Korea’s Fight Against Record Oil Prices and Weak Dollar

If no one can stop the oil prices’ rally and the dollar’s slide, it is well expected that the Korean economy will undergo unusually high inflationary pressures, a bearish stock market, a sluggish domestic consumption, a slowdown in exports, and an economic recession. In order to overcome this crisis and avert a depression, a series of short- and long-term countermeasures must be devised.
As a short-term measure, the government should take an action to facilitate the efficient use of energy, restrict the demand for oil, and minimize the pressure of the cost push inflation arising from oil price hikes by keeping public fares under tight control. At the corporate side, exporters need to upgrade the quality of their products and technology edge by heavily investing in research and development activities and secure a more stable profit base by hedging against foreign exchange risks in order to compensate for the profitability squeeze due to the won’s appreciation.

The U.S. dollar is expected to stay under heavy downhill pressure for a while as the world’s largest economy already tattered by chronic problems of the twin deficits is now facing a threat of rising delinquency by household borrowers and a financial market meltdown in the wake of widespread fallout of the subprime loan crisis. Furthermore, a number of governments around the world have moved to adjust the portfolio of their foreign exchange reserves and reduce their dollar-denominated assets while oil producing countries, including Iran, have attempted to allow non-U.S. currencies for the settlement of oil transaction. The world economy may be entering into an era of inflation as prices of raw materials including oil and grains are expected to stay at the current record levels or even rising further, given the strong speculative demand to capitalize on a weak dollar and the steady demand from the emerging markets, including India and China, which will likely sustain a fast growth in the years ahead. Therefore, the long-term counteractions for Korea against the adverse global economic conditions are to minimize the inflationary pressures by boosting the economy’s supply capacity through a steady economic growth.

In order to beef up the economy’s supply capacity, Korea needs to develop a number of new growth engines, which should include new energy regeneration business. The new industry is critical not only for the expansion of the growth potential but also for the reduction of the economy’s susceptibility to the fluctuations in global energy prices due to the heavy reliance on overseas suppliers. An increase in bio-energy agricultural products and price hikes in international grains resulting from higher oil prices will likely contribute to streamlining Korea’s agriculture industry and improving the standards of living for the poor farmers. A further developed agriculture will mitigate the political and economic backlashes caused by the market opening in the wake of the free trade pacts with the U.S. and other major trading partners.

Korea Times