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Economic Analysis

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A Turkish Crisis but a Korean Passover

Everything has been stirred up by U.S. President Donald Trump’s bold and unpredictable actions. On August 10, 2018, the president raised tariffs on Turkish steel and aluminum exports to the U.S. to 50 percent and 20 percent, respectively, on the grounds of national safety based on Section 232 of the 1962 Trade Expansion Act (TEA). To the surprise of many, this quite antiquated section was reactivated against major steel exporters for the first time in American history in March of 2018, but Mr. Trump doubled the tariffs on Turkey, which has stood as the sixth largest exporter to the U.S. Although Turkish steel exports were merely 6 percent of U.S. steel imports, the tariff imposition was more than enough to shake the global and U.S. financial markets.

On the day of the 50 percent tariff announcement, the DJIA fell almost 0.8 percent and another 0.5 percent on the next day, while the NASDAQ fell 0.7 percent and 0.3 percent, respectively. In the European markets, the blow was more dramatic as the German DAX fell by 2 percent on August 10 and another 0.53 percent a day later, and the Russian RTS more than 3 percent on the day of. In the Asian region, the impact was mixed in the sense that some countries like Indonesia were struck very hard, with the stock market plunging 3.55 percent and 1.56 percent for the two days following the tariff increases, while the Taiwanese market fell by more than 2 percent. On the other hand, Chinese markets seemed to fare well, showing no significant movement in its stock prices. Above all, however, the most devastating blow of the national security tariffs against Turkish exports was felt in the Turkish currency (TRY). Just before the tariffs were imposed, the TRY was 5.283 per USD on August 8, but surged to 6.351 on August 10, and then to 6.917 on August 13. This marked a 30 percent depreciation for the Turkish New Lire in matter of a few days. The Argentinian Peso also plummeted for the week but the magnitude was only about a 10 percent depreciation, relatively smaller than the impact on Turkey.

While the initial effect of the Turkish tariffs seems to be dying down across global markets, there have been deep-rooted concerns over the possibility on whether this Turkish shock would evolve into a global crisis such as the sub-prime mortgage calamity in 2008 or the Asian Financial Crisis in 1997. Analysts are particularly concerned about whether this impact will spread to the New Fragile Five, namely Argentina, Mexico, South Africa, Colombia and Turkey, which all have have enormous amounts of foreign debt. At the forefront of such grim expectations is the prediction by Professor Paul Krugman, who said the Turkish crisis resembles what happened in Asia in 1997. As he believes the excessive foreign debt by Asian counties in the late 1990s was the direct cause of the crisis, Turkey, with a USD 460 billion external debt amounting to 68 percent of its GDP, could be a similar detonator for the imminent crisis. Most of the theories about the coming of the crisis, including Krugman’s, rests on the fact that there are a number of countries with excessive foreign debt. For example, Hungary’s external debt amounts to 64 percent of GDP, Poland 56 percent, Chile 50 percent, Argentina 46 percent, and South Africa 34 percent. All of these foreign debt-ridden countries are extremely vulnerable as their debt service capability could be easily at risk to external shocks such as sudden movements of interest or exchange rates. In Korea’s case, it has entirely transformed from a country with a foreign-debt burden in 1997 to a USD 460 billion net creditor country in 2018. Therefore, the crisis argument based on the sheer size of the external debt simply does not apply to Korea.

Another argument for the possibility of a global crisis is that most advanced countries like the U.S. and Europe have to reduce liquidity extremely overextended for the last decade. One account says that over USD 40 trillion worth of liquidity were lent to emerging countries such as Turkey, South Africa, Argentina and Chile during the last 10 years. Most of these loans were extended to public sectors such as governments or public corporations to avoid credit risk of the private sector. These emerging countries welcome external funds for their infra-construction and welfare programs, making economic growth rate very high and incumbent leaders favored for their jobs. But the fairy tale began to turn awry when the U.S. began to reduce the base money and gradually raise the funds rate starting in 2016. Most of the loans extended to these emerging countries had to be called back amid the rising interest rates, and for some countries, especially with po-or industrial competitiveness, felt the strain of capital outflows in the foreign exchange market. Indeed, the sudden fall in the value of the Turkish Lire, Argentinian Peso and the Russian Rubble last week were all but a manifestation of capital outflow.

Now, there are two critical questions: One is how fast creditors would withdraw their loans from these countries. So far, massive and sudden outflows from the nations in general have not been witnessed. Especially for Korea, foreign capital accounts have shown stable movement for the last two years without significant movement in outflows. The other is whether these vulnerable countries have the ammunition to successfully fight back against the immense capital outflow. It could be sufficient reserves, raising interest rates, borrowing from other countries, or earning through exports and restricting import spendings. For some countries lacking reserves and industrial competitiveness, earning reserves through the promotion of exports seems to be a remote possibility. They might have to rely on either raising interest rates like Argentina did a few weeks ago or reaching out for external help, possibly from China, Japan or Russia. For Korea, on top of the USD 460 billion internal credits, the trade surplus reached more than USD 100 billion per year for the last four consecutive years from 2015. So, the Turkish crisis could end up as a typhoon in a tea cup, at least for Korea.

By Professor Se Don Shin
Dean, Sookmyung Women’s University

The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA

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