North Korea’s surprise nuclear test last week has added to the long list of negative factors for the Korean economy.
North Korea has already warned of war in response to the resumption of South Korean border propaganda broadcasts. A single artillery shell attack against the speakers will spark severe tension, similar to what we saw last summer.
This heightened geopolitical risk comes on top of many difficulties the Korean economy faces: the uncertainty in the Chinese economy as evidenced by the recent stock market crash, rising U.S. interest rates, financial vulnerability in emerging countries and lower oil and commodity prices.
These negative factors could pose such debilitating risks that it does not sound entirely unreasonable for some economists to forecast that the world may encounter another predicament like the 2008 global financial crisis.
Because of the unfavorable external conditions and growing competition, Korea’s large conglomerates are not faring as well as in the past. For instance, Samsung Electronics reported forecast-missing quarterly profit last week as sales of smartphones and memory chips were sluggish.
Samsung said it probably posted an operating profit of 6.1 trillion won ($5.08 billion) in the fourth quarter of last year, down 17.5 percent from the 7.3 trillion won the previous quarter. It was the first time since the third quarter of 2014 that Samsung’s operating profit had posted an on-quarter drop.
In the same week, Hyundai Motor Group said its share of the domestic car market dropped to 39 percent, marking the first time that it has gone under the 40 percent mark.
These are only the latest gloomy news regarding the corporate sector, which has already been struggling with dwindling revenues and increase of marginal firms. The shipbuilding industry is a prime example: Once the pride of the nation, the major shipyards have become troublemakers, with the Big Three -- Samsung, Hyundai and Daewoo -- posting a combined loss of 8 trillion won last year.
As we experienced in 1997, an economic crisis starts with the failure of liquidating or restructuring firms with unbearable debts. Massive nonperforming loans result in crises in financial firms, which lead to an economic meltdown.
Government officials insist that the situation is different because the Korean economy is now in much stronger shape in terms of foreign reserves, current account surplus and fiscal health.
Nevertheless, the instability in the Chinese economy and the North Korean nuclear test should remind the government and the corporate sector of the need to brace for the worst and work out contingency plans.
