Concerns Are Rising over Economy of South Korea

Concerns are rising over the South Korean economy with the weak U.S. dollar, low oil prices and the low interest rates showing signs of coming to an end.

The Dubai crude oil price recently exceeded US$60 per barrel for the first time in 28 months. The crude oil price is on the rise based on the political unrest in the Middle East and predictions that OPEC member countries will extend their reduced production. Some in the industry are predicting that the price will reach US$70 per barrel in the near future. 

An increase in oil price can lead to more exports as it contributes to the economy of emerging and oil-producing countries. However, it can result in less household consumption at the same time. In the long term, it can have a negative effect on the purchasing power and real disposable income of households by adding to the inflationary pressure. Then, the economic growth rate can be affected. 

The appreciation of the won has been conspicuous since late last month. This is because the South Korean economy showed a substantial growth in the third quarter, uncertainties related to the North Korea risk and Sino-South Korean relations are waning, and the likelihood of an interest rate hike is on the rise. The appreciation of the won is likely to continue for a while amid a strong U.S. dollar and a weak yen, and this can negatively affect the price competitiveness of South Korean exporters. 

With household debts already large, a rapid increase in market interest rate can have a negative impact on consumption by adding to the debt repayment burden of households. The Bank of Korea is likely to raise the key rate on November 30 and the market interest rate is already showing signs of going up. The central bank is currently emphasizing on the necessity of addressing the financial imbalance such as snowballing household debts that is attributable to years of expansionary monetary policy.