As emerging economies wobble, Korea must prepare for the worst

By Choi Sung-jin

Some emerging economies will become epicenters of global economic unrest in a few years, and Korea's overexposure to external factors will not allow the country to remain complacent, analysts warn.

At a workshop organized by the Korea Center for International Finance, Thursday, experts cited economic instability in emerging economies as one of the biggest variables in the global economy for next year. 

The experts agree that concerns about the hard landing of China's economy have somewhat eased but if the impact of the upcoming U.S. interest rate hike proves to be bigger than expected, it will hit the more vulnerable of the emerging economies hard and then may spread to the rest of the world. 

These emerging economies, in the course of overcoming the 2008 global financial crisis, have accumulated debt at a rapid pace, analysts have noted, and the ongoing shift of funds from emerging to advanced economies in the run-up to the upcoming increase of the U.S. interest rate is sharply raising the possibility of another worldwide crisis, this time starting from the emerging economies. 

The biggest deterrent to global economic recovery next year could be the slump in emerging economies, which account for 57 percent of the purchasing power of the global economy. China's economy has been moving slower this year and the slump will likely continue through next year in Brazil and Russia, too. 

"If the impact of the U.S. interest rate going back to normal proves to be larger than expected, it will trigger a crisis in two to three years," said Kim Kwon-shik, a researcher at KCIF, noting that the 1985 Latin American crisis, the 1997 Asian crisis and the 2008 global financial crisis all occurred after the Fed raised its interest rate. 

The sharp surge of debt in Brazil, Turkey and Malaysia will lead to a drastic increase of financial burdens. In addition, the Chinese economy's stunted growth still remains a risk because Beijing's shift to a strategy focusing on domestic consumption will hit the exports of emerging economies. The average export growth rate of 10 Asian economies plunged from 16 percent in 2007 to 0.9 percent last year. 

Korea, along with the Philippines, Brazil and Peru, is among those countries that rely heavily on trade with China. Korea is of course different from other emerging economies in that it is one of the world's strongest manufacturers, but the country must prepare for the possibility of "synchronization" if the impact of the U.S. interest rate hike expands and prolongs. "As the contagion of unrest in the emerging economies is more likely than ever, we must prepare for the worst," Kim said.