[The Editors' Verdict] Choo Kyungho's Economic Team: Confidence or Complacency?

More Foreign Exchange Reserves Than Past Crises
But Household and Corporate Debt Remains Another "Powder Keg"

Just as the post-COVID era seemed to be dawning, a whirlwind of economic crisis is sweeping through. And it’s happening in October, a month that has historically sent shivers down the spine of the Korean economy. October 2008, during the global financial crisis, was such a time. Foreign media outlets warned one after another about the possibility of a foreign exchange crisis as the won-dollar exchange rate surged and Korea’s foreign exchange reserves were depleting, and this eventually became a reality. Eleven years earlier, the situation was even more devastating. In October 1997, right before the foreign exchange crisis, foreign media competitively reported that Korea would apply for a bailout from the International Monetary Fund (IMF), and the Korean government reached out for help the very next month.

October 2022 is no different. With the cumulative trade deficit surpassing $30 billion for the first time ever as of the 10th of this month, and the current account turning to a deficit in August, economic crisis rumors are rapidly spreading. This is because it closely resembles the 1997 foreign exchange crisis and the 2008 financial crisis, both of which began with trade and current account deficits.

However, there is one striking difference from those times. The Yoon Seok-yeol administration’s economic team is showing more confidence than ever. At last week’s G20 Finance Ministers and Central Bank Governors meeting held in Washington, D.C., Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho actively promoted evaluations from the IMF and Moody’s that “Korea’s economic situation is fundamentally different from 1997,” drawing a clear line against crisis rumors. Bank of Korea Governor Lee Chang-yong echoed this sentiment, saying, “It’s not the same crisis as before. This is not empty talk.” While the majority of the public feels the crisis, the Yoon administration’s economic team’s confidence is largely due to Korea’s foreign exchange reserves, which are far more substantial than in 1997 or 2008.

Yet, there is another indicator that contrasts with those times: the ‘debt’ of households and businesses on the eve of the storm. As of the end of June this year, the total debt of Korean households and businesses stands at 4,700 trillion won. The problem is that with debt at an all-time high, the base interest rate has reached 3.0%, causing commercial banks’ loan interest rates to rise sharply. This inevitably impacts ordinary citizens with debt, self-employed individuals, and small and medium-sized enterprises. If the foreign exchange crisis originated from the nation’s empty treasury, now household and corporate debt could become a powder keg. At such a critical time, Governor Lee’s remark that “(interest rate hikes) contribute to stability when viewed from a macro perspective” feels rather complacent. When the government insists everything is fine, households and businesses tend to lose their sense of urgency. It might be more effective now to speak frankly to the public, saying, “Household debt is the biggest risk. Reduce your debt.”

Star economist Gregory Mankiw of Harvard University warned that “the current recession is different from the Great Depression or the 2008 financial crisis” and cautioned against policy-making based on ‘empiricism.’ He also said that to understand the economy, one must study history, politics, and psychology. The economic team should not be fixated on past indicators and fundamentals right now. They need to recognize the seriousness of ‘debt’ more than ever and understand why the public is anxious. Only then can they devise tangible measures to enhance the debt repayment capacity of vulnerable groups. While the economic team shows confidence in fundamentals, as Princeton University’s Atif Mian said, a ‘house built on debt’ can collapse in an instant. Confidence can turn into arrogance in a moment.

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