(EDITORIAL from the Korea Herald on Sept. 14)

One year after

A year ago tomorrow, U.S. investment bank Lehman Brothers filed for bankruptcy
protection, unleashing a global financial tsunami. Eleven years after being
buffeted by the Asian financial meltdown, Korea had yet another nightmare of
defaulting on its debt as a sovereign state.

But it did not take long before the nation overcame the initial shock and started
to pull itself together. Now it is pushing ahead for a full recovery. Thanks to a
stimulus package that included fiscal expansion and tax cuts, the domestic
financial market has regained the pre-crisis level of stability.
One indication of restored financial stability is Korea's declining premium on
credit default swaps, which has fallen below 1.5 percent from a high of 6.9
percent. Another is foreign exchange reserves, which have exceeded the pre-crisis
volume - $245.46 billion at the end of August, up from $243.2 billion a year ago.
No wonder Fitch Ratings has recently raised the nation's credit-rating outlook
from "negative" to "stable," while keeping its investment grade at A+, the same
the rating agency applies to China. Korea is the only country among the 10
countries whose credit-rating outlook has recovered since it was lowered last
November.
It is not just the financial industry that is recovering fast. Manufacturing is
regaining strength, too. For the first time in nine months, industrial output
posted an increase in July. True, the year-on-year increase was meager at 0.7
percent. Nonetheless, the transition from contraction to growth deserved public
recognition. Due credit should be given to Korea's industrial giants, such as
Samsung Electronics and the Hyundai-Kia Automotive Group, which have successfully
turned adversity into an opportunity to increase their shares in the world
market.
No wonder the Korean economy has been outperforming expectations. Second-quarter
growth, initially estimated at 2.3 percent, is being revised upward to 2.6
percent and 2.7 percent, as new data indicates. Now cautious optimism has it that
the economy will have contracted less than 0.5 percent, if at all, this year,
despite the government's initial 2009 outlook of a 1.5 percent decline.
Of course, this is not to say that the path to a full recovery is without any
pitfalls. Top economic policymakers are making a convincing case when arguing
that the incipient recovery is so precarious that it is premature to consider
withdrawing deficit spending. Indeed, there is no guarantee that the domestic
economy will be able to put itself back on track if the government should attempt
to balance the budget by gradually reducing fiscal deficits.
Another problem is that excess liquidity in the market is now being channeled
into the housing sector. To deal with this problem, the Bank of Korea may choose
to raise its benchmark rate in the near future. A rate hike will help push down
inflationary pressure coming from the housing market.
But it will certainly displease the administration, which has decided not to exit
from deficit spending in the near future, fearing that it might smother the
nascent recovery. The central bank and the administration will have to coordinate
their policies unless they wish to send conflicting signals to the market.
Ultimately, it is corporate investments that will make growth sustainable. A
recovery in investment will help set in motion a virtuous cycle of creating jobs,
raising household income and stimulating consumer spending. The whole process,
once started, will help restore the confidence of all economic players and expand
the economy vigorously. This is the reason why corporations need to be encouraged
to increase spending on plants and equipment.
The past one year has been painful, with corporate revenues plummeting and people
being forced out of jobs. But there is light at the end of the tunnel. The nation
deserves to pat itself on the back.
(END)