Signs abound South Korea’s economy is verging on a crisis. So why do experts say that is ‘very unlikely’?

A variety of economic indicators in September revealed the precarious state of the South Korean economy

But the government and economists maintain an economic crisis akin to 1997 or 2008 is ‘very unlikely’

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Economic woes are multiplying for South Korea, but the government says a crisis is unlikely. Photo: AP

Published: 6:30am, 11 Oct 2022Updated: 10:45am, 11 Oct 2022

Signs of stress in the South Korean economy have grown to levels similar to those of past financial crises, but the government and economists say a meltdown is unlikely as the country’s economic fundamentals are much different to those in 1997 or 2008.

A variety of economic indicators in September revealed the precarious state of the South Korean economy. Foreign exchange reserves have tumbled by the biggest margin since the global financial crisis. The won has fallen to a 13-year low against the US dollar. The country has recorded a six month trade deficit, while interest rates are being hiked.

Kang Sung-jin, a professor of economics at Korea University, said a financial crisis akin to those of the past was not on the cards, but the economy would go through a period of stagflation as growth is forecast to be slightly above 2 per cent this year and inflation is expected to be in the 5 per cent range.

He said domestic interest rates and China’s economic recovery will both have a major influence on economic prospects.

“In order to prevent an interest rate reversal with the US, the central bank must increase the rate of interest rate hikes,” Kang said. “At what point China overcomes Covid-19 also matters, as Korea’s trade dependence with China sits at almost 30 per cent.”