'Global economy to drag on Korea'

A noted global consultant said that Korea should keep its key interest rate at the record low level for the time being to ensure a sustainable economic recovery, citing the global economy, a rapid rebound of the won and household debt as the biggest obstacles to the Korean economy.

His advice comes amid concerns growing over a double-dip recession of the global economy after the triple tremors from the banking crisis in Spain, crumbling confidence in the U.S. and a setback in China's leading economic indicator has jolted the global market.

"Korea is generally in good shape. The exception is that household debt levels are still high. Keeping interest rates low should reduce the risk from debt levels and also the risk that the won rebounds too fast," Richard Dobbs, director of The McKinsey Global Institute, told The Korea Times.

The institute is McKinsey's business, economics, and technology research arm, and is funded by the partners of McKinsey & Company.

"The government needs to ensure the won does not rebound too fast against the Chinese yuan and Japanese yen in particular. It was also clear that the country had insufficient reserves during the crisis. Building up reserves can stop the won rebounding and allow Korea to be ready," he added.

He pointed out that Korea should realize that it will take longer than expected for the global economy to complete the de-leveraging process.

"The real challenge is that the global economy has high levels of debt, which typically takes three to five years to pay down. In addition, it has high unemployment, which again is going to take ages to work through. The global economy will be a drag on Korea."

Regarding the sluggish real estate market, the Seoul-based consultant said that the government should opt for micro measures rather than macro policies. "It is better to manage real estate bubbles through loan-to-value ratios rather than interest rates," he said.

But he downplayed concerns over inflation, saying, "A gradual strengthening of the won should offset the risk," he added.

The global consultant stressed that Korea should seek to capitalize on the opportunity arising from the global financial crisis.

"Korea needs to seize the opportunity from the fast rebound. I would hope that Korean companies can build regional leadership positions at a time when competitors from the U.S. and Europe are distracted."

Source: Korea Times