Growing Downside Risks to South Korean Economy in Wake of Impeachment < Video < Article

※This content was broadcast on the 'Economy ON' program of Yonhap News TV at 4 PM on December 18 (Wednesday). (Featuring: Wook Choi, Yonhap Infomax reporter, Hosted by: Min Jae Lee)

[Anchor Min Jae Lee]

While there are predictions that political uncertainty will somewhat decrease following the passage of the impeachment motion against President Yoon Suk Yeol in the National Assembly, concerns are growing that downside risks to our economy will further expand. Experts diagnose that as economic sentiment weakens, domestic indicators such as consumption may worsen. Let's find out the perspectives of the government and domestic and foreign experts who must overcome these challenges, with economy reporter Wook Choi.

[Reporter Wook Choi]

As you well know, reporters tend to have many evening appointments at the end of the year. In previous years, I also had difficulties managing my schedule due to numerous year-end gatherings with contacts and sources from my beat.

However, the situation has completely changed this year. Since I'm currently covering economic ministries like the Ministry of Economy and Finance, appointments that were set are being canceled one after another. Understandably, from the civil servants' perspective, they have to be cautious in the midst of the impeachment situation.

I started with this personal anecdote to illustrate how much economic sentiment has contracted. In fact, this situation is gradually being reflected in the indicators. Small business owners, who were already struggling, are expressing frustration as the year-end special demand disappears.

[Anchor]

I can relate to what you're saying. How specifically are these situations being reflected in the indicators?

[Reporter]

The official indicators the government uses to assess consumption are retail sales and service industry production, which are announced by Statistics Korea through the Industrial Activity Trend report. These indicators represent goods consumption and service consumption respectively. Additionally, private consumption, which is a component of GDP compiled quarterly by the Bank of Korea, is also one of the official indicators.

However, it takes some time for official indicators reflecting recent situations to be released. In such cases, we need to look at real-time indicators that, while not official statistics, can gauge the economic situation.

According to data from Korea Credit Data, credit card sales at small business restaurants nationwide from December 2nd to 9th decreased by 9% compared to the same period last year. This can be seen as an indicator that citizens are reducing dining out consumption due to the impact of martial law.

In a survey conducted by the Korea Federation of Micro Enterprise from December 10th to 12th on 1,630 small business owners nationwide in food and accommodation, wholesale and retail, and personal service industries, 88.4% of respondents said their sales had decreased since the declaration of martial law.

[Anchor]

There's also talk that political uncertainty should be considered somewhat resolved since President Yoon Suk Yeol's impeachment motion was passed in the National Assembly. Is there no possibility that the impact on the economy will decrease going forward?

[Reporter]

First, it's true that political uncertainty has decreased somewhat with the passage of the impeachment motion. Foreign media and financial markets are making similar assessments. If the impeachment vote had been rejected last weekend, the impact on the economy would have been even greater.

However, the problem is that the Constitutional Court's impeachment trial process will inevitably take several months. We should consider that the impeachment situation will continue until the verdict is reached.

The Constitutional Court's impeachment trial period is a maximum of 180 days. Looking at the cases of former presidents who underwent impeachment trials, it took 91 days from resolution to verdict for former President Park Geun-hye, and 63 days for former President Roh Moo-hyun.

The legal community expects the Constitutional Court to proceed with the trial more swiftly than previous presidential impeachment trials, but with so many variables, it's difficult to predict how long it will take until the verdict.

[Anchor]

So the longer the impeachment trial drags on, the greater the uncertainty for the economy will be.

[Reporter]

Yes, that's correct. The longer the impeachment situation continues, the greater the uncertainty will expand, and the impact on the economy is expected to grow.

The sector that could be most affected is domestic demand, including consumption and investment. As mentioned earlier, there's talk that the year-end special demand has disappeared as various year-end parties have been canceled since the martial law situation. It's also problematic that foreign tourists are decreasing as some countries have designated Korea as a travel risk country.

Skytour, a company specializing in inbound tourism, reported that after December 4th, immediately following the martial law situation, the rate of new reservation bookings dropped by more than 20%, and reservation cancellations increased from an average of 30-40 per day to 80.

[Anchor]

Not only is the decrease in consumption worrying, but there's also concern about companies reducing investments due to political uncertainty.

[Reporter]

Domestic demand has another axis besides consumption, which is investment. Companies may also postpone large-scale investment decisions and take a wait-and-see approach if political instability continues. It's also a general management strategy for companies to secure cash rather than expand investments during difficult times.

The Ministry of Economy and Finance, which is the economic control tower, also expressed concern about this in the 'Recent Economic Trends December Issue' published on the 13th, diagnosing that "there are concerns about increasing downside risks such as weakening household and corporate economic sentiment due to expanding domestic and foreign uncertainties." The Recent Economic Trends is also called the Green Book, which is a monthly publication containing the recent economic situation and the government's official economic diagnosis.

Until last month, the Ministry of Economy and Finance did not use the term downside risks in the Green Book. They even included the phrase 'gradual economic recovery trend' to express expectations that the economy would improve in the future. This month, this phrase was removed and the term 'concerns about increasing downside risks' was added.

[Anchor]

So the government's economic diagnosis has changed dramatically in a month since the martial law situation and the impeachment situation. I'm curious if economic sentiment also worsened during past impeachment situations.

[Reporter]

I was curious too, so I looked up some data from the impeachment situation of former President Park Geun-hye in 2016 and 2017. First, looking at the Consumer Sentiment Index (CCSI), it fell from 102.7 in October 2016 when the state affairs scandal broke out to 93.3 in January of the following year, and only recovered to 101.8 in April after the Constitutional Court's dismissal verdict.

The Consumer Sentiment Index is an indicator that comprehensively shows consumers' perceptions of the economic situation. A score above 100 means they view the economy optimistically, while below 100 means the opposite.

During the same period, the retail sales index, which represents the level of goods consumption, dropped from 97.0 in the fourth quarter of 2016 to 89.7 in the first quarter of 2017. In summary, we can see that there was a significant impact on consumer sentiment and actual consumption during the impeachment situation in 2016 and 2017.

[Anchor]

I can understand to some extent why the government mentioned concerns about economic sentiment contraction. Besides the government's economic diagnosis, what are the views of experts?

[Reporter]

Experts pointed out that the reduction in year-end consumption and foreign tourists, which is becoming a reality after the martial law situation, could be a factor in shrinking GDP.

Looking at specific opinions from financial market experts, there were mentions that if domestic economic conditions are significantly shaken due to the prolonged impeachment situation, we should leave open the possibility of negative growth in GDP growth rates for the fourth quarter of this year and the first quarter of next year.

There was also an analysis that if we assume a 5% decrease in local market sales and domestic consumption by foreigners in December, this would be a factor pulling down Korea's GDP by 0.04 percentage points this year.

[Anchor]

Experts are expressing concern about the expansion of downside risks to our economy with more specific figures. I'm also curious about the perspectives of foreign experts.

[Reporter]

Major institutions such as foreign investment banks (IBs) lowered their growth rate forecasts for our country immediately after the martial law situation broke out.

First, Citigroup lowered its growth forecast for next year to 1.5%, 0.1 percentage points lower than its previous forecast, saying that economic sentiment is rapidly deteriorating after the martial law situation.

Goldman Sachs evaluated that "we maintain our growth forecast for next year at 1.8%, lower than the market average, but risks are increasingly tilted to the downside." In particular, Goldman Sachs warned that downside risks could be greater due to external headwinds from China's economic slowdown and U.S. trade policies, unlike the impeachment situations of former President Roh Moo-hyun in 2004 and former President Park Geun-hye in 2016.

[Anchor]

Lastly, please summarize what countermeasures the government has for the domestic demand hit following the impeachment aftermath.

[Reporter]

The Ministry of Economy and Finance is currently preparing the economic policy direction for next year. There were concerns that the announcement timing would be pushed back to early next year after the martial law situation, but Deputy Prime Minister Choo Kyung-ho stated that it would be announced within this year. The economic policy direction for next year is expected to include measures to stimulate domestic demand, including support plans for small business owners.

The need for a supplementary budget to stimulate domestic economic conditions is also growing. While the Ministry of Economy and Finance has maintained the position that "we are not considering a supplementary budget," I understand that opinions are emerging internally that it could be considered.

Deputy Prime Minister Choo Kyung-ho said yesterday at the National Assembly's emergency current affairs inquiry on the Finance and Economy Committee, in response to a question about supplementary budget plans, "We will take appropriate response measures while looking at various external uncertainties and livelihood situations next year."

(Yonhap Infomax Economy Department Reporter Wook Choi)

※This content is from the video news covered in the Yonhap News TV Investigation File corner.

wchoi@yna.co.kr

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Wook Choi wchoi@yna.co.kr