Time to Exit?

Bank of Korea governor, Kim Choong-soo has been dithering over whether the bank should start to approach an ‘exit strategy’ or not. Kim has maintained his stance to not to implement a strategy if possible. However, his stance may change following the release of the real gross domestic product (GDP) figure on April 27.

The figure shows that the Korean economy grew 7.8 percent in the first quarter, compared with the same period last year, which is the highest since the fourth quarter of 2004 when the economy increased by 8.1 percent. Furthermore, both domestic demand and exports show upbeat trends. Meanwhile, private consumption has risen by 6.2 percent, although tax benefits for those changing their old cars have ended. Investment in equipment, another pivot of domestic demand, is solidly rising, growing 29.8 percent in the first quarter alone.

Moreover, exports are flying at a high altitude, with products like semiconductors and automobiles increasing. Exports have expanded 21.3 percent year-on-year and by 3.4 percent from the previous quarter.

Since all of this proves that the economy has entered the path to recovery, the focus has shifted to whether the benchmark interest rate needs to be increased or not. Currently, the interest rate for a one-year fixed deposit is no more than 3 percent per year. This is because the benchmark rate has remained at the super low level of 2 percent for 14 consecutive months.

Of course various factors that can threaten the economy remain latent. The growth rate can be slowed in the second half of the year, with exchange rates and the prices of international raw materials showing dicey movement. Furthermore, growing household debt and vulnerable employment-related indices are also considered to be a burden to the economy. In addition, nobody knows when unforeseen issues abroad such as Greece’s debt crisis will occur. There continues to be conflict regarding the Chinese yuan, as well as signs of a return to fiscal austerity in a bid to prevent the real estate market from overheating.

However, it is reasonable to normalize economic policies when the economy is on the right track. There is a view that it is now time for the emergency measures implemented during the global financial crisis to be withdrawn. If these emergency measures continue for too long, they can distort the allocation of resources and invite the pressure of inflation. Furthermore, it can hinder restructuring which can help strengthen the economic constitution. Some argue that now is the right time to consider the exit strategy as the growth rate is high and the inflation rate is stable.

Meanwhile, Ministry of Strategy and Finance minister, Yoon Jeung-hyun opposes an increase in the interest rate, saying that the Korean property market is not yet stabilized. He said, “It would be premature to raise the interest rate and the stance of the government toward it remains unchanged.” The BOK governor also pointed to the private sector’s ability to recover itself as an essential prerequisite for an exit strategy. He said that indices measuring this ability are investment in construction and employment. However, construction investment increased by just 0.9 percent in the first quarter from the previous quarter, not yet regaining its vigor, while the number of jobs is expected to increase by only 240,000 this year.

An official from Hyundai Research Institute said, “Whether the BOK governor finally approaches the exit is merely a question of time. But he should consider implementing the exit strategy by taking soft-landing measures in order for the floating money to flow into productive places and thus including business investment.”