World Economy

South Korea Situation Dismal

South Korea Situation Dismal South Korea Situation Dismal

The South Korean economy is under siege. Look around and you will see gloom and doom, from the delayed recovery of the global economy, the slowdown of the Chinese economy and low oil prices to dwindling exports, sluggish domestic demand, consumption and investment.

Problems like youth unemployment, household debt and impending massive layoffs threaten social stability, Asia News Network reported.

The Bank of Korea has cut its growth forecast for this year to 2.8% from 3%, which is still higher than forecasts made by most international agencies and local private think tanks.

In yet another latest set of data attesting to the dismal situation, the Financial Supervisory Service said that the number of corporate credit rating downgrades has hit the highest mark in 17 years.

The number of companies whose credit ratings were downgraded stood at 159 in 2015, the highest since the Asian financial crisis in 1998, when the comparable figure was 171.

Heavily affected were companies in sectors that were hit by a global slump such as steel, construction, refinery and petrochemicals.

The situation is gloomier in some of South Korea’s major industries such as shipbuilding and shipping, which are bracing for radical restructuring that will result in massive layoffs.

Media dispatches from Geojedo Island, the hub of shipbuilding which once was the pride of the South Korean economy, portray desolate scenes of vacant factories and a rapidly cooling local economy.

The problem is that there seems to be no easy way out of the current doldrums. Policymakers need an effective combination of monetary and fiscal policies as well as swift and efficient restructuring of troubled sectors and companies.

The Bank of Korea kept the key interest rate at 1.5% for the 10th consecutive month.

The central bank may well believe that at this stage, lowering the rate will have little effect on consumption and investment. It also needs a tool in case the Chinese economy slows down further or the US raises interest rates.

  Shake-Up Needed

Having spent 33% of the state budget in the first quarter, the government also does not have enough room for additional frontloading. This may require the government to write a supplementary budget, for which political parties’ cooperation is essential. Also important and urgent is the restructuring of struggling sectors such as shipping and shipbuilding. It is a relief that the main opposition The Minjoo Party of Korea and splinter People’s Party are moving to work with the government and the ruling Saenuri Party on the restructuring issue.

After last week’s general election, Moody’s said Saenuri’s loss of its parliamentary majority is likely to make it harder to pass structural reforms, and that could have negative effect on the nation’s sovereign credit.

It is hoped that the rating agency’s concern was ungrounded. The South Korean economy cannot afford a further fall.

  Exports Drop

South Korea’s exports of industrial parts and materials fell for the fourth straight quarter in the first quarter of this year amid weak global demand and low oil prices, Yonhap quoted the trade ministry as saying recently.

Outbound shipments of industrial parts and materials fell 10.7% on-year to $59.4 billion in the January-March period, accounting for 51.2% of the country’s overall exports, according to the ministry of trade, industry and energy.

The first-quarter figure marked the fourth consecutive decline since the second quarter of last year, when it posted a 1.8% on-year drop.

Imports also shrank 10.7% on-year to $36.3 billion over the cited period, with the country posting a trade surplus of $23.1 billion.

It marked the 20th consecutive quarter that the country’s quarterly trade surplus in the sector surpassed the $20 billion mark, the ministry said. Shipments to most regions declined on sluggish global demand.

Exports to the Middle East tumbled 20.7% on-year to $2.7 billion, and shipments to China plunged 14.8% to $19.8 billion, while exports to the United States inched down 0.2% to $6.8 billion over the cited period.