By Kim Tong-hyung
Geopolitical tension and ballooning household debt are the top economic concerns for South Korea heading toward 2011, according to a leading economic think tank.
The weakening recovery of the global economy and the strengthening Korean won, which may deteriorate the profitability of local firms, are issues that warrant close attention as well, the LG Economic Research Institute (LGERI) said.
?There is a possibility that the heightened geopolitical risk following the North Korean shelling of Yeonpyeong Island could spark capital flight and expand the ?Korea discount? on the stock market. The country?s household debt has been continuing to grow even after Korea?s exit from recession, and this, combined with the expected increase in interest rates and the future course of the housing market, represents an uncertainty with potentially serious consequences,? said LGERI?s Lee Chang-seon.
?The profitability of South Korean companies could slide rapidly being affected by sluggish global markets, higher interest rates and the strengthening local currency.?
The geopolitical risks, stoked by North Korea?s warlike provocations and nuclear program, growing household debt, and expectations of narrowed profit margins for local firms were among the seven major issues identified by LGERI that it believes could shape and define South Korea?s financial market and economy for 2011.
Other factors include the ongoing financial troubles in Europe; the possible ?side effects? from monetary policies of major economies such as the United States, European nations and Japan, which are likely to keep their key interest rates near zero for an extended time; and fallout from the global discussion on reforming the international monetary system.
?Among the PIIGS (Portugal, Italy, Ireland, Greece and Spain) nations, two countries (Greece, Ireland) are already receiving European Union financial aid, and all eyes are now on Portugal and Spain ... It?s unlikely that the Euro Zone will be able to regain the confidence of the market in 2011 and the financial instabilities are likely to continue,? Lee said.
?Europe?s ongoing financial troubles will obviously have a major impact on the global economy and financial markets, and could also shake South Korea?s financial markets severely. A crisis in Europe could also lead to a retreat of the massive amount of Europe-based capital currently in South Korea. Korea could also lose a chunk of its foreign investment money should investors move increasingly toward ?riskless? assets.?
The South Korean economy had displayed durability despite North Korean antics in previous years, but Lee is among a growing camp of observers who believe that the effects of the recent cross-border clashes could be more profound.
The North Korean shelling of South Korea?s Yeonpyeong Island near the disputed maritime border last month killed four people, including two civilians, and left scores of houses destroyed. South Korea also holds North Korea responsible for the sinking of its warship, Cheonan, in May, which killed 46 sailors.
?Should the military clashes continue without a breakthrough in resolving the conflict between the two countries, the negative effects on the South Korean economy could amplify, which may lead foreign investors to bail from South Korean stocks, bonds and currency,? Lee said.
?The year 2011 will be a crucial period in determining the geopolitical situation on the Korean Peninsula, as well as the effect on the South Korean economy and financial markets.?
The country?s household debt has been rising at a rate of 12 percent per year since 2000 to reach 770 trillion won (about $670 billion) at the end of September this year. This, combined with spiraling house prices, represents a ticking time bomb for the South Korean economy, Lee said.
In a poll of 16 private and public economic research institutes conducted by the Federation of Korean Industries (FKI), the respondents picked the escalated tensions between the two Koreas as the biggest source of uncertainty for 2011, and job creation as the top priority for the economy in 2011. They also predicted the country?s economy to grow 4.2 percent in 2011.
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