[Column] Hard landing avoided, but challenges ahead

Lee Sang-ryeol

The author is an editorial writer of the JoongAng Ilbo.

The first year of President Yoon Suk-yeol’s administration has been bumpy with a looming crisis. Instead of celebrating the sweeping victory by candidates from his People Power Party (PPP) in local elections in June — just a month after he was inaugurated — the president tersely responded to congratulatory remarks from reporters. He rather asked them if they felt tangible signs of an upcoming storm. “This is no time for us to speak of the election triumph of our party,” he said. Loud alarms had been sounding on the economic front.

In a survey of 46 economists and others by JoongAng Sunday in May, all of them agreed that the economy faced multiple crises. The global economy was in a downward spiral. The Korean economy managed to avoid immediate havoc. To tell the truth, there were no major bankruptcies or massive layoffs. But we still have many regrets about the way the conservative administration handled a looming crisis although the economy did not crash.

First of all, early detection of the dismal signs and fast action were lacking. One example is trade deficit. A trade deficit of $1.7 billion was recorded in May, the month the president took office. It was the second straight trade deficit after an earlier one in April. The balance had been in the negative in December and January, too, when Moon Jae-in was the president. As the trade front had been shaky, the Yoon administration had to take action. But it did in late August after a three-month hiatus.

The Ministry of Trade, Industry and Energy finally reported on a strategy to strengthen export competitiveness to Yoon in the 7th emergency economic meeting. Trade has been in a long deficit streak. The cumulative deficit for 11 months this year reached $42.5 billion, the largest-ever. The government should have responded more proactively to the trade deficit, given the shameful experience of the deficit leading up to a yawning current-account deficit and foreign exchange crisis that sent the country to seek an international bailout in 1997

Response to the real estate slump also has been slow. The government has been loosening one bundle of regulations on multi-homeowners after another, but the action should have come faster. Housing sales already dried up in the first half due to scarce buying. Many have urged the government to untangle the multiple anti-market regulations imposed under the Moon Jae-in administration. A former senior economic secretary to a former conservative president said that the real estate market can turn instantly icy once cooling starts, adding the government must act faster with deregulation.

But regulations on properties in the capital region and restrictions on loans stayed intact. The government’s message also did not help the market. It simply suggested a further fall in housing prices was inevitable.
 

President Yoon Suk-yeol speaks before having a meeting with the Ministry of Trade, Industry and Energy and the Ministry of SMEs and Start-ups in the guest house of the Blue House to get a briefing on their plan for 2023. [JOINT PRESS CORPS]

Won Hee-ryong, minister of land, infrastructure and transport, said that housing prices in Seoul could be deemed normal when the price to income ratio (PIR) now at 18 comes down to 10 or 12. That means housing prices should fall 30 to 40 percent further. The minister may have meant to express his wish for stabilization in housing prices in Seoul. But his comment implying a condoning of the drop in housing prices only contributed to a further freeze of the market.

Indiscretion was another folly. In August, the Bank of Korea’s monetary policy board raised the base rate to 2.5 percent from 2.25 percent, placing it on par with the Fed funds rate target of 2.25 to 2.5 percent. During a press briefing, BOK Governor Rhee Chang-yong suggested a further raise of 25 basis points. The over-generous forward guidance was ill-timed. The Federal Reserve was in urgency to tame inflation running at 40-year highs. The Fed delivered a third straight hike in 75 basis points in September following June and July. The gap with Korean rates quickly widened, while the next monetary policy meeting in Korea was to be held on Oct. 12.

Gov. Rhee’s indication of a 25-basis hike helped accelerate the won selloff as the market interpreted it as a weak determination to defend the local currency against the dollar.

Mistakes can happen in economic policy. But the authorities weren’t paying heed to warnings from experts if they repeatedly neglect their advises.

Next year’s conditions are expected to be tougher. The economy cannot afford even a small mistake. Authorities must remember this year’s lesson if they really do not want to harden people’s lives further.