The Korean economy is expected to face a host of external and internal challenges in 2016. Externally, the risks stemming from the world’s two largest economies, the United States and China, will put the Korean economy to a severe test. Domestically, a rapid rise in household and government debt and resistance to structural reforms will constrain efforts to boost the economy.

Earlier this week, President Park Geun-hye picked a new helmsman who will steer the nation through these challenges. She tapped Rep. Yoo Il-ho of the ruling Saenuri Party to serve as minister of strategy and finance.

The appointment was a surprise, given that Yoo, a two-term lawmaker, had resigned as minister of land, infrastructure and transport in October to run for the April general elections.

Yoo’s credentials as finance minister can be challenged as he is primarily a tax expert. A finance minister is required to have knowledge and experience not only in government finance but in other economic matters as he doubles as deputy prime minister for economic affairs.

Yet Yoo is well informed in diverse economic and social issues as he has served as spokesman and chief policymaker of the ruling party. His political background will also help him secure cooperation from lawmakers of the ruling and opposition parties in legislative issues.

Upon appointment, Yoo said he would put equal emphasis on boosting the economy and implementing structural reforms. To stimulate the economy, he said he would maintain the expansionary fiscal policy pursued by his predecessor, Choi Kyung-hwan.

But the rapid rise in government debt under President Park leaves little room for Yoo to expand fiscal spending. The state-run think tank Korea Development Institute has recently advised the government to keep its debt under control.

Yoo said he would not let government finances further deteriorate. Nevertheless, he said he would find ways to increase spending as the economy still needed stimulus. He said he had some ideas, but refused to elaborate.

Any attempt to boost the economy will also be constrained by the explosive growth in household debt. Next year, the debt problem could worsen as the U.S. Federal Reserve is expected to keep raising interest rates.

But Yoo ruled out the possibility of the U.S. rate hikes detonating the household debt bomb. He also rejected the suggestion that household debt has reached a level that could weaken consumer confidence, thereby dampening the fragile economic recovery.

Yoo also dismissed growing concerns about an oversupply of homes by noting that few homes remained unsold. With this, he implied he would not take measures any time soon to cool down the property market. 

Critics assailed the nominee for expressing overly optimistic views. He would do well to heed the criticism. A top policymaker should not take potential risks to the economy lightly.

As the most urgent task for him for the moment, Yoo cited the enactment of the bills on structural reforms. The main opposition New Politics Alliance for Democracy recently suggested it would pass the bills, except those on labor reforms, within this year. But little progress has been made yet.

Even if the reform bills are passed through the Assembly, the government is likely to face difficulties implementing its reform program, which encompasses the public sector, labor market, financial system and education sector, as those with vested interests will mount resistance. Policymakers will have to redouble efforts to communicate with them. 

Another urgent task for Yoo is corporate restructuring. The government said it would promptly weed out zombie companies that have been barely staying afloat on state-provided payment guarantees or bank loans. But no tangible results have been produced yet. The task should be wrapped up as borrowing costs have begun to go up.

While the first round of U.S. rate increase alone may not seriously affect Korea, policymakers need to closely monitor the U.S. monetary policy as additional rate hikes could cause turmoil in the global financial markets.

Many commodity-exporting countries have been in distress since last year due to the plunging prices of their commodities. Higher U.S. interest rates will increase the debt burden of these countries by making their currencies cheaper vis-a-vis the U.S. dollar.

Emerging market economies are Korea’s export markets. If they get into trouble, global demand for Korean goods will shrink. Furthermore, if they disrupt the global financial system by failing to repay debt, an open economy like Korea would not be able to escape the impact.

China also poses serious risks to Korea. The world’s second-largest economy has been slowing down, causing a drop in Korea’s shipments. If China’s slowdown accelerates, Korea’s exports would further shrink.

Worse yet, China is likely to stop pegging its currency to the greenback in a bid to make it cheaper. A cheaper yuan would undermine the competitiveness of Korean products.

For Korea, the worse scenario would be a slowdown of the Chinese economy amid a continued rise in U.S. interest rates and the eruption of debt crisis in emerging market economies. The new finance minister should steer the nation away from the looming perfect storm.

By Yu Kun-ha

Yu Kun-ha is the editor in chief of The Korea Herald. He can be reached at khyu@heraldcorp.com. — Ed.