SEOUL, Jan. 7 (Korea Bizwire) – The South Korean economy, which has been struggling with exports and flaccid domestic demand over the past year, is facing a triple whammy of weakening growth in China, geopolitical uncertainties surrounding North Korea and stubbornly weak international crude prices, watchers said Thursday.
South Korea’s economy, which was rocked by a U.S. interest rate hike late last year, took another hit after the Chinese stock market crash and the weakening of the yuan.
Making matters worse, Asia’s fourth-largest economy was jolted by North Korea’s surprise announcement that it successfully conducted its fourth nuclear test on Wednesday.
Such developments have caused the government to beef up monitoring of external developments and potential fallout with senior policymakers doing their best to ease market jitters by promising to implement contingency plans if the need arises.
After news broke that the North tested another nuclear device, Financial Services Commission Chairman Yim Jong-yong stressed that the impact of the test will not last long and that any financial fallout will be limited.
This was followed by a statement by Finance Minister Choi Kyung-hwan who said the government is capable of handling the current situation.
“The market will be checked around the clock and the government will take swift action to control fallout,” he said.
Among areas affected by the string of unexpected developments, the local bourse took the brunt of the impact.’
After taking a beating on Monday following China’s market crash, the benchmark Korea Composite Stock Price Index (KOSPI) again plunged 21.1 points, or 1.1 percent, to end the day at 1,878.68 on Thursday.
China’s stock market halted trading earlier in the day after share prices plunged by more than 7 percent from Wednesday.
This shock was felt in the foreign exchange market. The South Korean currency ended at 1,200.60 won against the greenback, down 2.7 won from the previous session’s close and the lowest level since Sept. 8 last year.
“China’s economic slowdown, the U.S. interest rate hike and geopolitical risks surrounding the region combined to fuel the problem,” an observer said.
The weakening of the Korean won can have negative consequences for investments, and expose local companies to currency risks, although if exchange rates stabilize, the weak won can make locally made goods more competitive abroad, he said.
Another area of concern is a possible move by the U.S. Federal Reserve to gradually mark up interest rates in the coming months, which could cause an outflow of capital from the country.
Further complicating the matter is a sharp drop in crude oil prices brought on by sluggish demand. Weak crude prices are a sign of tough economic times ahead.
“Weak trade will limit economic growth while the drop in crude prices will invariably hurt global petrochemical and refined petroleum prices that make up a sizable portion of South Korea’s exports,” he said.
South Korea’s exports dropped 7.9 percent on-year in 2015 to US$527.2 billion.
Local experts, meanwhile, said that under present circumstances, it is hard to forecast how things will develop down the road.
A finance ministry official who declined to be identified said judging by past experience, the nuke test will have only short term repercussions.
“On the other hand, China’s stock market crash and weak crude prices may pose a whole new set of problems,” a source who declined to be identified said.
Others such as Yun Chang-hyun, a professor of business management at the University of Seoul, said if the China risk, U.S. rate hike, and low crude prices become entangled, then the situation can get out of hand.
“There may not be another explosion like the global financial crisis, but there is a chance that domestic consumption and investment will start decreasing that will drag down growth,” he said. “If things go in this direction the country may be hard pressed to achieve 3 percent level growth in 2016.”
The government said 3.1 percent growth may be reached in 2016, up from the 2.7 percent forecast for 2015.