Chang Yong Rhee: The challenges of Korean economy after
COVID19 - growth and stability
Opening address by Mr Chang Yong Rhee, Governor of the Bank of Korea, at the Bank
of Korea - Korean Economic Association International Conference 2022, Seoul, 11
November 2022.
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Distinguished guests,
I am very delighted to welcome all of you to BOK-KEA International Conference. We
are honored to host this conference jointly with the Korean Economic Association.
I would first like to express my sincere appreciation to Professor Lee Jong-wha,
President of the KEA, and Professor You Hye Mi, the host of today's conference, as
well as our guests from abroad, Professor James Morley, Wong Chan Yuan, Joshua
Aizenman, Yiping Huang, and Mr. Robert Subbaraman, Head of Global Macro
Research at Nomura. I would also like to welcome all the moderators, speakers,
discussants and other participants.
The theme of the conference is "The Challenges of Korean Economy after COVID-19:
Growth and Stability." If I was given this theme last year, a few long-term challenges
Korea is facing would have come to the fore such as low birth rate and aging
population, risk of secular stagnation, pension and labor market reform, economic and
geopolitical fragmentation resulting from tensions between the US and China, to name
a few. As you are well aware, however, since I took office in April, global inflation has
rapidly soared, and we are now busy in coping with high inflation.
Like many other major central banks, we systematically missed inflation forecasts after
the pandemic. I can think of two major factors: first, the Russia-Ukraine War which
elevated energy prices unexpectedly in the early part of this year, and second, the
damaging combination of currency depreciation and higher energy prices from the
second half of this year following faster monetary policy tightening in the United States.
The Korean economy is highly dependent on energy imports, about 25% of total
imports, and half of the inflation surge from 3.6% in January to 6.3% in July this year
was due to the energy price surge. Even though energy price decreased somewhat in
the second half, significant depreciation of the Korean won during this period made
energy prices remain high and inflation persistent as energy imports are mostly invoiced
in US dollars. It might sound like an excuse, but it was hard to predict oil and gas price
changes as they were significantly affected by political events, and, even though we
were expecting rapid US monetary policy tightening and a strong dollar well in advance,
the change in the dot plots in the September FOMC meeting was more than we
expected. On top of that, the fact that two major central banks in Japan and China are
the two exceptional cases of loose monetary policies made our currency depreciate
much more than expected in September before it started to stabilize recently.
More recently, prices and our exchange rate have somewhat stabilized and the speed
of US interest rate hikes is expected to be less rapid as indicated by the recent press
conference by Chairman Powell. Ensuring price stability and reducing inflation through
tight monetary policy are still our priority. At the same time, as the recent interest rate
increase has been fast by any historical standard in Korea, there are growing signs of
stress in various sectors, and maintaining financial stability, especially in non-banking
financial sectors, is becoming an important
issue. In fact, we are seeing signs of money move from non-banking sectors to the
banking sector after deposit rates in banks significantly increased following policy rate
hikes. How to recycle those flows back to non-banking sectors is an important policy
issue for the BOK to manage financial market stability in this period of high inflation and
tight monetary policy.
Now, back to long-term challenges facing the Korean Economy. Among many
challenges, the risk of economic and geopolitical fragmentation stands out to me the
most. In fact, it is a short term challenge, too. The escalating US-China tensions and
further deterioration of the Russia-Ukraine War are likey to lead to financial and trade
fragmentation and consequently, the contraction of global growth and trade. It will be
structural headwind limiting long run growth of the Korean economy, which is heavily
dependent on exports.
In this respect, global cooperation at the economic and political levels is more urgently
needed than ever. Countries responsible for global leadership, among others, need to
promote collaboration and cooperative competition, since the weakening of trade and
global growth stemming from fragmentation can have negative impacts on all countries.
In retrospect, China's rapid growth over the last two decades allowed the Korean
economy to delay painful restructuring, while reaping the benefits of trade expansion
with China. We no longer have that luxury. Korea cannot any more avoid restructuring
reforms, even though painful, in diversifying its supply chains and concentration of key
industries to achieve more balanced and equitable economy.
Ladies and gentlemen!
The Korean economy is currently faced with many challenges and opportunities amid
an accelerated global monetary tightening after the pandemic. Some of them are
common across many major economies and some of them are unique to Korea. Today
I would like to learn from your insights and wisdom on "The Challenges of the Korean
Economy after Covid-19". My best wishes for a successful conference.
Thank you.