South Korea:High oil prices may trigger stagflation

Persistently soaring oil prices could lead the Korean economy into stagflation, LG Investment Securities warned yesterday.

The steady rises in oil prices may result in a sharp economic downturn and inflationary pressures, raising the likelihood of stagflation, said the LG brokerage in its latest economic forecast.

It speculated that high oil prices have discouraged the Bank of Korea's Monetary Policy Committee from raising the interest rate, despite growing concerns over inflationary jitters.

"The central bank's decision to freeze the short-term interest rate at the current level is interpreted as an attempt to not put burdens on corporate performance and the real economy," said Yoon Hang-jin, an LG Investment analyst.

"At a time when unfinished corporate and financial restructuring and unstable consumer prices are posing a threat to economic recovery, policy planners are required to cope with the oil price hikes more flexibly," he said. In a separate report, however, the Hana Bank Economic Research Institute said that consumer prices are not expected to rise to levels that would touch off stagflation. Nevertheless, apprehensions over economic conditions are mounting, due to the nation's excessively heavy dependence on oil consumption and exports for sustained growth, the institute said.

According to government officials, the price of Dubai crude for October delivery reached $31.43 per barrel, up 30 cents from the previous day. The price of Dubai oil for November delivery also climbed to $31.54, surpassing the high of $31.51 reached at the time of the 1991 Gulf War.

Meanwhile, Tongyang Securities yesterday issued a report calculating the interconnectivity of oil prices, economic restructuring and stock prices.

"If the annual average oil prices, (in terms of the Western Texas Intermediate crude), stay in the $25-$28 range and restructuring accelerates, the Korea Stock Price Index will eventually break the 1,000 point," said Tongyang economist Lee Dong-soo, noting that delayed restructuring will pull down the index to between 600 and 700.

"In case the oil prices rise to $30-$35 mark and restructuring accelerates, the KOSPI will post gradual increases to the 800 point. However, delayed restructuring, combined with the sky-high energy prices, will send the KOSPI crashing below 600," said Lee.

He also forecast that the KOSPI will rise to 700, if oil prices record further rises to $36-$40 amid accelerating restructuring.

"A successful restructuring, however, will not be helpful to the stock market if oil prices rise close to $50 per barrel. Slow restructuring, if combined with the over $40 oil prices, will send the KOSPI sinking into a bottomless pit," he said.

The Tongyang economist predicted that oil prices are unlikely to top $40 by the year's end, warning that the energy factor will weigh heavily on next year's GDP growth, trade balance, consumer prices and stock prices. Early on Thursday, Tokyo-based Nomura Securities said that oil price hikes to date are destructive enough to swing Korea's current account balance into the red in a years time.

Updated: 09/09/2000

http://www.koreaherald.co.kr/news/2000/09/__05/20000909_0559.htm

-- Carl Jenkins (Somewherepress@aol.com), September 08, 2000

Answers

Much is said here about Dubai oil, but I think South Korea gets much of its oil from Indonesia, a country that is in the tank, as far as living up to its OPEC quotas is concerned.

Coming is nothing but trouble, trouble, trouble for South Korea, I think.

-- Wayward (wayward@webtv.net), September 08, 2000.

Once more I can only say shades of y2k.

-- Uncle Fred (dogboy45@bigfoot.com), September 08, 2000.