Taiwan and South Korea both reported better-than-market-expected economic growth figures last week, and both look very similar: booming exports and failure of domestic demand to keep up, a phenomenon that has caused some problems and will further worsen financial vulnerability if the trend continues.
The Wall Street Journal reports that in South Korea, for example, exports of goods grew 4.4% in Q1 this year compared to Q4 2019 before the outbreak of New Crown Pneumonia (CCP virus), while private consumer spending remained 5.5% below the benchmark. The same is true for Taiwan, where electronics exports jumped 28.4% in 1Q this year compared to a year ago, and the contribution from net exports far exceeded consumption in the 8.2% growth in gross domestic product (GDP) last quarter.
A large part of this problem involves the foreign exchange market, where both Taiwan and South Korea do not want excessive appreciation of the local currency, which would weaken export competitiveness. This sets up two risks, the first of which is a surge in the foreign exchange floor that would bring the two Asian export powers into conflict with the United States over exchange rate manipulation. While this will not happen soon, the U.S. Treasury may not remain silent indefinitely.
The second risk is more complex and more worrisome in the long run. Both Taiwan and South Korea’s central banks try to avoid raising interest rates to prevent adding fuel to the fire of their respective currencies’ appreciation. However, maintaining such low interest rates and relying heavily on monetary policy rather than fiscal policy to support demand could worsen the financial vulnerability associated with the housing market.
Data released by Taiwan’s central bank show that Taiwan’s household debt-to-GDP ratio was 86.7% in 2019. However, total outstanding mortgages have increased by 10% since the outbreak of the new crown epidemic, implying that the household debt-to-GDP ratio has climbed further. South Korea’s share in this regard is even higher, with a household debt-to-GDP ratio of 102.8% at the end of last year, according to the International Institute of Finance (IIF). Even by the standards of advanced economies, this ratio is high in Taiwan and South Korea.
The report points out that the governments of Taiwan and South Korea are aware of the destabilizing effects that high leverage can cause and have made several attempts to cool the housing market. But when too many general economic policy is based on the government’s aversion to debt and excessive export priorities, is bound to accumulate many vulnerabilities.
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