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(EDITORIAL from Korea Times on May 15)

All News 07:24 May 15, 2023

Alarm bells ring
Low growth, widening deficits pose threats to economy

The Korean economy is bracing for diverse daunting challenges. The state-run Korea Development Institute (KDI) made a gloomy forecast Thursday, lowering the nation's economic growth estimate for the year to 1.5 percent from the previous 1.8 percent. It revised down the growth estimate for the first half to 0.9 percent from 1.1 percent and lowered the rate for the second half to 2.1 percent from 2.4 percent.

The KDI's forecast is based on the possible recovery in outbound shipments of semiconductors paired with the potential effect from China's reshoring. The institute also said the growth rate could fall to the lower range of the 1 percent level should the current conditions continue. In fact, the sluggish exports of chips and demand from China continued in May.

According to the Korea Customs Service, the nation's exports in the first 10 days of May declined 10.1 percent from the same period last year, registering a trade deficit for more than 14 consecutive months. It said the trade shortfall amounted to $29.4 billion as of May 10 this year.

Concerns are also growing over the lackluster domestic consumption coupled with the torpid overseas sales. Most worrying is the snowballing household debt. Notwithstanding the high interest rate, the major banks' individual lending rose sharply by 2.3 trillion won ($1.71 billion) over the past 17 months.

Buffeted by the continued drop in tax collection, the deficit in the state management fiscal balance widened to 54 trillion won in the first quarter of this year. This represents more than 90 percent of the deficit expected for the entire year. The state debts surged by more than 20 trillion won in the three-month period to reach 1,053 trillion won.

Adding to the current woes, the national economy faces further dilemmas due to potential risks, such as possible financial market instability in the United States and the prospect of economic retaliation from Beijing, prompted by Seoul's recent move to get closer to the U.S.

The increasing deficit will likely deal a severe blow to the nation as it could result in a drop in external credit, capital outflow and financial market turbulence. Despite such dark prospects, however, the Yoon Suk Yeol administration has taken flak for having maintained a seemingly easygoing attitude in dealing with the economic issues. For starters, Deputy Prime Minister and Economy and Finance Minister Choo Kyung-ho invited criticism by saying "the economy will show signs of recovery from the latter half of this year." The finance ministry also became the object of cynicism when it praised itself for having preemptively tackled the diverse crisis factors over the past year. It also went on to say that the government could shift to "sound fiscal management."

Yoon observed his first anniversary last week and said he would focus on "paying attention to the problems facing the economy and the people's livelihood" during the second year of his tenure. Yoon should take concrete measures to implement what he pledged.

The priority should be placed on overcoming the snowballing shortfalls. For this, the government should mobilize all possible steps to decrease the trade deficit. Measures should include expansion of trade financing to boost export companies and diversify export markets and items. In the event of financial market fluctuation, the Yoon administration should also consider signing currency swap contracts with the U.S. and Japan.

The only and best way for the nation to overcome the low growth is to strengthen the competitiveness of domestic enterprises. The government and the National Assembly should double down on providing the businesses with more opportunities in state-of-the-art sectors such as semiconductor, batteries and bio. Toward that end, more efforts should be made to get rid of various regulations hindering business activities. Instead of taking populist policies, the government should sharpen the growth potential through strenuous structural reforms covering pensions, labor and finance.

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