[Insight & Opinion] When Politics Makes the Economy More Difficult

[Asia Economy] Gangwon Province refused to fulfill its obligation regarding the refinancing of 205 billion won worth of asset-backed commercial paper (ABCP) related to the Legoland project financing (PF). The commercial paper, which had received the highest credit rating (A1) due to the local government's guarantee, was defaulted because the local government withdrew its guarantee. Although they later promised to repay by January next year, the already strained short-term funding market froze. The government and the Bank of Korea held an emergency macroeconomic and financial meeting and announced a liquidity supply program exceeding 50 trillion won. This is the result of approaching the Legoland issue politically.

The instability in the bond market also involves the Korea Electric Power Corporation (KEPCO) bonds. Since the second half of last year, the issuance of KEPCO bonds with the highest credit rating has surged, crowding out other bonds with relatively lower credit ratings in the bond market. KEPCO has issued bonds worth 23.18 trillion won this year alone. Looking closely, this too is the result of political choices. KEPCO posted a deficit of 14 trillion won in just the first half of this year. KEPCO's massive deficit is due to the nuclear phase-out policy and the suppression of electricity rates by successive governments, regardless of political orientation. Electricity rates have remained almost unchanged since 2013. KEPCO has no choice. If it stops issuing bonds, it will face an immediate liquidity crisis.

On August 16, right after the 'Beidaihe (北戴河)' meeting where current and former top Chinese Communist Party and government leaders gathered, Premier Li Keqiang visited Shenzhen City in Guangdong Province in southern China to meet with local government leaders. Shenzhen is a symbolic place visited by Deng Xiaoping in 1992 when he clearly promoted reform and opening-up in his so-called Southern Tour speeches (Nansun Ganghua, 南巡講話). On the same day, President Xi Jinping visited Liaoning Province and toured the Liaoshen Battle Memorial Museum. The Liaoshen Battle was a decisive fight during the Chinese Civil War between the Kuomintang and the Communist Party, where Mao Zedong’s Communist forces gained the upper hand and took control of Northeast China. Xi Jinping has no intention of following Deng Xiaoping’s reform and opening-up vision. Now, Li Keqiang is stepping down, and Xi Jinping is entering his third term. The successor premier is reportedly Li Qiang, who was responsible for the Shanghai lockdown that was devastating to the Chinese economy. In a situation lacking transparency, the expanded involvement of the Communist Party across the economy is unlikely to have a positive impact. After Xi Jinping’s reappointment announcement on October 24, the combined market capitalization of the five major Chinese companies listed on the US stock market dropped by about 52.2 billion dollars in one day. The Hong Kong stock market fell to a 52-week low, and the yuan has continued to weaken.

Former UK Prime Minister Liz Truss, who resigned after only 49 days in office, only increased instability in the global financial markets. On September 23, Truss announced the largest tax cut policy in half a century, but the announcement of tax cuts without countermeasures alongside expanded public spending triggered concerns about fiscal deterioration. To simultaneously implement large-scale tax cuts and fiscal expansion, the issuance of government bonds inevitably had to increase. The pound sterling hit record lows, and UK government bonds experienced an unprecedented price crash and extreme volatility. The losses suffered by UK pension funds alone are said to have reached up to 150 billion pounds, equivalent to 243 trillion won. Despite intervention by the Bank of England, the market did not stabilize, raising the possibility of a financial crisis, which ultimately forced Truss to resign as prime minister. From David Cameron’s misjudgment in holding the Brexit referendum to Truss’s reckless policies, politics has hampered the UK economy over the past seven years.

Economic problems always exist, but the answer must be found in politics, as Democratic Party leader Lee Jae-myung said during his presidential candidacy. The economy is more politics than science. However, bad politics never helps the economy in any country. Kim Dong-yeon, the current governor of Gyeonggi Province and former Deputy Prime Minister for Economy, said that if our economy is in crisis, it is a crisis of political decision-making.

Kim Sang-cheol, Economic Commentator

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