Six hours of fear, the scars that martial law has left on our economy? Concerns over chain contraction in the real economy

■ Broadcast: YTN Radio FM 94.5 (09:00-10:00)
■ Host: Reporter Cho Tae-hyun
■ Air date: December 4, 2024 (Wednesday)
■ Dialogue: Lee Jung-hwan, professor at Hanyang University School of Economics and Finance

* The text below may differ from the actual broadcast content, so please check the broadcast for more accurate information.

◆ Cho Tae-hyun: Let's continue with Cho Tae-hyun's vivid economy part 2. In the first part, we comprehensively looked at the impact on the financial market as a whole. Let's look at the bigger picture. Impact on the overall economy Let's talk with Lee Jung-hwan, a professor at Hanyang University's School of Economics and Finance. Is the professor out?

◇ Lee Jung-hwan: Yes, how are you?

◆ Cho Tae-hyun: We were texting each other until dawn. You barely slept, right?

◇ Lee Jung-hwan: It's a bit of embarrassing news, so I feel a little sleepy.

◆ Cho Tae-hyun: As I told you earlier, I actually brought an underwear in case you get arrested today. I took the professor to the studio like this and called him because I was worried that the professor might be arrested, but fortunately, this part seems to have been resolved. Our producer is in his 20s. It's the first time I've seen martial law issued in my life. They say they haven't even heard the words, but it's our first time seeing it. Something like this.

◇ We saw it for the first time, too. This is a story from 1979. Our anchors and I are actually the generation after that, so in a way, martial law is the first time.

◆ Cho Tae-hyun: A person who is a generation after generation. It's a very unusual situation, but if you have any opinions or questions related to this, please text me at 0945. It's reflected in the broadcast, too. In particular, I will ask the professor for opinions on questions that I am curious about. Anyway, let's start with this part first. After martial law broke out, there were a lot of comments saying that they bought emergency food. I think things like Curly and Coupang went crazy last night, but it means that they gave the people great anxiety and fear. How do you see the impact of this fear or anxiety on the economy?

◇ Lee Jung-hwan: The biggest thing is the contraction of consumption or the contraction of investment. In other words, uncertainty increases, but if uncertainty increases, it is a reasonable decision to postpone consumption to the next and postpone investment to the next. There are things that can't be helped with eating, but basically, whether you buy a car or a company builds a new factory, these decisions are very big decisions and not necessarily decisions that must be made today. The story of that is delayed a little, so the probability of the next one is very high, and thus things such as shrinking consumption may occur in the short term. And if this uncertainty is resolved, it can eventually show these trends of blocking consumption or investment earlier.

◆ Cho Tae-hyun: If we don't use consumer goods, we can't live without them, so we'll use these things, but we won't use luxury products on top of them. Companies' investment will also be delayed. If companies' investment is delayed, it will inevitably have a negative impact on the economy as a whole, right?

◇ Lee Jung-hwan: Yes, there has been a lot of research on the economic effects of uncertainty since the early 2000s. Fundamentally, uncertainty also affects the stock market, but it is partly thought of as a recession factor that inevitably affects economic activity as a whole. If there is a lot of uncertainty, the mechanisms mentioned earlier are that if people don't consume, domestic demand shrinks, and if they don't invest, the economy shrinks, so they say that this uncertainty is most affected by the stock market, but if there is a lot of uncertainty, it affects the real economy. It can be said that a lot of research has been conducted on uncertainty shocks.

◆ Cho Tae-hyun: Things like financial markets are an immediate reaction, but the economic situation is directly reflected with a time difference. These were also situations that would have an impact, but as I mentioned earlier, the financial market reacts immediately. The first thing I reacted to here was the exchange rate as well. It's gone up a lot. What do you think of this scene?

◇ In fact, the foreign exchange market did not operate until dawn, but as soon as Korea's martial law announced it, there were situations where the exchange rate almost rose to below 1450 won as soon as the foreign exchange market was prolonged. Originally, this might not have been known when it wasn't traded, but since it was actually traded, I think it's possible to understand that these situations occurred where the exchange rate went up quickly and then went up quickly for a moment. It can be understood that this exchange rate reflects anxiety about the country's economy. The rise in the exchange rate is such a problem that can lead to greater national credibility due to the growing uncertainty in the Korean economy. If interest rates and national credibility fall, people say that there was a problem with the issuance of government bonds in Korea, and that uncertainty eventually led to a rise in demand for dollars and a decrease in demand for won.

◆ Cho Tae-hyun: There is a possibility that the exchange rate has gone up like this, and anyway, it is maintained at a very high exchange rate that is maintained around 1,400 won. What kind of impact will these things have on our economy as a whole, not on the financial market?

◇ Lee Jung-hwan: In the past, there were many opinions that if the exchange rate was high, exports would be good and the balance of trade would be good, but since the 2010s, there seems to be no clear increase in exports just because the won-dollar exchange rate is rising. Instead, it is import prices that have a negative impact on the exchange rate. If the exchange rate goes up, the international settlement currency is the dollar, but if we want to buy overseas goods through this dollar, the amount we have to pay in won increases, so it is a basic fact that import prices rise when the dollar goes up.

◆ Cho Tae-hyun: The overall price will also rise,

◇ Lee Jung-hwan: The overall price, especially food prices and raw material prices, has been increasing a lot lately. Shouldn't you understand this situation where these things can have a lot of impact on the price of the shopping cart? And of course, prices such as raw materials and intermediate goods are bound to rise a lot.

◆ Cho Tae-hyun: If prices go up like this, won't it affect monetary policy?

◇ Lee Jung-hwan: The Bank of Korea has lowered the base rate twice this time, and the speed of lowering the base rate will be a problem. Inflation is catching up, but it doesn't seem to be catching up in some areas. In particular, things like eating out and food prices are not felt enough, but prices should be stabilized. For example, the service industry, which is rising by 7% to 8% next year, raises prices every year, but it is not stabilizing, so you can understand that these things can act as a burden. And if prices rise, interest rates will be lowered late, of course, but these situations will inevitably occur when interest rates are lowered late.

◆ Cho Tae-hyun: One thing that caught my eye when I was watching last night's events. It has been confirmed that Korea's CDS premium has jumped from the U.S. side. First of all, what is CDS premium?

◇ Lee Jung-hwan: The CDS premium can be seen as a kind of measure of the probability of state bankruptcy. In fact, this is a kind of insurance, but what kind of insurance is it can be regarded as a kind of insurance against the bankruptcy of the state's bonds, and when you do this insurance, for example, if the state bonds go bankrupt, you can see it as a special case where you can pay the insurance money and receive the principal. So, it's kind of like betting against a country going bankrupt, and it's said that it went up a lot as it went up to 600pp during the 2008 financial crisis, and yesterday, it was showing a little bit of a rise. Concerns about any credit or any debt in the country have grown a bit, as they are concerned that there will be a situation close to a coup in the civil war. So, as there is political uncertainty and how to interpret this situation has become very uncertain, things like this CDS premium, which measures the risk of state bankruptcy, have risen a little. However, in fact, in 2008, there was a real shortage of foreign exchange, so short-term foreign exchange was insufficient, so it rose a lot.

◆ Cho Tae-hyun: It was like that back then.

◇ Lee Jung-hwan: You might think that's why the financial situation went up at that time, but you might think that it went up a little bit because of political uncertainty.

◆ Cho Tae-hyun: That's right. Looking at the situation last night, the political uncertainty in Korea and the political uncertainty in France were mixed, so the New York market was a little confused, but fortunately, it seems to be calming down a little. But if you look at the current situation. I think a lot of people were worried. I thought listener 1 might be at war all night. That's what he said. Listener 2 was nervous after watching the real-time news with the owners near the gimbap restaurant. I'm confused. We also lose our stocks. I hope it will be stable. A lot of people are nervous and worried. If we were to appease these things in this situation, I think the government needed to respond step by step, but no matter how emergency and unexpected it was, the economic ministry's response was a bit chaotic. How did the professor see it?

◇ Lee Jung-hwan: In fact, martial law is a story that the military controls it, so there are situations in which the administration has no choice but to proceed in a little secret about what to do when martial law occurs. I have a lot of civil servants friends, but they said they were embarrassed, too. I have to get a text message all of a sudden and get a call from an emergency contact network, but I don't think there's any contact. The role of the administration is inevitably reduced because I understand that the military is in control. Although the military itself is part of the administration, martial law is centered on the military, so there is a lack of response to this because a new administration is formed under the martial law commander. These are situations that are bound to be insufficient because they are situations that you don't know and you can't help but think that these problems occurred because no one predicted this yesterday. In the end, fundamentally, as far as I understand, martial law is what the military does.

◆ Cho Tae-hyun: That's right.

◇ Lee Jung-hwan: Those are situations that are difficult for the general administration to respond to. Also, because it was so unexpected and unpredictable, I think it was a difficult situation to make protocols and things like that.

◆ Cho Tae-hyun: I think it's something that no one expected and didn't care about any kind of manual or protocol on martial law. If you look at the news that came in a while ago, there is news that the presidential office has expressed a collective resignation of the chief secretary, but I don't think they actually knew. That's how sudden it is, and the person who should be responsible should be responsible. Anyway, if you look at our economic situation now, there is a very sluggish growth outlook for the 1% economic growth rate by next year or the year after next. In this situation, this uncertainty broke out again. How should I look at this part? Which part is the hardest hit?

◇ Lee Jung-hwan: Uncertainty has increased with the recent Trump administration, and uncertainty has led to a decrease in Korea's economic growth rate. I think it became a problem as tariff risks grew. However, Korean politics is also in a situation where uncertainty has increased, so I don't know at all, but other events such as 2017 may occur, and now they are saying that they are talking about it, and if that happens, consumption and investment will inevitably shrink.

◆ Cho Tae-hyun: Eventually, it will lead to a growth rate.

◇ Lee Jung-hwan: If consumption or investment shrinks again, it will lead to growth, and the possibility of sluggish growth will increase. In the end, this is a political event, but when it is resolved, uncertainty will be reduced and there will be room for investment and consumption, and events that increase uncertainty will be a bit more national risk when looking back on these situations in 2017. It can be understood that increasing risks creates an environment in which things such as growth rates are inevitably hindered.

◆ Cho Tae-hyun: Anyway, Korea also has an open economy, so these things are very important, whether it's foreign investment funds or whatever funds come into Korea. What do you think about this part of the possibility that it will lead to a funding exodus?

◇ Lee Jung-hwan: There seems to be no particular flow of funds out of the market, and now they are saying that they will use the stock market stabilization fund or the necessary bond stabilization fund to eventually supply liquidity through the fund. If necessary, the Bank of Korea provides a lot of loans, and the mortgage asset bank gives collateral and borrows money from the Bank of Korea. There seem to be various measures to make it easier to take things such as collateral assets and foreign exchange positions. Since yesterday's event ended fundamentally, there will be no big negative impact without any major issues, but I think there will be no issues enough to explode, but it seems clear from an investor's point of view that Korea's overall assets are inevitably less attractive as investment assets in such uncertainties. In fact, I was waiting for the stock price to rebound after hitting a low point, but I think I made it clear that such expectations were formed yesterday with the influx of foreigners, and those expectations are inevitably delayed a little.

◆ Cho Tae-hyun: Okay. I thought listener 3 was only in martial law movies. I couldn't sleep a wink because I was worried. That's what he said. I'm sure there are a lot of people who couldn't sleep a wink today. What should I say about the politics? I'm a little angry about this unreasonable situation, which is not relieving worries or concerns, but causing concerns and concerns to the people. As a result, the financial market is also reacting. When the KOSPI was mentioned earlier, it started the market with a decline of a little less than 2%, and then reduced the fall. Now, the fall has become very large. With a 2.3% drop, the market is on a rollercoaster ride. When you look at the overall situation. As this situation continues, the F4 meeting was held early this morning. This is a meeting attended by the deputy prime minister, the chairman of the Bank of Korea's Financial Services Commission, and the chairman of the Financial Supervisory Service, and we talked about liquidity that can be supplied by all means to stabilize the market. What kind of things can you think of?

◇ Lee Jung-hwan: As I said earlier, there are funds to stabilize the stock market and bonds. The next thing Korea can use is pension funds that can be provided if there is a continuous shortage, such as the National Pension Service. Of course, there is some room for pension funds to be theoretically operated or not, but things like the Stock Exchange Stabilization Fund have to be used first, but it seems that it has the influence to influence the dollar in a way by doing things like currency hedging positions as a dollar supplier. In the foreign exchange market, the Bank of Korea and the Ministry of Strategy and Finance eventually supply Korean foreign currency assets. You can sell it so that it can serve as a supply of dollars. Then, in the case of liquidity supply by banks, as I mentioned earlier, the Bank of Korea provides more collateral assets or, in general, the IP market. In a way, it can be understood that it can function to limit the supply of funds in the short-term liquidity market and prevent banks from falling into danger and risk of insolvency. Eventually, the stock market and bond market banks will be at the center, and there are many ways to supply funds in a way. Then, regarding the dollar, there are these expectations that the Bank of Korea and the Ministry of Economy and Finance can eventually supply foreign currency liquidity through dollar transactions. In the end, you can understand that these are situations where you can increase the supply of dollars by selling assets.

◆ Cho Tae-hyun: But if you supply liquidity and artificially stabilize the market in this way, are there any side effects or concerns?

◇ Lee Jung-hwan: I think short-term volatility is a concern. To prevent short-term volatility, you can think of it as releasing funds in a short period of time. Of course, if this is prolonged, bubble and other problems arise depending on excessive liquidity supply. In the end, it's a matter of uncertainty, but as uncertainty explodes, speculators are forced to come in. In a way, speculators are betting on things like this, where they can buy and sell investments that increase volatility in this volatile market, so the reason the authorities are intervening is to reduce this volatility and reduce volatility to prevent unnecessary volatility and to resolve uncertainty. In the end, if these speculators add uncertainty, the confusion in the financial market will be so severe that the fund and in a way, by actively supplying won liquidity and dollar liquidity, it will increase the stock price, stabilize the bond market, restore bank liquidity, and stabilize the foreign exchange market.

◆ Cho Tae-hyun: Okay. After this incident, so did Wall Street. I think Elon Musk, who comes out everywhere, was very shocked. I think you're surprised, but the possibility that these things will affect the national rookie. What is the concept of national rookie?

◇ Lee Jung-hwan: National credibility is, after all, the credibility of the state. You can understand that financial stability and transparency are the focus. Transparency is clearly not a positive factor because when political uncertainty increases, issues such as transparency become a little poor, and financial stability is an economic growth rate, but economic growth is likely to decrease. In addition, if there is a big event and a problem actually occurs, you can understand that it is an event that has no choice but to negatively affect the credibility. Nevertheless, I personally think that there is not much possibility that it will actually affect national credit or credibility because of these things that have been resolved quickly.
because these situations are already organized to some extent
◆ Cho Tae-hyun: Is it okay to say that the possibility of credit ratings being downgraded by credit rating agencies is not that big?

◇ Lee Jung-hwan: If you say it's a good solution in the short term, and the government is transparently managing it, and overall political uncertainty has grown, but I think it's uncertainty about this impeachment or this political risk. In fact, because that's an institutional issue, things like the overthrow of the state or other legal issues are issues that can be operated within the system, so it's a little bit less likely to have a big impact on credit ratings. I'm guessing it's the same.

◆ Cho Tae-hyun: Okay. "Listener 4" says he's going to work at 4am at the market. The vegetable owners at the tofu rice cake shop were all nervous. I learned the importance of peaceful daily life. This peaceful daily life should continue, but looking at the politics now, it seems a little hard to expect such things. I told you that it was a peaceful daily life, but one of the reasons for the extreme confrontation between the ruling and opposition parties and the issuance of martial law this time was the budget issue. How do you think we should deal with this budget?

◇ Lee Jung-hwan: It's an ambiguous problem, but I understand that it became a bit of a catalyst for the special activity cost, the prosecution, the police, or the presidential office to reduce the special activity cost. However, we have to maintain it at a reasonable level, and in the case of special activity expenses, some of them are in the form of a little wage subsidy, so I admit to it to some extent, so it's not just looking at the budget too politically, but it's civil servants who receive money. Economically, I have no choice but to think that it is right for public officials to make compromises considering how actively they use this and how accurately they use it. This is a political issue, but nevertheless

◆ Cho Tae-hyun: It also has a lot of influence economically, so

◇ Lee Jung-hwan: It has a huge impact and it's about the livelihood of civil servants. Doing this too much is bound to be very negative. In terms of applying political pressure, it may be positive, but if they trigger such situations that increase uncertainty, people will become anxious, consumption will shrink, and if consumption shrinks, so the investment mentioned earlier will continue to shrink. Therefore, since the economy is based on rationality, it is clearly a problem to make unconditional reductions.

◆ Cho Tae-hyun: Listener 5 said his 8th grader son couldn't sleep at night asking if he should go to the army. Oh, how worried I would have been to say this. What are you talking about in a country with BTS BLACKPINK? That's what I really want to ask. What do you think the government should take care of to quell such anxiety when the market is so anxious?

◇ Lee Jung-hwan: When the stock market becomes very volatile, people's sentiment becomes unstable again. In the end, many assets and news like this are emerging in the stock market, and the stock market itself is a volatile market compared to the bond market, so it is necessary to reduce the volatility of the stock market by using stabilization functions. Second, we cannot help but talk about the foreign exchange market, and since the foreign exchange market is also an indicator that can stimulate the sentiment of some people in the country, there seems to be a clear need for some intervention in this. It is necessary to reduce unnecessary uncertainty, so it seems that there is a clear need to stabilize the exchange rate by intervening to some extent when the exchange rate manipulator is not able to do so. In the end, these indicators are originally volatile indicators and regional volatility indicators can change a lot, but these changes have negative effects, so I can tell you that it is clear that it is necessary to stabilize them by intervening to some extent in the period of confusion.

◆ Cho Tae-hyun: Okay. Measures to curb uncertainty in anxiety should be urgently released. So far, I have looked at various macroeconomic fallout surrounding the incident with Lee Jung-hwan, a professor at Hanyang University's School of Economics and Finance. Thank you for talking today.

◇ Lee Jung-hwan: Yes, thank you.