[Initial Perspective] The Complex Crisis as the 'New Normal'

Do Not Expect a Return to Past Situations
Need to Prepare Countermeasures Considering Constant, Complex, and Ongoing Risk Factors

The term New Normal, frequently mentioned whenever economic conditions change rapidly, originates from statistics. It is derived from the Normal Distribution, which has a bell-shaped curve that is symmetrical and convex around the mean. Here, ‘normal’ refers to an average and typical situation. The New Normal refers to a situation where the average economic conditions or environment have changed significantly. When the distribution is skewed to one side or has an abnormally thick tail (fat tail), it is difficult to consider it a normal, typical situation.

Using the past normal as a benchmark, the past year has seen many events with a low probability of occurrence (extreme values). The Ukraine war, hyperinflation, global interest rate hikes, real estate crises in the U.S. and China, and financial and construction company insolvencies related to real estate project financing (PF) have all emerged as successive unsettling variables. At the start of the year, liquidity crises caused by the Legoland incident were narrowly overcome.

Moreover, it seems that rather than responding appropriately to these events, we have been expecting a return to the average or previous normal. The capital market’s hopes for inflation easing and interest rate normalization (?) persisted throughout the year. There was also ongoing optimism that the Ukraine war would end soon. Expectations were held that the commercial real estate and PF crises might ease as the real estate market recovered. Because of this, there was a somewhat passive response, perceiving that a return to what had long been considered a normal situation was imminent. Perhaps neither the government nor the market wanted to diagnose the crisis as a crisis and instead tried to avoid confronting the situation.

As the year ended and plans for the next year were being made, news of Taeyoung Construction’s workout was simultaneously reported. Financial authorities reassured the market by stating that the crisis would not spread to other construction companies and that the financial market was quite stable. However, financial market participants were once again engulfed in anxiety. The sharp rise in bond yields for mid-sized and large construction companies reflects the market’s unease. Some voices express concerns that even if Taeyoung Group sells all its assets, it may be difficult to resolve the trillions of won in borrowings and contingent liabilities held by Taeyoung Construction.

Looking back, none of the factors that were said to potentially trigger a crisis have returned to normal or been properly resolved. Conflicts around the world continue, and major countries’ monetary authorities, battling inflation, do not seem ready to lower interest rates back to past normal levels. The real estate crises in the U.S. and China and the domestic PF crisis are ongoing. Furthermore, it is impossible to know what crisis factors may lurk ahead.

It is highly likely that a situation of constant conflicts and complex risk factors will be the New Normal for the coming years. The unstable domestic and global economic conditions may be constants rather than variables. The essential skill that the government, financial authorities, companies, and investors must have in this negative New Normal situation is crisis management ability. Waiting and hoping that economic conditions will luckily return to the past normal will only make the situation more difficult.

To overcome the New Normal situation where extreme events occur frequently, it is necessary to predict possible scenarios and prepare response plans for each to minimize the shockwaves. The government, financial authorities, companies, and investors must recognize the changed situation as the New Normal and actively seek breakthroughs.

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