2025 Economic Crisis: Korea’s Strategy

Analysis of Potential Economic and Financial Crisis in 2025: Lessons from Past Crises

1. Definition and Likelihood of a Financial Crisis

A financial crisis occurs when banks lose liquidity due to a mismatch between deposits and loans.
After lessons from past global financial crises (IMF, SVB incident, etc.), the Korean banking system has been strengthened.
The likelihood of a financial crisis is low due to increased bank capital, deposit-backed loan systems, and the Bank of Korea's active liquidity supply (unlimited RPs, etc.).

2. Definition and Likelihood of a Foreign Exchange Crisis

A foreign exchange crisis occurs when a country's foreign exchange reserves are insufficient to pay for international transactions in dollars.
Korea's foreign exchange reserves are approximately $415 billion (9th in the world), with a continuous trade surplus, and net foreign financial assets of approximately $1 trillion (including overseas investment assets), unlike in the past.
Operating a floating exchange rate system to mitigate exchange rate shocks, and increasing the proportion of foreign currency assets and foreign bonds have lowered the likelihood of a crisis.

3. Difference Between Recession and Economic Crisis

A recession is a phase where economic growth slows down (a cyclical issue).
An economic crisis signifies a systemic collapse and a severe financial or fiscal catastrophe for a nation.
The Korean economy has recently experienced a recession, but this is due to structural stagnation and not an economic crisis.

4. Development of Crisis Preparedness Systems

Establishment of the International Finance Center at a national level after the IMF foreign exchange crisis and improvement of foreign currency management systems.
Enhanced crisis response systems by the government and financial institutions:
- Suppression of excessive increase in short-term foreign currency debt.
- Continuous expansion of foreign exchange reserves and overseas asset management.
- Strict liquidity management by financial institutions.

5. Psychological Fear vs. Reality

Rumored crises may differ from actual crises:
- Like the saying “A much-talked-about party has little to eat,” excessive fear reduces the likelihood of an actual crisis.
A stable economic environment is created when awareness of risks and policy responses are combined.

Conclusion: Likelihood of an Economic Crisis in Korea

Financial Crisis: Low likelihood due to the safety of the domestic banking system and the government's swift response.
Foreign Exchange Crisis: Korea's foreign exchange reserves and structural stability have been strengthened in the international financial environment.
Recession: The current slowdown and low growth are ongoing, but this does not represent an economic crisis implying systemic collapse.
Excessive public fear can distort reality, hence rational and evidence-based judgment is needed.

< Summary >

The likelihood of a financial crisis and a foreign exchange crisis is low.
The current economic system is robust, having learned from the IMF foreign exchange crisis.
The main issue at present is recession and low growth.
It's crucial to examine the structural strengths and countermeasures of the economy rather than being overly fearful of a crisis.

Crafted by Billy Yang
[Related articles at Next-Korea.com]
1. Possibility and Countermeasures of Financial Crisis
2. How to Deal with an Era of Global Exchange Rate Volatility?

*YouTube Source: [경제 읽어주는 남자(김광석TV)]

– 한국경제는 ‘위기의 역사’를 다시 쓰고있나… 2025년 금융위기 징후와 극복 전략 | 김광석의 콜라보 – 경제포차 오건영 1편

Bank of Korea's Interest Rate Freeze and Exchange Rate Issues: Impact on the Economy

1. Interest Rate Freeze: Maintained at 3.0%

The Bank of Korea recently froze the base interest rate at 3.0%. This announcement follows two consecutive interest rate cuts.

This decision is interpreted as an extension of the monetary policy that has been adjusted to stabilize prices and promote economic growth. However, it is crucial to note that even with the interest rate freeze, the current economic situation is more immediately affected by exchange rate movements.

2. Economic Problems Caused by Rising Exchange Rates

Increase in Import Prices: When the exchange rate rises, the prices of goods imported from overseas increase. South Korea's economy is structured to import raw materials, process them, and then export the finished products. Therefore, a rise in exchange rates leads to an overall increase in production costs.
Increase in Raw Material Prices: The prices of key raw materials such as flour, sugar, iron ore, coal, and crude oil are rising sharply. It is inevitable that these increases in raw material prices will affect the cost of finished products.
Manufactured Goods and Consumer Prices: The prices of manufactured goods, such as textiles and machinery produced in factories, also increase due to rising exchange rates, which directly impact consumer prices.

3. Additional Cost Increases: Chain Reaction

Electricity Rate Hikes: When the prices of coal and gas rise, the cost of electricity production increases, which can lead to higher electricity rates. This puts a burden on the entire industrial sector.
Transportation Cost Increases: Rising prices of gasoline and diesel fuel lead to higher logistics costs. Increased transportation costs raise product prices at every stage from production to the consumer.
Price Increases Across the Entire Value Chain: The rise in exchange rates does not simply raise the prices of raw materials or specific goods. In an export-oriented economy like South Korea, it has a ripple effect across the entire value chain, from businesses to consumers.

4. Interaction between Exports and Exchange Rates

In principle, a rise in exchange rates could benefit export companies. A decrease in the value of the won makes it cheaper for foreign countries to buy our products.

However, the increase in production costs due to rising raw material prices can offset these benefits or even lead to losses. In other words, a rise in exchange rates does not necessarily have a positive impact.

Key Takeaways

A rise in exchange rates may be beneficial for the export sector in the short term but has a negative impact on the overall economy.
There is a risk of a decline in the national standard of living and corporate competitiveness due to rising prices and increased production costs.
While the interest rate freeze aims to contribute to price stability, managing exchange rates is becoming a more urgent task.

< Summary >

The Bank of Korea has frozen the base interest rate at 3.0%.
Rising exchange rates lead to increases in import prices and production costs, with rising raw material prices such as coal and crude oil impacting the entire processing and distribution process.
The increase in electricity rates and transportation costs raises overall prices in the South Korean economy, negatively affecting both the public's quality of life and corporate profitability.
The relationship between exchange rates and exports is complex, and it is difficult to simply assume that export profits will increase with a rise in exchange rates.
Crafted by Billy Yang
[Related articles at Next-Korea.com]
Exchange rate increase and economic crisis
Interest rate freeze, economic stabilization strategy

*YouTube Source: [Jun’s economy lab]

– 금리동결? 과연 괜찮은걸까

Current Economic Situation Analysis: Interest Rate Freeze, Inflation, Exchange Rate, Growth Rate

1. The Relationship Between Interest Rate Freeze and Price Stability

The recent decision by central banks to freeze interest rates is largely intended to stabilize prices and prevent price surges.
However, freezing interest rates cannot be a fundamental solution to curb inflation in the short term.
In the U.S., both the Producer Price Index (PPI) and Consumer Price Index (CPI) continue to rise, with external factors such as rising oil prices (at $88 per barrel) also increasing inflationary pressures.
Interest rate cuts require a clear confirmation of price stability, but whether the Korean economy can withstand the time it takes to reach that point remains a critical question.

2. Interest Rates in Korea and Their Impact

Currently, South Korea's base interest rate is 3.0%, which is high compared to the average interest rate over the past 26 years.
High interest rates increase the interest burden on real estate debt, and individuals and households are seeing a gradual decrease in their spending capacity.
This leads to a slowdown in domestic demand, adversely affecting the real growth rate.

3. Exchange Rates and Economic Risks

The won-dollar exchange rate is currently very sensitive, and it is imperative to prevent it from exceeding 1,500 won.
A rise in the exchange rate can lead to higher import prices, resulting in higher inflation and increased costs for businesses.
However, there is a lack of policy measures to stabilize the exchange rate, which is likely to continue to act as a destabilizing factor.

4. Slowdown in Economic Growth Rate

South Korea's economic growth rate slowed to 2.2% last year, and this year's outlook is expected to be even lower at below 2%.
A growth rate below 2% is a very poor figure, practically considered "low growth."
There is also a lack of strong government or central bank commitment to support specific industries like semiconductors or to introduce capital investment plans.

5. Difficult Business Environment

The ongoing freeze and high interest rates are making it difficult for companies to bear their debt interest.
Increased costs such as electricity rate hikes and the ambiguity of government policies are further deteriorating the business environment.
In effect, the message being conveyed is "companies must survive on their own," which is likely to weaken domestic corporate competitiveness in the long term.

< Summary >

Freezing interest rates is a policy aimed at preventing price surges, but it is not a complete short-term solution to stabilize prices.
High interest rates and the resulting increase in debt interest are burdening both households and businesses, and the Korean economy is facing a difficult situation with slowing growth.
In a situation where it is necessary to prevent a rise in the exchange rate, economic policies and industry support directions are unclear, and businesses are facing continuous management burdens.
Crafted by Billy Yang
[Related articles at Next-Korea.com]
Understanding the Correlation Between Interest Rate Freeze and Economic Growth
Analysis of Exchange Rate Fluctuations and Risks in the Korean Economy