Don’t let a political crisis dampen the economy

  Ahn Dong-hyunThe author is a professor of economics at Seoul National University.A democratically-elected president is poised to be impeached for the third time since the country’s founding. The latest impeachment motion did not go through last week due to the lack of quorum, but we are just at the beginning of a political turmoil. The president who has never been popular has put himself into a vegetative state through an epic pratfall. The opposition leader facing multiple legal cases cannot but thank his stroke of good luck. He won’t waste any means to capitalize on the windfall before any ruling gets in the way of his bid for presidency.

A state of anarchy inevitably will last through the first half of next year, whether it is because of the Constitutional Court’s ruling to uphold or deny a legislative impeachment if it is endorsed or because of the “orderly early exit” arranged by People Power Party chief Han Dong-hoon, regardless its feasibility.

The toll on the economy and financial markets would be significant. Donald Trump is returning to a second presidency in the United States in January, armed with various protectionist weapons to lash against trading foes and allies alike. A domestic whammy is now added to external uncertainties.

The foreign exchange rate is most worrisome. In the last impeachment episode in 2016 against President Park Geun-hye, when candlelight vigil protests began in late September, the U.S. dollar traded at 1,100 won and then shot up to 1,250 won in early 2017. In normalized to pre-impeachment levels in March after the Constitutional Court gave the green light to ousting her. The dollar-won rate that sprang above 1,440 won from 1,401 following the martial law declaration eased somewhat after the lifting of the decree, but remains volatile around 1,430. It is feared that the exchange rate will revisit levels above 1,500 won that were unseen except during the financial crises of the late 1990s and 2007-2008.

Stocks at least had been resilient during the last impeachment episode in 2017. The main Kospi rose from 2,050 to 2,160. But this time may be different. The Korean stock bourse is defended mostly by local bootstrap individual investors who account for about 60 percent of daily trade volume. Institutions including pension funds have long deserted the market as they must ensure returns. Only speculators are left among foreign investors mindful of the forex movement. Individuals left stranded have joined the flight to the U.S. market. The buffering forces to sustain the market are no more, boding badly for its outlook.

The economy also cannot expect any shield. The economy grew 0.5 percent in the third quarter and 0.8 percent in the fourth amid a presidential vacuum from the impeachment in 2016. It rose 0.9 percent in the first quarter in the following year before the impeachment became legally valid in March. Samsung Electronics enjoyed a peak period with its operating profit surging to 53 trillion won ($37 billion) in 2017 from 29 trillion won in 2016.

All other mainstay export items — petrochemicals, steel and nuclear energy — had global competitiveness then. But today’s trade field is primarily defended by automobiles and chips. Moreover, Samsung Electronics’ dominance has sharply waned since then. The economy is also deficient of shock barriers.

The last impeachment crisis hit private consumption the hardest. The latest impeachment also arrived at the year-end, the usual peak season for merchants, aggravating their already hard-knock livelihood. Uncertainties spell a protracted lethargy in investment in construction fields and new facilities. Fiscal help cannot be expected as next year’s restrictive budget only got streamlined in the legislature. The central bank is constrained in further loosening due to steep depreciation in the currency value.

Therefore, companies and individuals are on their own to survive the harsh tumultuous times. The economy is in tatters due to political havoc and is abandoned by companies, talents and retail investors. The barren field is on fire. A quarreling couple at least feeds their children during their fights. Politicians always talk about caring for the people. Fight on if you must, but do make time to look after the people.

Translation by the Korea JoongAng Daily staff.