What are economic fundamentals?

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– Written by Yeajin Shim

Today, I’m going to talk about economic fundamentals of a country. Did you recognize that Korea’s KOSPI index fell two days straight? I was frustrated since it started to fall the day after I bought bunch of stocks. The culprit which made KOSPI fall was India’s financial crisis. Not only India but other emerging markets such as Brazil and China are going through financial turbulence, as you might have heard of. Once, there have been highly optimistic views toward emerging markets that all the emerging markets would rise while the West has met its end. Now that those emerging markets are falling and showing its weakness, it’s doubtful that whether it’s just a growing pain or deep structural problems that would cause another financial crisis all over the world. As one of Asian countries, Korea also took a hit. But the impact was minimal and many experts expect quick rebound of Korea’s economy; it’s because Korea is considered to have strong economic fundamentals.

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The word ‘fundamental’ has the meaning of basics. When it comes to economics, it indicates the most basic macroeconomic indexes such as economic growth rate, inflation rate and unemployment rate. Those most basic indexes compose fundamentals of one country and this so called ‘fundamentals’ best describe the economic status of a country. To put it simple, it shows how strong one’s economy is; whether it’s weak or strong. It can be referred to as stamina of a person. To run fast and long, we have to equip ourselves with strong fitness or we would collapse in no time. That’s what happened to emerging markets now. Once it was forecasted that emerging markets are ready to run with strong fundamentals, which turned out to be bogus. The reason this happened was because it’s hard to estimate fundamentals accurately. We chose to be optimistic, and now we sank in the mire.

Korea’s fundamentals are also yet to be determined strong. The positive factors that constitute strong fundamentals of Korean economy are vast foreign exchange reserves amounting at over 300 billion dollars, trade balance surplus, and soundness of government finance. On the other hand, there are also threatening factors such as high household debt and high percentage of foreign investment in the domestic stock market. In general, Korea’s fundamentals are evaluated to be strong enough but it is not reassuring.

Financial Services Commission Chairman Shin Je-yoon, made a remark on Korea’s fundamentals. “Considering US quantitative easing tapering, Korea’s economic fundamentals are sound and strong unlike other emerging markets but we have to scrutinize its impact and route. In this time of crisis, we should prepare not only to microeconomic threats which are easily noticeable but also to macroeconomic threats. Also, we should check four systematic risks: tipping effect in the economy, economic volatility, macroeconomic soundness, and mutual relationship with foreign nations.” He also emphasized that Korea should prepare a system that can pre-examine those threats and joint efforts of the Financial Services Commission, Financial Supervisory Service, and Bank of Korea are needed.

We all have played with LEGO blocks when we were small. We built houses, cars, and castles with those blocks. One day, I was tired of normal house so that I started to make a fancy one with the shape of upside down pyramid. It looked risky and it was vulnerable to just a touch. It had weak fundamentals. Unlike my LEGO house, economic fundamentals should be strong to stand any external influence. There we can make Korea’s economy bigger and stronger.

Yeajin Shim (greatshimbabe@gmail.com)

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