Market Trust in Gov’t Essential for Economy

The foreign exchange market is seeing wild fluctuations, with the won’s value yesterday falling to its lowest level in six and a half years at 1,328.1 per dollar.

The stock market closed at 1,366.1, far below the psychologically sensitive mark of 1,500.

Korea’s real economy is in trouble as well. According to a report by the Korea Economic Research Institute, major indexes on the real economy just slightly rose in August, including industrial production (1.9 percent); the service industry (1.6 percent) and facility investment (1.6 percent).

The figures show the loss of Korea’s economic momentum. Moreover, the data was released before September, when the global financial crisis began to appear.

Exports, the backbone of the Korean economy, are also seeing dim prospects. “Major economies will show one to two percent growth next year,” an official of the Strategy and Finance Ministry said. “The global recession will drive down Korea’s exports to other countries.”

Banks and companies are short of dollars, and the country’s household debt has skyrocketed to a combined 660 trillion won (496 million dollars). Some predict that an economic crisis triggered by a housing market recession could strike Korea as a result of falling housing prices and the bankruptcy of construction companies.

The market’s trust in the government is essential to revitalize the Korean economy. The economic team of the incumbent administration has lost credibility through its maligned foreign exchange rate policy.

Many experts are urging the government to closely monitor the market instead of intervening to regain trust.

“Liquidity in foreign currencies is the biggest problem, but the government cannot solve it by intervention,” said Korea Institute of Finance researcher Shin Yong-sang. “It should minimize intervention based on the assumption that banks will face the crisis themselves.”

Unlike in the 1997 financial crisis, the government now openly shares information on its foreign reserves and external debts.

Critics say, however, that the government has lost the authority to implement a policy immediately and consistently since the ministry handed over its financial policymaking power to the Financial Services Commission.

They say the government should ask the financial industry and companies to refrain from hoarding dollars, and appeal to the people to help overcome difficult economic conditions by recovering the market’s trust in state policies and leadership.

Others, however, say equating the situation to that of the 1997 crisis is a stretch. They are urging a closer look at the situation, warning that the exaggeration of a crisis and fears will only make things worse.

kkh@donga.com bae2150@donga.com