| Containers are piled up at a harbor in Korea's largest port city of Busan, Wednesday, when the won-dollar exchange rate surged above the 1,380 won-level for the first time in more than 13 years. A weakening won is blamed for a trade deficit Korea suffered for five consecutive months through August. Yonhap |
Kim says prolonged trade deficit could be perceived as sign of economic crisis
This article is the first in a series of interviews with economic experts to analyze the status of the Korean economy and make policy suggestions. ― ED.
By Yi Whan-woo
A noted economic expert has called on the Korean government to raise its guard against a possible economic crisis, as the Korean economy is facing challenges similar to those of the 2008-2009 global financial crisis.
Kim Jin-il, a former U.S. Federal Reserve economist, pointed out that the five-month-long trade deficit Korea has suffered, which is rare, could be perceived from abroad as a sign of a possible crisis if it is protracted.
Also an economics professor at Korea University, Kim assessed that Asia's fourth-largest economy is currently undergoing turbulent times that are comparable to the 2008-2009 global financial crisis.
“The negative balance of trade can raise doubts over Korea's economic fundamentals outside the country if it persists,” Kim said in a recent interview with The Korea Times.
| Kim Jin-il, a former U.S. Federal Reserve economist and current Korea University economics professor / Courtesy of Kim Jin-il |
His remarks came as Korea logged a trade deficit for the fifth consecutive month in August ― for the first time since 2008.
The deficit amounted to a record $9.47 billion in August, as imports soared 28.2 percent year-on-year to $66.15 billion to outpace exports, which have been slowing down in terms of growth. Outbound shipments increased 6.6 percent year-on-year to $56.6 billion.
“The trade deficit is not at a worrisome level so far, but it could be perceived as a sign of serious damage to the Korean economy if it does not improve,” Kim said.
The trade balance is one of the multiple economic indicators that has deteriorated to its worst level since either of the two events that battered the Korean economy: the 1997-1998 Asian financial crisis and the 2008-2009 global financial crisis.
These indicators include: the growth rate, consumer prices, the won-dollar exchange rate, the foreign exchange reserve and short-term foreign debt.
While the Bank of Korea (BOK) lowered its 2022 economic growth forecast to 2.6 percent from 2.7 percent in its latest revised outlook, concerns linger over inflation as consumer prices jumped 5.7 percent in August from a year earlier. The Korean currency declined below the 1,380-won level against the U.S. dollar for the first time in more than 13 years on Wednesday, while the ratio of short-term foreign debt compared to Korea's foreign exchange reserves has surged to its highest level in 10 years.
These unfavorable circumstances faced by Korea have prompted concerns that the country may again be on the brink of an economic crisis.
During a meeting with economic ministers on Aug. 24, President Yoon Suk-yeol vowed to prevent another financial crisis, citing the rapid depreciation of the Korean won against the dollar and the ballooning trade deficit.
Kim said that Korea in 2022 is comparable to how it was during the 2008-2009 global financial crisis, because both were affected by economic crises initiated by outside factors ― the COVID-19 pandemic at the end of 2019 and the U.S. subprime mortgage crisis in 2007 ― that rippled through the entire world.
“On the other hand, the risks during the 1997-98 Asian financial crisis were limited to Asia, and in certain circumstances, only to Korea,” Kim said.
Asked whether Korea is capable of withstanding a possible third economic crisis, Kim said it is “uncertain,” considering the fact that pandemic-driven risks are new to the entire world.
He pointed out that the external risks in 2022 ― namely the Ukraine war, supply chain bottlenecks, the U.S.-China trade row, China's growth slowdown, and hawkish U.S. credit tightening ― are notable for taking place simultaneously.
“Such a scene is different from the past, making it more difficult for the country to cope,” he said.
Asked about possible countermeasures by the government, Kim said, “The risks are out of the government's hands as they come from outside.”
He emphasized that the government should set policy priorities over whether it will opt for growth over inflation or companies over workers. But he said that it is important to seek a social consensus in this process.
Kim forecast that the Fed's hawkish approach to rate hikes is likely to continue until U.S. inflation shows signs of falling below 2.5 percent, given that its inflation target is set at 2 percent.
He expects that the aggressive rate hikes by the U.S., which may cause capital flight in the short term, are unlikely to trigger a foreign capital outflow in the medium to long term, since the BOK started its monetary tightening earlier than the Fed and has signaled continuous, incremental rate hikes.
“Under the circumstances, the BOK is urged to stick to its policy to win the market's trust,” he said, calling on the central bank to pursue a preemptive, persistently long series of incremental rate hikes until the Fed's hikes are over.
Kim was a Fed economist from 1996 to 1998 and again from 2003 to 2011.