Milestone 3 Econ 230

The Impact of the Federal Reserve, Central Bank and Fiscal Policies on Samsung Electronics

Shaquirra Mayo

Regent University

The Impact of South Korea’s Federal Reserve Policy on Samsung’s Economic Growth

“An overall rise in prices over time reduces the purchasing power of consumers, since a fixed amount of money will afford progressively less consumption.”. (Floyd, 2022) South Korea’s federal reserve policy, Bank of Korea (BOK) raised their policy rate in response to current monetary restrictions because of inflation caused by surged energy prices, compounded by the war in Ukraine. (CNBC, 2022) “The decision could help curb further weakening of the won after the currency tumbled 9.4% against the U.S. dollar this year, making it one of the worst performers among emerging markets.”. (CNBC, 2022) The purpose of the federal reserve is to provide a country with a safe, flexible, and stable monetary and financial system. (Hayes, 2022) With South Korea’s financial market under close watch after the decision to hike rates in response to their top financial policy maker (US) enforcing monetary tightening, in the effort to fight inflation, Samsung’s economic growth is at risk. (Yonhap) Because inflation is defined as a rise in prices that can be translated as the decline of purchasing power over time, Samsung’s economic growth will take a hit. (Fernando, 2022)

“Samsung Electronics… is bracing for extended global political and economic turmoil, as the war in Ukraine and China's COVID-19 lockdowns increase risks for its businesses, even as net profit for the first quarter surged nearly 60%.”. (Jaewon, 2022)

The Impact of South Korea’s Central Bank Policy on Samsung’s Economic Growth

“The central bank has been described as the "lender of last resort," which means it is responsible for providing its nation's economy with funds when commercial banks cannot cover a supply shortage.”. (Heakal, 2021) South Korea’s central bank has delivered a historic interest rate hike to seize control of inflation. (CNBC, 2022) How does this impact Samsung Electronics? Well, for starters, Samsung is sensitive to global circumstances as more than 80% of the South Korean tech company's revenue comes from overseas markets. (Jaewon, 2022) Because Samsung production depends on overseas markets, the economic state of the company is at risk with relation to the central bank, but not as extreme of a risk as the federal reserve. In the past, South Korea’s central bank acknowledged that Samsung Electronics smartphone crisis could potentially hamper economic growth. (Kim, et al., 2016) With the COVID-19 pandemic, the War in Ukraine, and other economic factors taking place, the company may have constraints to face.

The Effect of Fiscal Policies on Samsung in South Korea, China, and India

Fiscal policy is the federal government’s policy on taxes, spending, and borrowing that is designed to influence business fluctuations. (Cowen, et al., 2020) Since the 1960’s South Korea’s macroeconomic policies have focused on export-led growth. (Chang, et al., 2002) The effect of fiscal policies in Samsung’s home country, South Korea, are neutral.

South Korea’s policy normalization remains appropriate, given Korea’s relatively advanced recovery and rising inflation… Fiscal policy should be broadly neutral while continuing to provide targeted support for affected sectors and vulnerable households, as needed. (Kaufman, et al., 2022)

In China, the effect of fiscal policies on Samsung also seems to have minimal impact during the global economic crisis at hand. China plans to expand their fiscal policy, and it is expected to play a leading role in support of growth for the country in 2022; it has also been concluded that China’s central and local government debt level is still manageable. (BBVA, 2022) Lastly, in India, the effect of fiscal policies on Samsung are practical, as India focuses on evolving their fiscal policy:

“Fiscal policy has evolved since the pandemic began. In 2020-21, the fiscal deficit was 9.2 percent of GDP, double the previous year’s deficit… In 2021-22, the deficit is expected to be 6.9 percent of the GDP, with reduced current expenditure and increased capital expenditure.”. (Rai, 2022)

References

BBVA. (2022). China | Is China’s expansionary fiscal policy sustainable? Retrieved from https://www.bbvaresearch.com/en/publicaciones/china-is-chinas-expansionary-fiscal-policy-sustainable/

Chang, T., Liu, W. R., & Thompson, H. (2002). The Viability of Fiscal Policy in South Korea, Taiwan, and Thailand. ASEAN Economic Bulletin, 19(2), 170–177.

CNBC. (2022). South Korea’s central bank joins peers in historic half-point rate hike. Retrieved from https://www.cnbc.com/2022/07/13/south-koreas-central-bank-joins-peers-in-historic-half-point-rate-hike.html

Cowen, T., & Tabarrok, A. (2020). Modern Principles of Economics (5th Edition). Macmillan

Higher Education. https://mbsdirect.vitalsource.com/books/9781319329464

Fernando, J. (2022). Inflation. Retrieved from https://www.investopedia.com/terms/i/inflation.asp

Floyd, D. (2022). 10 Common Effects of Inflation. Retrieved from https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp#:~:text=An%20overall%20rise%20in%20prices,fast%20at%20the%20higher%20rate.

Hayes, A. (2022). Guide to the Federal Reserve. Retrieved from https://www.investopedia.com/terms/f/federalreservebank.asp#:~:text=The%20Fed%20provides%20the%20country,stable%20monetary%20and%20financial%20system.&text=The%20Fed's%20main%20duties%20include,stability%2C%20and%20providing%20banking%20services.

Heakal, R. (2021) What Central Banks Do. Retrieved from https://www.investopedia.com/articles/03/050703.asp

Jaewon, K. (2022) Samsung braces for prolonged geopolitical and economic fallout. Retrieved from https://asia.nikkei.com/Business/Technology/Samsung-braces-for-prolonged-geopolitical-and-economic-fallout

Kaufman, M., Srinivasan, K. (2022). Strong Policies Help Korea Navigate Uncertain Times. Retrieved from https://www.imf.org/en/News/Articles/2022/05/12/CF-Korea-strong-policies

Kim, C., Kim, C. (2016). Bank of Korea flags Samsung export risks, says recovery still on track. Retrieved from https://www.reuters.com/article/us-southkorea-economy-samsung-elec/bank-of-korea-flags-samsung-export-risks-says-recovery-still-on-track-idUSKCN12D0IU

Rai, S. (2022). India’s New Budget Reveals a Shift in Fiscal Strategy. Retrieved from https://carnegieindia.org/2022/02/17/india-s-new-budget-reveals-shift-in-fiscal-strategy-pub-86453

Yonhap. (2022). S. Korea to closely monitor market after Fed's aggressive monetary tightening. Retrieved from https://www.koreaherald.com/view.php?ud=20220616000146