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(LEAD) (News Focus) S. Korean economy faces challenges amid U.S. rate hike

2017/03/16 10:19

(ATTN: UPDATES with background, comments in paras 2-4, 3rd para from bottom; ADDS photo)

By Kim Boram

SEOUL, March 16 (Yonhap) -- Experiencing stiff challenges at home and abroad stemming from rising tensions with China and the latest U.S. rate hike, South Korea is entering a phase where it must overcome headwinds while handling the transition in the government, experts here said Thursday.

Earlier in the day, the U.S. Federal Reserve raised the target range for the federal funds rate by 25 basis points to 0.75 to 1 percent, citing the strengthening labor market and a moderate increase in inflation.

It is the first hike since U.S. President Donald Trump came into power on pledges to boost the economy, and the third since rates were lifted from near zero in late 2015 for the first time in nine years. The last rate hike took place in December.

Economic observers said a higher U.S. rate hike put Asia's fourth-largest economy under considerable downside pressure that must be overcome if it hopes to move forward.

China is set to strengthen punitive measures against South Korean goods and businesses via tourism, retail and cultural content in the wake of Seoul's decision to install the U.S.-led Terminal High Altitude Area Defense (THAAD) system on its soil.

With the inauguration of President Trump, the United States is pressing its trade partners, including South Korea, under a new "America first" policy that calls for renegotiation of trade matters. South Korea has been in Washington's cross hairs as its trade surplus with the U.S. more than doubled to hit US$23.25 billion in 2016 from 2011 on the back of the Seoul-Washington free trade agreement (FTA).

In April, moreover, the U.S. government is expected to unveil a list of currency manipulators, which may include South Korea along with China and some other exporting nations.

South Korea was put on a monitoring list by the U.S. Treasury Department last year due to the bilateral trade surplus with the United States, as the country met two of the three criteria.

If Washington includes South Korea on its blacklist, it will bring about a huge negative impact on the real economy and the financial sector at a time when the country is already struggling to deal with other issues.

Economists, in particular, said with the Fed likely to raise its key rate at least three times this year, South Korea could be forced to follow suit. Raising interest rates at this juncture can lead to a heavy drag on household debt worth more than 1,300 trillion won (US$1.14 trillion).

"Household credit may turn into bad loans for local lenders and undermine the overall financial system," said Ha Joon-kyung, a professor of economics at Hanyang University. "The government should handle the debts in order to prevent a possible spillover into the entire financial system."

   On the domestic side, the government should go through corporate restructuring in a timely manner and deal with debt-ridden companies such as Daewoo Shipbuilding & Marine Engineering Co., a major shipyard here.

The shipbuilder has 440 billion won in debt due in April, and there are concerns that the shipbuilder can hardly afford to pay the debt amid the dearth of new orders and a delay in the delivery of drill ships.

Faltering private consumption is a daunting task for the South Korean economy.

Consumer sentiment fell to an eight-year low in January, with retail sales posting minus growth for three months in a row in January.

In order to prevent any fallout from the U.S. monetary policy affecting the financial market, the South Korean government is focusing on risk management of the financial institutions.

It tightened regulations on financial solvency and liquidity to have local banks maintain better fiscal health, with guidelines to expand fixed rate and amortized loans to control household credit.

"The government will set up an emergency task force to check the trend of household debts every week," the finance ministry said after a meeting of officials from related agencies including the Bank of Korea and the Financial Services Commission. "We will draw up policies to improve government-backed loans for low-income people and to ease their financial burden before the first half."

   To prop up the economy in the first place, early spending of the 400 trillion won budget for 2017 in the first six months of the year is high on the government's list of priorities.

Also, the Seoul government is considering drawing up a supplementary budget if economic data shows no signs of clear recovery in the first quarter.