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Policymakers need to closely guard against volatility
The U.K. people have spoken on quitting the 28-member European Union after 43 years. The Leave campaign's victory in last week's referendum has shocked the world and upset international financial markets.
Concerns are mounting among local experts that the U.K.'s decision could result in adverse effects for Korea, whose economy is heavily dependent on exports and financial market is highly vulnerable to external factors. The Korean financial market reacted sensitively to the Brexit decision. On Friday, the Korea Composite Stock Price Index (KOSPI) fell 3.1 percent to 1,925.24 points, the biggest daily loss in over four years.
The U.K.'s vote for isolation over integration with the EU has surprised many Koreans. The uncertainty in the global economy triggered by Brexit has added to Koreans' concerns about the local economy, already struggling with protracted growth, declining exports and an unemployment crisis. Even before the Brexit referendum, Korea's economy had been expected to face harsher challenges in the second half of the year, such as corporate restructuring, which is taking its toll on the local job market and deepening worries about less domestic spending.
On top of these concerns, the government now needs to factor in Brexit in its economic policy direction for the second half of the year, to be released Tuesday. The report will contain an update to the growth forecast for the Korean economy, currently standing at 2.8 percent. Finance Minister Yoo Il-ho should announce necessary budgetary and monetary measures to effectively guard against post-Brexit challenges facing the Korean economy.
Korea's exports are expected to be affected negatively from the Brexit that could hurt the economy of Britain and the eurozone. This is an undesirable situation for Korea's already underperforming exports. Korea's exports stood at $39.78 billion last month, down 6 percent from the same period a year ago and marking a decline for the 17th consecutive month, making this the longest-ever losing streak since related data was first compiled in 1970.
The government needs to renew its export and investment strategy with the U.K. in the post-Brexit years. More than 79 percent of Korean companies in Britain said that its exit from the EU will hamper their businesses. The Korean International Trade Association said that Korea should move quickly to strike a free trade deal with the U.K. Foreign Minister Yun Byung-se said that Korea will consider a bilateral free trade deal. This could boost bilateral trade, which stood at $13.5 billion in 2015, and serve as an impetus for Korean companies to seek new business opportunities in Britain.
Korea should also forge stronger regional coordination, through platforms like the Asian Infrastructure Investment Bank (AIIB), to jointly deal with global economic uncertainties.
Britain's actual departure from the EU may take two to seven years, so the prolonged departure process means continuing uncertainties in the global economy and financial markets. Also, the possibility of other members following the U.K.'s departure can become a reality, signaling a disintegration of the EU system. Seoul must meticulously prepare to deal with these wide-ranging scenarios in the post-Brexit period to minimize damage to the economy.
