[Weekly Review] Government Warns Against Excessive Anxiety Over Iran... No Impact on Real Economy

Bank of Korea: "A $10 Increase in Oil Prices Reduces Current Account Balance by $9 Billion"
Household Loans Increase by 60 Trillion Won Annually Despite Real Estate Regulations
Government Finances Bleak... National Debt Surpasses 700 Trillion Won

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] To prepare for the repercussions of the conflict between the United States and Iran that escalated into armed clashes, the government has formed a joint response team and taken action. With the financial markets calming down for now, the government is focusing on preventing excessive anxiety from spreading in the market. However, the impact of the Iran situation on Korean companies due to the sharp rise in oil prices is expected to require more time to observe. The Bank of Korea forecasted that "assuming export and import volumes remain unchanged, a $10 increase in oil prices would reduce the current account balance by $9 billion." In the previous year, the impact of a $10 rise in oil prices on the current account was estimated at $8 billion, indicating that the influence of oil prices has grown.

◆ Hong Nam-ki: "Beware of Excessive Anxiety" = On the 10th, Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, said regarding the conflict between the U.S. and Iran, "Domestic and international financial markets are showing signs of stabilization, and no direct impact or unusual trends have yet been observed in the real economy sector." Hong presided over the 'Middle East Situation Related Ministers' Meeting' at the Government Seoul Office and stated, "Since uncertainties related to instability in the Middle East region still exist, we will closely monitor the situation and market trends calmly but respond firmly if necessary."

Hong added, "While it is necessary for everyone to have a serious awareness and response posture, it is important to be cautious about emphasizing excessive anxiety," and urged, "Please trust the government's firm preparedness and response strategy and calmly fulfill your respective roles." The government has established five joint task forces across five ministries covering areas such as safety measures for overseas Koreans, financial markets, international oil prices, the real economy, overseas construction, and maritime logistics, monitoring the situation 24/7. In case of emergencies, such as disruptions in oil and gas supply, the government plans to proactively and swiftly activate the already prepared contingency plans, including the release of government and private stockpiled oil.

◆ Bank of Korea: "A $10 Increase in Oil Prices Reduces Current Account by $9 Billion" = Before the Iran situation was reflected, the current account balance turned to an increase compared to the same period last year in November of last year, after nine months. The current account, which had started to decline due to the U.S.-China trade conflict and semiconductor price drops, showed signs of improvement after about a year. The Bank of Korea reported that the current account balance in November 2019 was $5.97 billion (approximately 6.9 trillion KRW). This was an increase of $840 million (about 16%) compared to the same period the previous year ($5.13 billion). This marked an improvement compared to the previous year after about a year since November 2018, when Korea's export market began to deteriorate. The cumulative current account balance up to November was $55.64 billion, and it is expected to comfortably surpass the Bank of Korea's forecast of $57 billion for the entire year of 2019. A Bank of Korea official said, "Looking at the November current account, it can be interpreted that fears of turning into a deficit have at least subsided." However, the official added, "We need to observe the trend for a few more months to determine if it is a definite positive turnaround."

However, it is too early to interpret this positively. The size of the goods balance actually decreased, and the increase in the current account was largely due to corporate dividends. Concerns about a 'recession-type surplus' persist as the decline in exports and imports due to global trade sluggishness continues. Although the situation has calmed for now, if oil prices continue to surge due to instability in the Middle East, a negative impact on the current account is expected. A Bank of Korea official explained, "If international oil prices continue to rise due to the Iran situation, it will be a negative factor for the current account," adding, "Assuming export and import volumes remain unchanged, a $10 increase in international oil prices would reduce the current account surplus by $9 billion."

◆ Real Estate Measures Ineffective... Household Loans Increase by 60 Trillion KRW Annually = As real estate prices soar, the government's real estate regulations have become ineffective, with household loans continuing to increase. In December, bank mortgage loans increased at the fastest rate in over three years. Despite the successive real estate measures introduced by the Moon Jae-in administration, the scale of household loans in the banking sector, including mortgage and credit loans, has increased by about 60 trillion KRW annually.

According to the Bank of Korea's 'Financial Market Trends in December,' bank mortgage loans increased by 5.6 trillion KRW last month. This was about 700 billion KRW more than the increase in November (4.9 trillion KRW). The increase in demand for funds was due to active transactions in both jeonse (long-term deposit lease) and sales of houses. The monthly increase in mortgage loans was the largest since November 2016, when it recorded 6.1 trillion KRW. Bank household loans also continued to expand. Following an increase of 58.9 trillion KRW in 2017, household loans rose by 60.8 trillion KRW in 2018 and 60.7 trillion KRW last year. Despite the government's continuous real estate measures, annual bank household loans have not slowed and have increased by about 60 trillion KRW each year. The Moon administration introduced measures such as the August 2, 2017 plan, the September 13, 2018 plan, and the comprehensive December 16 plan last year.

A Bank of Korea official explained, "The demand for jeonse funds continued, and apartment transaction prices rose, leading to a significant increase in household loans in December." The official added, "The loan flow will change depending on how effective the real estate measures are. These loan regulations have a time lag, such as about two months for ownership transfer dates. Even during the September 13 plan, loans decreased two to three months later."

◆ National Debt Surpasses 700 Trillion KRW... Bleak Government Finances = Meanwhile, as of the end of November last year, the central government debt surpassed 700 trillion KRW for the first time in over 20 years since related statistics began.

According to the 'Monthly Fiscal Trends January Issue' published by the Ministry of Economy and Finance, as of the end of November last year, central government debt stood at 704.5 trillion KRW, an increase of 6 trillion KRW from the previous month. It is expected to exceed 700 trillion KRW by the end of December last year as well. The integrated fiscal balance from January to November last year recorded a deficit of 7.9 trillion KRW, the largest deficit in 10 years since 2009 for the same period. Accordingly, the annual integrated fiscal balance is likely to return to a deficit for the first time in four years since 2015. Initially, the government had forecasted a 1 trillion KRW surplus in the integrated fiscal balance, but it has become difficult to meet this target due to early and active fiscal spending in the first half of the year, which widened the fiscal deficit.

Meanwhile, national tax revenue decreased. Up to November last year, national tax revenue was 276.6 trillion KRW, down 3.3 trillion KRW compared to the same period the previous year. The tax revenue progress rate also fell by 1.5 percentage points to 93.8% compared to the previous year. A Ministry of Economy and Finance official explained, "The fiscal deficit peaked in the second quarter due to early and active fiscal spending in the first half, but the deficit has been narrowing since the third quarter as expenditure gradually decreased relative to revenue."

This content was produced with the assistance of AI translation services.