Ministry of Finance and Economy noted in its last bulletin.
“The government will make its utmost efforts to boost the private economy and strengthen risk management efforts, while also focusing on taming prices and stabilizing people’s livelihoods,” the ministry vowed.
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