Turning global crisis into an opportunity

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: In the wake of global economic recession, most of the countries seek to minimise the impact of the crisis on them. Republic of Korea (South Korea)’s export-oriented economy is considered to be more prone to be get affected by the crisis. In the backdrop, South Korea has taken various proactive and bold steps to prepare itself for any unforeseen situation. The state is seamlessly trying to intervene, assist, direct and coordinate with the market in the process. Even though there are signs of recession, with sluggish domestic demand and slowing exports, the government’s multi-pronged stimulus plan seems to be helpful in minimising the effect of the crisis.

The South Korean approach to the crisis is distinct as it has been trying to utilise the crisis as an opportunity to further enhance its standing in the world economy.

For this, the government has been careful about both micro and macro-economic variables. South Korean National Economic Advisory Council (NEAC), which consists of 27 private experts of economy, seven government officials, and the South Korean president as the chairman, works as the nodal body to devise strategy and broad direction to the country’s economic preparedness.

To minimise the repercussions of the crisis, South Korea has announced more stringent monitoring of the banking sector and to provide them more incentives to comply with regulations. The comprehensive package to deal with the situation has provision to provide three-year government guarantees for new foreign exchange borrowings by banks until June 2009.

In addition, the government has also decided to provide an additional $30 billion to banks to ease pressures in the foreign exchange market.

The government is keen to maintain liquidity in the financial market and not hesitant to take ‘decisive’ and ‘sufficient’ steps. South Korean pre-emptive measures has been quite bold, as even China and Japan, which have $1905.6 billion and $977.7 billion of foreign reserves, did not use their foreign reserves to the extent South Korea did to ensure domestic liquidity. In October, India was the only country in Asia which spent more money from its forex to provide liquidity to its financial market than South Korea. South Korea used $27.35 billion and $11.74 billion of its forex in October and November to expand supply of foreign currency liquidity to ease pressure in the local currency market.

In November, the Bank of Korea (BOK) provided $7.5 billion to banks through four rounds of competitive auction swap trades. The BOK tried to provide further liquidity through long-term CRS trading. The bank also provided around $6.7 billion to commercial banks to support export and import financing. The government has pledged that it would continuously monitor liquidity and would intervene in case it is needed.

All the decisive steps of South Korean government seem to bring confidence in foreign investors to the Korean stock market. They turned to be net buyers during four consecutive trading sessions between November 26 and December 1, after a long period of net selling. It is also pertinent to mention recent improvements in the country’s current account balance and external debt structure.

In October, the current account showed a monthly record high surplus of $4.9 billion. On December 18, around one month before the schedule, the South Korean Ministry of Strategy and Finance (MOSF), Financial Services Commission (FSC) and the Korea Fair Trade Commission (KFTC) have announced their coordinated action plan, which is indicative of government willingness to early execute fiscal measures and other governmental policies in 2009 to cope up with the crisis and revitalise the economy.

According to the Action Plan, around 60-70% of the budget for major projects would be spent in the first half of 2009 on the basis of its economic effect on the overall economy. Budgets for public projects which can create jobs and budgets for easing financial difficulties will be executed in December 2008 itself. The government has also announced measures to revitalise consumption and investments by sub-regulations related to tax reduction acts. Thirty percent tax reduction will be given to automobile buyers to boost domestic demand. The tax reduction would be available till the first half of 2009. Government has also announced tax deduction for temporary investments to be extended for one more year up to December 2009. Private investment in social infrastructure projects will also be encouraged, which would include railways, harbour construction and highway construction. The government has announced that less business friendly regulations will be lifted or improved. South Korea has also been working on creating more jobs by its own New Deal policy in which the government has proposed to create more jobs by cleaning Korea’s four biggest rivers and building flood defences along them.

Apart from looking at the domestic economic scenario, South Korea has also been trying to build more broad-based financial linkages in the East Asia as well as in the Asia. South Korea is eager about financial market stability through the speedy implementation of the Asian Bond Market Initiatives (ABMI). On October 24, South Korean president Lee Myung-bak and Japanese prime minister Taro Aso agreed to support an initiative in which Korea, China, Japan and the Asean will create a joint fund worth $80 billion to fight against the global financial crisis. In a first-ever three-way summit with the Japanese prime minister Taro Aso and the Chinese premier Wen Jiabao in mid-December, the South Korean president Lee Myung-bak expressed resolve to collectively work to minimise the impact of the crisis in the region. In a joint statement, the three leaders said that they would push domestic demand and infrastructure projects while refraining from raising new barriers to investment or trade over the next 12 months. It is important to note that South Korea signed bilateral currency swap agreements with Japan and China of $20 billion and $27 billion respectively. South Korea has already had similar agreements with the US, worth $30 billion. South Korea, which is co-chair of the Asean+3 finance ministers meeting, wants to further improve financial cooperation with other Southeast Asian countries. The government has also been looking forward to build cooperative ties between advanced and emerging markets and plans to propose appropriate measures in the upcoming G20 Summit in April 2009.

It is obvious from the bold government initiatives of South Korea that it does not want to be a last minute ‘fire-fighter’. Rather, it wants to do everything possible to abate the crisis beforehand. The South Korean case provides a good lesson for the countries which are unable to devise comprehensive and bold policies against the crisis and rather taking piecemeal efforts to minimise the impact of the crisis.