Since my childhood, I have often
heard people say “Honesty is the
best policy”. This now famous
quote is believed to have been
said by Benjamin Franklin. But this
phrase does not just apply to people on a
personal level, but on a national scale as
Recently, some foreign investors doing business in Korea have expressed their concerns about Korea’s current political situation. They may think that the Korean economy is losing its steam due to political instability taking place throughout the country. Many others, however, have expressed strong confidence in the long-term viability of the Korean economy. That’s because they started their business in Korea not just for short-term profits, but for long-term business opportunities.
With the exception of the US and a few other nations, most countries are having a hard time dealing with political and economic uncertainties and risks. Korea is not an exception. Foreign correspondents understand that Korea’s current political instability is a cyclical phenomenon. Every five years, the Korean president suffers from a “lame duck” period a year before the next presidential election.
Nevertheless, many people are concerned
about the gravity of this year’s situation.
In particular foreign investors are worried
that Korea may be hit with an economic
An economic crisis refers to a situation in which a country experiences shrinking GDP and sharp inflation. Such an event is usually triggered by a crisis in currency. Under free capital mobility, short-term speculative capital funds move in and out of the country whenever profit conditions change. Their capital size is so huge that their move immediately affects the foreign currency markets in the host country. The sudden outflow of huge capital lowers the value of the local currency. If the supply of foreign currency is depleted, it will face a foreign currency crisis. If the debtor country fails to pay the payment of principal and interests, it will face a foreign debt crisis. But Korea is not going to experience a foreign currency crisis or a foreign debt crisis, as it has been a trade surplus country for years and has consequently accumulated enough foreign currency reserve holdings. Now, the country holds more than USD 370 billion.
According to a recent report released by the government authorities, a financial
crisis is not likely to occur because the
financial status of commercial banks is
sound. Thanks to the strict imposition of
LTV (Loan to Value) ratio and DTI (Debt
to Income) ratio, the banks’ balance sheet
looks good. In the eyes of loan officers,
both LTV and DTI are important factors
in determining their mortgage lending but
they put even heavier weight on the borrower’s personal credit score.
For Korea, however, the commercial banks have been strict in applying the LTV and DTI ratios. Every time the housing market was being overheated, the financial authorities immediately lowered the LTV ratio to sufficient levels. This ratio used to be kept at a low within the 40-60 percent range for many years. In terms of the soundness of the balance sheet, the commercial banks are quite alright. So the chance of a financial crisis occurring are slim.
Nevertheless, Korea is undergoing a political turbulence in the absence of presidential leadership. Political and opinion leaders thus should make utmost efforts to shorten the lengthy and overheated controversy. Officials should be more honest with each other and prioritize stabilizing the economy over anything else. They should also encourage business people to make long-term investments. The entire world is watching Korea with extreme interest. Let us show them we are weathering the current political situation well and thus, the economy will prosper even more in the future.