"Trade Deficit, Exchange Rate, and Inflation Are Okay?" Amid Complex Crises... Government's 'Solo Optimism'

Repeated Failures in Managing Government Messages on Trade Balance and Exchange Rates
Concerns Over Market Instability and Declining Policy Credibility

[Asia Economy Sejong=Reporter Kwon Haeyoung] Amid the so-called 'three highs (高)' complex crisis of high inflation, high interest rates, and high exchange rates, the government's repeated 'optimistic outlooks' are missing the mark. While these messages are largely intended to alleviate unnecessary market anxiety, the government's failure in message management has raised concerns about market instability and declining trust in policies.

According to the government on the 21st, the Ministry of Economy and Finance distributed a press reference material titled 'Recent Trade Balance Trends' on the 22nd of last month, stating that it is "more appropriate to judge based on the merchandise trade balance" regarding the recent trade deficit. This was after the announcement of the trade deficit from August 1 to 20 on the same day.

The Ministry said, "Considering recent changes in the trade structure such as the expansion of overseas production exports by Korean companies," and added, "The merchandise trade balance has continued to show a surplus until June due to the boom in intermediary trade." They also explained that the merchandise trade balance maintained surpluses of $800 million in January, $4.3 billion in February, $5.6 billion in March, $2.9 billion in April, $2.7 billion in May, and $3.6 billion in June this year.

However, just two weeks later, on the 7th of this month, the merchandise trade balance for July turned to a deficit, turning the government's statement into a promise unfulfilled. Consequently, the Economic Analysis Division of the Ministry of Economy and Finance, which distributed the press reference material emphasizing the merchandise trade surplus, had no choice but to mention the July merchandise trade deficit reversal in the 'Recent Economic Trends September Issue (Green Book)' released on the 16th.

The Bank of Korea also forecasted that the 'current account balance,' which the government had said was fine, would turn to a deficit in August. This is because the August trade deficit recorded an unusual $9.47 billion, making it highly likely that both the merchandise trade balance and the current account balance would show deficits. Although Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho stated at the National Assembly on the 29th of last month that "trade balance deficits and current account balances come out differently," this remark is also likely to be proven wrong soon.

The exchange rate issue is similar. Since June, Deputy Prime Minister Choo has continuously stated that "an exchange rate of 1,300 won cannot itself be seen as a sign of an economic crisis," and "the dollar's strength has caused other major currencies to decline, so it cannot be viewed as a crisis signal." However, the won-dollar exchange rate, which was in the 1,290 won range, has surged to the 1,390 won range and is on the verge of breaking 1,400 won. As the exchange rate soared, the government hastened to calm the situation by hinting at the possibility of a Korea-US currency swap agreement. Choi Sang-mok, Chief Secretary for Economic Affairs at the Presidential Office, mentioned on the 16th, "I think there will be natural discussions on common interests such as the exchange rate during the Korea-US summit."

In the market, concerns have also been raised that the government's theory of a price peak in late September to early October may be overly optimistic given the recent rapid rise in prices. Although the inflation rate may peak as the government expects, variables remain such as winter energy supply instability from Europe and rising import prices due to high exchange rates. Even if the inflation rate peaks as early as late September, high inflation is expected to persist, leading to unfavorable views on the government's 'solo' optimistic outlook.

In fact, the government is feeling the pressure internally. On the 19th, Deputy Prime Minister Choo met with the processed food industry, which is raising prices on items such as ramen, urging them to minimize price increases. The decision on whether to raise electricity rates in the fourth quarter, scheduled for the same day, has been postponed due to disagreements among ministries over concerns about fueling inflation.

While government messages to ease excessive market anxiety are necessary, overly optimistic forecasts and missed predictions by the government are problematic as they fuel market anxiety and undermine policy credibility. Especially as a complex crisis including global stagflation (low growth, high inflation) approaches, major institutions are lowering their growth forecasts for Korea next year. Just this week, the Organisation for Economic Co-operation and Development (OECD) and the Asian Development Bank (ADB) downgraded Korea's growth rate for next year to 2.2% and 2.3%, respectively.

Professor Kang Sung-jin of Korea University’s Department of Economics pointed out, "When signs of an economic crisis appear, if the government says 'it's okay, don't worry,' the market interprets it the opposite way. The government should be more cautious in managing messages and respond with sophisticated policies rather than just messages."

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