Risk Factors of Korean Economy and Issues
Risk Factors of Korean Economy and Issues
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  • 승인 2007.11.05 13:20
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Supported by strong exports and facility investments, the national economy has grown 4.8 percent during the first three quarters of this year from a year ago.

The seasonally-adjusted economic growth during the second quarter especially was 1.8 percent compared with the first quarter, the highest growth since the fourth quarter in 2003 (2.7 percent). During the third quarter, too, the production growth of the service industries including manufacturing industry has shown an upward tendency.

Since the beginning of the second half of the year, however, the domestic economy has become more uncertain. Combined with the US Subprime mortgage crisis which took place in August, soaring global oil prices and the won's continuous rise against the dollar has been threatening the domestic economy. Impact of changes in oil prices and foreign exchange rates for the past three years on the national economy hasn't been as serious as the previous ones. However, the slowdown in the global economy and unstable international financial markets are expected to work as risk factors which can curb growth of the domestic economy.

In the first place, unsecured global financial markets have encouraged international investors to make flight to quality and such a situation can negatively affect the worldwide stock markets. Moreover, there is a problem of the so-called yen-carry trades as investors, who borrowed yen at low interest rates in Japan to invest in higher-yielding currencies and assets elsewhere, will likely repay the money. Such a worldwide tendency to reduce liquidity is likely not only to cause the global stock markets to fall, but also to expand share fluctuation following the US interests rate cuts.

Next, surging global oil prices can worsen the profitability of domestic companies. In connection with reasons for soaring oil prices, many observers have cited inflow of speculative funds into the international oil markets and reduction of the US oil stocks as well as an increase in demands during the winter.

Owing to weakened dollar and rate cuts, in particular, more capitals are flowing into the oil markets. In addition, the continuous won's rise against the dollar can play a negative role in the structure of quantity-oriented domestic exports.

The nation has enjoyed booming exports despite strong won because of the healthy world economy and diversification of export destinations. The current account surplus, however, has reduced since 2005.

The current account during the first eight months of this year has declined to US$530 million, while the service account shortfall caused by an increase in overseas demands following the strong won and improvement of income standards has been maintained since 1999. Besides, due to lack of value-added products in domestic exports, the structure of exports largely depends on the price factor. The index showing the advancement of export structure which has drawn a downward curve after recording 103.2 in 2001 dropped to 89.1 in August this year.

The shock or a ripple effect by ongoing overseas risk factors such as strong oil prices and weak foreign exchange rates have emerged important factors on which the domestic economy depends. Accordingly, it is important to secure capacity to cope with the negative ripple effect in preparation for possible activation of such risk factors. For this purpose, the government will have to seek ways to heighten efficiency of economic policies so that the temporary shock caused by the domestic and foreign risk factors won't affect the long-term growth of the nation's real economy.

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