[Yeouido Interview] Hong Seong-guk "Inflation + Exchange Rate + Household Debt + Real Estate, This Crisis Is Really Serious"

"Complex Crisis Phase, Government Seems Unwilling to Make Soft Landing Efforts"
"If Interest Rates Invert, Exchange Rate Problems Will Arise"
"Real Estate, Individuals May Suffer Japan-Style Pain"
"Depending on Crisis Response, Korea Could Become Big 3"
"We Also Need a Grand Strategy"

Hong Seong-guk, Member of the Democratic Party of Korea./Photo by Yoon Dong-joo doso7@

[Asia Economy Reporter Naju-seok] Hong Seong-guk, a member of the Democratic Party of Korea, has been sounding the alarm by defining the current crisis as a complex crisis whenever he gets the chance. None of the domestic or international conditions are easy, and the challenges the Korean economy must solve are intricately tangled. In particular, Hong argues that the global economic recession triggered by high interest rates is a negative factor for Korea. He expressed concern that if South Korea's trade deficit grows to $40 billion this year, foreign investors' perception of Korea could change.

In a recent interview with Asia Economy, Representative Hong poured out his concerns about the economic situation. As the secretary of the Democratic Party's Livelihood Economic Crisis Countermeasures Committee, he worried about the ruling party's economic awareness. He said, "The government and ruling party still see society as an expanding one (an economy that is growing). Because they believe in the trickle-down effect, they think that if the king dollar weakens, this severe crisis phase will simply disappear as if nothing happened, and they are not coming up with any measures." He added, "Whether the Democratic Party did well or not, even if the Democratic Party had shortcomings, at least if the Democratic Party viewed the world with a 10-year-old perspective, the current government and ruling party are looking at the world with a 1990s mindset. In a crisis phase, policies should be prepared in advance to help people achieve a soft landing, but it seems they have no intention of doing so," expressing his worries.

The following is a Q&A.

- Why do you see this financial crisis as more serious?

△ Countries like the U.S. only have to worry about inflation. For us, inflation is naturally an issue, but we also have household debt and real estate problems. Countries with similar real estate price increases include Canada, Australia, Sweden, and New Zealand, where housing prices surged and are now declining. Additionally, the current account deficit is severe. If this year's trade deficit reaches $40 billion, foreigners will no longer view Korea as favorably as before.

Hong Seong-guk, Member of the Democratic Party of Korea./Photo by Yoon Dong-joo doso7@

- What kind of response is needed in this complex crisis phase?

△ In the short term, the government needs to present that it has many policies to stabilize sentiment. Currently, the foreign exchange market is the top priority. If the $400 billion foreign exchange reserves are broken into, it could temporarily get tangled, and if it gets tangled, it could explode. Psychologically, the government must frequently communicate that it has many measures. If the government enters the World Government Bond Index (WGBI), $70 billion (100.76 trillion won) could flow in, and showing the scale of net external assets and what can be liquidated will build trust that this is different from the past International Monetary Fund (IMF) crisis. Measures against polarization must also be implemented.

- Real estate prices are sharply declining.

△ If the real estate market becomes a problem, there is no answer. For individuals, there is a possibility of a Japan-style scenario. During Japan's bubble economy, housing prices rose fourfold over ten years. Although our prices have risen a lot, they have not risen that much, so I think the real estate market will not follow the Japanese pattern. However, those who bought houses in the final phase are people who borrowed money. The damage they suffer is enormous. For individuals, this could lead to a Japan-style scenario. To stabilize real estate, various measures are needed. Financial institutions need to increase loan loss provisions, capital adequacy, and deposit insurance limits (currently 50 million won) to absorb shocks.

- The won-dollar exchange rate has already surpassed 1,400 won. How do you evaluate the current exchange rate situation?

△ The exchange rate is a bridge connecting us and the outside. It is urgent that this bridge does not break. In the past, interest rates between Korea and the U.S. have inverted twice. However, in the past, we had a current account surplus, household debt was not severe, there were no serious disputes between countries, and the U.S. did not take excessive measures. There was also a currency swap. The problem now is that these factors are absent. If interest rates invert, problems will arise in the exchange rate.

- Is it impossible for the opposition to accept Yoon Seok-yeol's tax cut policies such as corporate tax cuts?

△ In a phase where a recession is expected, money should be spent. Imagine the economy is not just bad but that real estate might decline once. In such a situation, cutting corporate taxes and giving tax cuts to the wealthy is strange. In a situation of severe polarization, lowering the top income tax or discussing financial investment taxes is absurd. When the economy is bad, it is logically right to collect more from the rich and give to the poor.

- Xi Jinping's third term as China's president has been confirmed. There is much interest in U.S.-China relations; what is your outlook?

△ Now is a time that requires more imagination. The U.S.-China confrontation was expected, but it was different from expectations in that it was like clothes getting wet in a drizzle. COVID-19 made the situation more barbaric. During Xi Jinping's third-term transition, the U.S. only attacked China, and China was on the defensive. But going forward, China will throw punches. The U.S. raised issues about electric vehicle batteries through the Inflation Reduction Act, but China will retaliate with rare earth elements and others.

- How should Korea respond?

△ Among future industries, Korea plays a very important role in semiconductors, batteries, and bio sectors. These industries are currently stuck between the U.S. and China. But I see this as an opportunity. By strengthening support for these industries and maintaining neutrality, it could be a great opportunity. We should think about building infrastructure for electric vehicles to create an efficient system and export it overseas. Korea should adopt a hedgehog strategy. Even the U.S. should be able to speak up about semiconductors. Korea has many globalized companies. Korea is the only country with such a portfolio in materials and semiconductors. Korea has everything from food, fashion, medicine, finance, chemistry, software, to manufacturing. Considering Korea's world-class level and industrial balance, countries like Germany, the UK, Europe, and Japan have not reached this level. If politics is done well, Korea could become one of the world's top three.

Hong Seong-guk, Member of the Democratic Party of Korea./Photo by Yoon Dong-ju doso7@

- What needs to change in the political sphere?

△ These days, the term "grand strategy" is often heard, and we need a grand strategy too. Politicians are not idle. Each is working hard in their own way, like side kicks or aerial spinning kicks, but it is like a frog in a well. When the season changes, the water level may change, or in winter, the well may freeze and the frog may die. But no one wants to see change. Conservatives take pride in having built the foundation of the Republic of Korea and believe the old ways are right, unaware that the world has changed. We need the momentum to push a grand strategy. But the problem is that it only appears during elections.