South Korea has seen gasoline prices rise for 33 consecutive days to approach 1,480 won ($1.22) a liter, marking the highest price in 13 months. The hike poses a big threat to the economy in 2017.
Despite skepticism over the agreement by petroleum producers on an output cut, the nation should be vigilant over whether OPEC and some non-OPEC producers will really implement their promise to slash collective output by 1.8 million barrels a day, starting Jan. 1.
Prices of international crude, such as Brent and Dubai, have shot up nearly 100 percent compared to the first quarter of this year, reaching the range of $52-$56 a barrel.
Local economists are worried and the Bank of Korea picked the coming direction of oil prices as one of 10 major global economic issues next year.
The situation is quite contrary to the period between 2015 and early 2016, when policymakers were citing low crude prices -- which dipped to $25-$27 a barrel in February -- as one of the main barriers for economic vitalization.
But the then-cheap crude was not a bane but boon to Korea: those could undoubtedly ease the cost burden of households and many industrial sectors.
Generally, crude prices are in inverse proportion to the US dollar’s value, but the current situation is different from ordinary cases as the Federal Reserve is maintaining a hawkish monetary stance. Chances are high that petroleum and the greenback will both stay at a strong position, at least in the coming weeks.
This would mean a dual burden for Korea, as import oil prices have no choice but to rise in the wake of the weak purchasing power caused by the weak won vs. the dollar.
The dollar has surpassed the 1,200-won mark, recording a 10 percent surge in about three months -- it was trading at 1,090.5 won on Sept. 7.
The steady pace of the US’ growth could bring the exchange rate up to 1,300 won later in 2017, some currency traders predict.
The strong dollar may be a boon to local exporters in terms of global price competitiveness.
However, higher costs will certainly offset the merits in the midterm, as import prices of raw materials will continue to climb on the local currency’s depreciation.
It is crucial to minimize shocks from the two main negative external factors, which are likely to dent yearly growth.
On Thursday, the Ministry of Strategy and Finance revised its outlook for the growth of gross domestic product in 2017, lowering it to 2.6 percent from its earlier forecast of 3 percent.
This is the first time in 18 years that the government has predicted a 2 percent level of economic growth. The last time it did so was in 1999 when the nation was hit by the 1997-98 Asian foreign exchange crisis.
It is even lower than the figures suggested by the International Monetary Fund (3 percent) and the Bank of Korea (2.8 percent).
However, some say the government prediction is rather rosy compared to those made by local private think tanks.
Hyundai Research Institute and Korea Economic Research Institute projected 2.3 percent and 2.1 percent GDP growth, respectively, for next year.
Their gloomy outlook reflects the weakening purchasing power of households.
Cash reserves held by households posted 1.9 trillion won in the third quarter, a sharp decline from the 14.1 trillion won in the previous quarter, according to the Bank of Korea.
The relative shortage in surplus funds is attributable to bank mortgages for apartment purchases over the past few years. Higher gasoline prices and rising bank loan rates also pose threats to households.
As for the corporate sector, air carriers and other industries heavily dependent on oil imports, their operations are susceptible to a spike in crude prices. In particular, a large proportion of small manufacturers might face higher costs.
The Park Geun-hye scandal means South Korea’s control tower is as good as vacant in terms of drawing up countermeasures, leaving the economy vulnerable to external uncertainties.
There is an urgent need to replace the president as soon as possible.
