Trouble ahead

By John Burton

Unfortunately, there is not much to celebrate in the New Year at least as far as Korea's economy is concerned. Most economists predict tough times ahead.

One key reason is Korea's dependence on semiconductors as a main growth engine. Chips now account for almost a fifth of the country's total exports. The industry faces both long-term challenges, as I discussed in my previous column, and short-term disruptions.

Weaker global demand and geopolitical tensions are causing a decline in Korea's chip exports, with a 30 percent fall in recent weeks from a year ago. Events in China will determine the outlook for the sector in the year ahead.

China's zero-COVID containment measures last year slowed its economic growth, which reduced demand for chips, which account for almost a third of Korea's exports to its giant neighbor. China's recent easing of COVID restrictions is raising hopes that chip exports could rebound in 2023. But this may provide only temporary relief.

Korea is under American pressure to reduce chip exports to China. Washington is expecting Seoul to comply with a range of semiconductor export restrictions announced in October. Korean chipmakers Samsung Electronics and SK hynix have been granted a one-year waiver before they need to enforce the measures.

They will need to find new markets in the meantime. That could prove difficult ― at least in the short term ― because there is less global spending on electronic products, such as personal computers, which rely on memory chips.

The troubles in the chip sector meant that Korea's total exports shrank by 14 percent in November from a year ago. Hikes in interest rates in the U.S. and elsewhere will mean the slowdown in sales of consumer electronic products will continue for some time.

While exports are falling, the cost of Korea's imports, mainly energy supplies and other natural resources, have increased. This means the country's current account surplus will sharply narrow this year. The situation has also been exacerbated by the sharp fall of the won against the U.S. dollar, which has made it one of the weakest currencies in Asia.

The picture is no better when it comes to the domestic economy due to high levels of household debt, rising inflation, increased interest rates and fiscal tightening. As a result, most economists estimate the economy will grow by less than 2 percent in 2023, compared with 4.1 percent in 2021 and 2.6 percent last year, which would be the weakest economic performance since 2009.

The large size of household debt, among the biggest in the world, is constraining consumer spending when incomes are being eroded by rising inflation and interest rates. Although the inflation rate may have peaked, it is still likely to remain higher than the central bank's target rate of 2 percent over the coming months. This means that the central bank will continue to keep interest rates high to squeeze inflation.

Not only will consumers be spending less, but so will companies in terms of investments. In addition, the administration of President Yoon Suk Yeol is planning to cut government spending this year, although the opposition-controlled National Assembly is likely to try to reverse those plans.

Moreover, President Yoon's proposals to reinvigorate the economy through pro-business policies, including cutting taxes, promoting labor reform and easing curbs on property speculation, appear to be going nowhere as long as the National Assembly remains out of his control. His low approval ratings have not helped his cause either.

Even as he waits for the next legislative elections in April 2024, Yoon must prepare for other economic challenges. One could be a collapse in the overvalued property market if mortgage rates remain high as Korea undergoes the most aggressive monetary tightening cycle since the 1997 financial crisis.

Nevertheless, there is also the possibility that the central bank, aware of the risks that its monetary policy is causing, could take a more cautious approach in the coming months. It wants to avoid, for example, further stress in the corporate credit sector following the recent bond default by Legoland Korea or causing the nation to fall into a recession.

President Yoon could regain some popularity if he displayed leadership in tackling economic issues. He could turn things to his advantage in implementing reforms if the economic slowdown convinces the public that such measures are needed.

However, this so far looks like a missed opportunity. Lacking charisma and communications skills, he has wasted valuable political capital in pursuing rather trivial goals such as moving the presidential office from the Blue House.

He has also antagonized the opposition whose support he needs in passing economic reforms in the National Assembly by targeting prosecutions against former officials of the Moon Jae-in administration.

The apparent dysfunction of the Yoon administration is likely to leave Koreans confronting painful and difficult times. Happy New Year!

John Burton (johnburtonft@yahoo.com), a former Korea correspondent for the Financial Times, is a Washington, D.C.-based journalist and consultant.