Shin Hyun-song, the nominee for Bank of Korea governor, said the likelihood of stagflation occurring in the Korean economy is not high. However, he said that if the Middle East war is prolonged, various response measures, including currency and fiscal policy, should be prepared.
Shin said in a written answer submitted on the 8th to Rep. Cha Kyu-geun of the Rebuilding Korea Party, a member of the National Assembly's Strategy and Finance Committee, "For now, the possibility of stagflation is not high." Stagflation refers to a situation in which high inflation and an economic downturn occur simultaneously.
Specifically, Shin said, "It is true that upward pressure on prices and downward pressure on growth have increased due to higher energy prices and supply disruptions from the Middle East war," but added, "An improvement in the semiconductor cycle and the government's supplementary budget will partially cushion the shock."
Regarding the recent rise in prices, he assessed it as stemming from a temporary supply shock. He said, "It is not desirable to respond to supply-side factors with monetary policy," but added, "If the shock is prolonged, we should respond by using several policies, including currency and fiscal policy."
As for Korea's foreign exchange reserves, which stood at $423.6 billion as of last month, he assessed that they are "not insufficient to serve as a buffer against external shocks." As the foreign exchange authorities' response to the rise in the won-dollar exchange rate led to a decline in reserves, he drew a line against some calls to increase them to stabilize the market.
As grounds, he cited large net external financial assets and a low ratio of short-term external debt. As of the end of last year, net external financial assets were $904.2 billion, amounting to 48.3% of gross domestic product (GDP). This means Korea has far more assets accumulated overseas than money borrowed from abroad. The short-term external debt ratio is 41.8%, much lower than during the foreign exchange crisis (286.1% in 1997) and the financial crisis (72.4% in 2008).
Meanwhile, he expressed concern about household debt. He said, "Major domestic and international studies find the threshold for household debt ratios that constrain consumption and economic growth is 80% to 85%," noting that Korea's household debt ratio is estimated at 88.6%, above that level, weighing on growth.
Shin said, "We need to continue efforts to stabilize the household debt ratio downward," adding, "Improvements are also needed in systems related to housing finance, such as creating incentive schemes that can induce financial institutions to reduce their handling of mortgage loan lending."