Park Geun-hye’s ouster leaves an economic leadership vacuum

Posted on : 2017-03-13 17:32 KST Modified on : 2019-10-19 20:29 KST
South Korea now must manage China’s economic retaliation over THAAD, growing household debt and low growth
On the afternoon Mar. 12
On the afternoon Mar. 12

Park Geun-hye’s ouster as president leaves the South Korean economy facing a political leadership vacuum. It also comes at a moment when a number of external risks are becoming realities, including China’s economic retaliation over the THAAD deployment decision and the US’s protectionist pressures and moves to speed up its interest rate hikes. For the next two months, South Korea’s economic control tower will face the tasks of managing those external risks and wrapping up Park’s now momentum-deprived economic policies, leaving more room for the next administration to respond to long-term downturn conditions.

For the moment, the economic team’s biggest task is responding to formidable external risk factors. First among them is economic conflict with China, which has reached a fever pitch as the THAAD deployment enters its execution stage. Beijing has responded with a string of official and unofficial economic retaliation measures, with repercussions that could very likely spread to areas such as tourism, culture, and trade.

Another concern is the increasingly protectionist line from Washington since the arrival of the Donald Trump administration. On Mar. 6, White House National Trade Council (NTC) director Peter Navarro singled out Samsung and LG for accusations of “trade cheating.” Another strong possibility is that the US could demand renegotiation of its Free Trade Agreement with South Korea. The US Treasury Department‘s foreign currency report, which is scheduled to come out in April, poses an additional serious burden.

The Federal Reserve is also seen as almost certain to raise the interest rate in March, and the chances of accelerating its interest rate hikes from a predicted two or three this year cannot be ruled out. If the US does hasten its interest rate hikes, it is sure to pose a significant burden as South Korea’s downturn drags into the long term amid snowballing household debt.

Besides carefully managing these external risks, the current economic team also has to wrap up Park’s central economic policy approaches, including her focus on the “creative economy” and increased welfare without raising taxes. Park’s creative economy vision has faced harsh criticism over what many see as the use of strong-arm tactics against corporations without generating obvious results. With both the ruling and opposition parties including stronger social services as a major part of their election pledges, Park‘s ideas for increased welfare without raising taxes have similarly hit a wall. The economic team now finds itself having to shift focus away from these policies, which will be discarded, and to go to work instead on building ammunition and making headway with ideas for a new direction in financial policy.

“For now, we’re going to push the economic policies for 2017 in order of priority, but in the long term we’ve got to get ready for a change in the direction of financial policy,” said a Ministry of Strategy and Finance source.

“It’s looking like we will be going through the procedures to get some financial wherewithal ready to shore up domestic demand early on under the next administration,” the source added.

To this end, the government held a series of meetings of related agencies on Mar. 11 and 12 to focus energies on reviewing economic issues. On the afternoon Mar. 12, Deputy Prime Minister and Minister of Strategy and Finance Yoo Il-ho presided over a roundtable for Cabinet ministers in economy-related areas at the Central Government Complex in Seoul. Second Vice Minister Song Eon-seok held financial situation review meeting later the same day. Previously, First Vice Minister Choi Sang-mok presided over an expanded macroeconomic/financial meeting on Saturday, Mar. 11.

Yoo also plans to attend an upcoming Mar. 15 meeting of G-20 finance ministers in Baden-Baden, Germany. With South Korea facing a number of external economy issues, Yoo is planning to attempt bilateral meetings with US Treasury Secretary Steven Mnuchin and Chinese Finance Minister Xiao Jie.

“The deteriorating domestic economy and uncertainties surrounding external conditions have left Yoo Il-ho and the rest of the economic team facing a greater responsibility in terms of managing macroeconomic risks,” said Yonsei University economics professor Sung Tae-yoon.

“They’re going to need a good job of managing some important issues until the new administration arrives, including THAAD, the US interest rate hike, the foreign currency report, and procuring funds for Daewoo Shipbuilding and Marine Engineering,” Sung said.

By Noh Hyun-woong, staff reporter

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