Leadership vacuum weighs on fragile economy

By Nam Hyun-woo

Before the election of a new president in May, a lack of political leadership is feared to weigh heavily on the economy, which could be affected by a series of big events in the coming months.

After President Park Geun-hye’s impeachment was upheld last week, pundits agree that the country had managed to remove political uncertainty. But they worry that without strong leadership a potential U.S. rate hike, possible designation of the country as a currency manipulator and China’s retaliation over the deployment of a Terminal High Altitude Area Defense (THAAD) battery will negatively impact the economy.

“The conclusion of the impeachment removes one important element of political uncertainty, allowing a new president to come in and focus on formulating reforms that address Korea’s structural challenges,” Moody’s Investor Service Credit Officer Steffen Dyck said.

“However, upside risks to our growth forecast of 2.5 percent for 2017 are limited given that other domestic and external headwinds will affect Korea.”

The U.S. Federal Reserve will most likely raise its key rate during its meeting scheduled this week. This will place the Bank of Korea in a dilemma ― the central bank cannot follow suit of the U.S. due to the country’s snowballing household debt amounting to 1,340 trillion won as of last year, but inaction might end up causing foreign capital flight.

Another potential hitch due next month is the U.S. Treasury’s report on currency manipulation.

Experts say the likelihood of Korea being labeled as a manipulator is lower than other countries which were in the Treasury’s monitoring list, but they also point out that Washington may threaten to do so to get the upper hand in disputes regarding any renegotiation of a trade deal with Korea.

On a more negative note, China is continuing to come up with retaliatory measures after Seoul agreed to deploy a U.S. missile defense system here, such as banning tour agencies from selling tours to Korea, which has jolted the already-weak consumption here.

Observers are concerned whether acting President and Prime Minister Hwang Kyo-ahn will be able to deal with the issues over the next two months.

“Korea is set to face many difficult situations, which could be too tough for the acting President. Worse, Prime Minister Hwang does not seems ready to take on the challenges. The lack of proper political leadership really poses a big risk,” Prof. Lee Phil-sang at Seoul National University said.

Against this backdrop, experts say Deputy Prime Minister and Strategy and Finance Minister Yoo Il-ho’s role will be critical. However, there are questions whether Yoo can concentrate on economic matters.

Hwang did not clearly rule out his running for the presidency. If he announces his presidential bid, Yoo will assume the role of acting President, taking charge of not only economic issues but also all state affairs.

One of key events for Yoo is the mid-March meeting of G20 finance ministers in Germany. The government is seeking meetings with Yoo’s U.S. and Chinese counterparts.

In a meeting with economic ministers Sunday, Yoo stressed that “all economy-related ministries should maintain the government’s policies while paying extra attention to risk management and economic recovery.”

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