Korea's Two-Track Crisis... Weak Korean Economic Strength, Insufficient Defense

Expert: "Financial and Real Economy Complex Crisis, The Inevitable Has Come"

Economy Propped Up by Debt After Financial Crisis
COVID-19 Adds Fuel to Exposed Weakness

"The novel coronavirus infection (COVID-19) was a trigger for our economy."

Regarding the financial and real economy complex crisis caused by COVID-19, economic experts have the sentiment that "what was bound to happen has happened." After the 2008 global financial crisis, there was a liquidity feast, and the economy, which was essentially propped up by debt, is now collapsing. In particular, the Korean economy had already been weakened in its fundamentals before the COVID-19 outbreak; with the onset of COVID-19, the real economy contracted, and as the market was shaken, financial shocks have now been added.

◆ US Financial Market Bubble Bursts... Foreigners Quickly Cash Out = According to the Korea Exchange, foreign investors have net sold more than 5 trillion won in the KOSPI market alone since the fear of the COVID-19 pandemic (global outbreak) intensified this month. The KOSPI index fell from 2002.51 points (closing price) at the beginning of this month to 1685.08 as of 10:57 a.m. on the 13th.

The panic among foreign investors began as COVID-19 spread worldwide. Even though the U.S. Federal Reserve (Fed) lowered the benchmark interest rate, it could not quell market fears, and investors instead sought to secure cash. The place investors turned to for cutting losses was Korea. Shin Se-don, honorary professor of economics at Sookmyung Women's University, said, "Because the Korean economy was internally vulnerable and was considered a major outbreak country of COVID-19, foreigners used this as an opportunity to exit."

The evaporation of KOSPI market capitalization and the deterioration of the financial market lead to worsening financing conditions for domestic companies. Companies, already hit in sales by COVID-19, may face difficulties in raising funds. Credit rating agencies have already been downgrading the credit ratings of domestic companies one after another, which could cause a credit crunch for companies that had been raising funds by issuing bonds at low interest rates, potentially leading to financial institution insolvencies. According to the Korea Institute of Finance as of the 12th, Korea's CDS (5-year) rose 14 basis points (bp) from the previous day to 56 bp (1 bp = 0.01 percentage points). CDS is a derivative product that compensates for losses when a country or company issuing bonds defaults; a higher figure indicates a higher risk of default for that country or company.

◆ The Damaged Real Economy: COVID-19 Was Like a Slap in the Face = In fact, the weakening of the Korean economy's fundamentals had already been evident before the COVID-19 outbreak. The reduction in working hours and the increase in minimum wage imposed labor cost shocks, making the overall economy vulnerable. After maintaining a growth rate in the 3% range, the growth rate fell to the 2% range last year, with overall sales of self-employed and small and medium-sized enterprises (SMEs) sluggish, and rising labor costs making the situation even more fragile.

The industrial structure was also vulnerable. Korea is highly dependent on exports, and last year, semiconductor prices plummeted, already damaging exports. The current situation is expected to further block export routes. As Korea was identified as one of the major COVID-19 spread countries, human and material exchanges were cut off, and with COVID-19 spreading to the U.S. and Europe, trade conditions now also need to be a concern.

If this situation continues, there are concerns that debt could explode. Not only household debt but also the repayment rates of debts by self-employed and SMEs could sharply decline, leading to insolvencies in financial institutions and large corporations. At the end of last year, Korea's household debt reached a record high of 1,600 trillion won. Korea's private credit ratio relative to GDP was 195.0% as of the end of the third quarter last year. This means that nearly twice the amount of the real economy is piled up in corporate and household debt. The private credit ratio rose 13.1 percentage points since the fourth quarter of 2017 (181.9%), ranking second among 52 countries surveyed by the Institute of International Finance (IIF), following Sweden. This is the result of household debt continuing to increase and corporate debt, which had been stagnant, starting to rise again.

Professor Sung Tae-yoon of Yonsei University's Department of Economics said, "With the real economy being shocked by COVID-19, the global financial market plunged, and Korea became isolated, causing the shock to appear even greater." He added, "The impact will sequentially affect self-employed individuals, small business owners, SMEs, and companies influenced by the global value chain (GVC)." Professor Lee In-ho of Seoul National University's Department of Economics said, "The real economy itself seems to be considerably difficult, even more so than the financial market." He emphasized, "Ultimately, the financial market reflects the real economy, but with concerns about large-scale bankruptcies, the real economy seems likely to be severely damaged."

If the situation prolongs, Korea's representative asset, the real estate market, could also be shaken. Professor Kim Sang-bong of Hansung University's Department of Economics said, "The real estate bubble will burst due to COVID-19," adding, "Ultimately, household debt issues will surface, and delinquencies in the financial market are expected to increase." Professor Sung Tae-yoon said, "Although real estate prices rose in Seoul's Gangnam and metropolitan areas, on a nationwide scale, real estate prices had not increased. If the entire real economy sinks and financial market problems expand, the decline in the real estate market could become more visible."

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