Wanted: Squeaky-Clean Technocrat to Run the Bank of Korea

(Bloomberg) -- South Korean President Moon Jae-in's biggest personnel challenge for 2018 may be finding a new central bank chief to guide interest rates higher without upsetting capital flows or the nation's indebted households.

But first he'll have to find someone who can pass muster in parliament, where members of both the ruling and opposition parties are expected to focus as much on ethical standards as economic expertise.

In the wake of political and corporate scandals that toppled the previous administration, three of Moon's initial picks to be ministers failed last year under heightened scrutiny. The candidate to succeed Governor Lee Ju-yeol, whose four-year term ends March 31, could be in for an even tougher time. They're likely to face the spotlight alone now that Moon has filled his Cabinet.

Policy Dilemma

“Ethics is an important issue, but it's disappointing that enough attention isn't given to the expertise and policy stance of candidates during hearings,” said Kim Jung-sik, a professor of economics at Yonsei University in Seoul. “The new governor will have the dilemma of whether to minimize capital-outflow risks by following the Federal Reserve, or to put more focus on boosting the domestic economy.”

The Bank of Korea, which raised rates to 1.5 percent in November, has signaled its next steps will be gradual. Economists surveyed by Bloomberg project one or two hikes of 25 basis points in 2018, with the central bank taking a cautious approach after years of cutting rates took the benchmark to a record low and household debt to an all-time high.

The trouble is, the Fed is forecast to raise rates three times this year, which may push benchmark borrowing costs in the U.S. above those in Asia's fourth-largest economy. While this has happened before, policy makers in Seoul worry that the rate differential, coupled with acute military tension on the Korean peninsula, could accelerate capital outflows.

The change at the BOK also comes amid a broader changing of the guard at some of the world's most important central banks this year. Jerome Powell will succeed Janet Yellen as chair at the Fed, Zhou Xiaochuan may retire after his record 15-year tenure at the top of the People's Bank of China and Bank of Japan Governor Haruhiko Kuroda's current term is due to end.

Potential Candidates

Moon hasn't dropped any hints about potential candidates for governor, but local media has speculated on many names. These five have appeared repeatedly in reports:

• Kim Kwang-doo, vice chairman of South Korea's National Economic Advisory Council.
• Park Bong-heum, a former central bank board member and former planning and budget minister.
• Shin Hyun-song, economic adviser and head of research at the Bank for International Settlements in Basel.
• Jang Byung-wha, a former senior deputy governor of the Bank of Korea.
• Rhee Chang-yong, director at the International Monetary Fund in Washington.

While the law allows Lee, 65, to be reappointed, and he came through ethical probes unscathed, a governor hasn't been kept on for second term since the 1970s.

His successor can expect a grilling from lawmakers on the lookout for anyone who has evaded taxes, made speculative property-market trades, falsely reported an address or dodged military service.

Moon's first pick for labor minister stepped down last year after a drunk driving charge came to light. His initial choice for justice minister withdrew following allegations he forged a marriage document 40 years ago and a candidate to lead a newly created ministry for small and medium enterprises dropped out amid controversy over his views on creationism and Korean history.

Moon pressed ahead with his appointment of Foreign Minister Kang Kyung-wha, who admitted to using a fake address to get her daughter into a high school, and he has the power to defy parliament if he thinks his choice is worth the political fallout.

There is no deadline for the announcement on Moon's pick, but the nomination for Governor Lee was made less than a month before his predecessor's term ended.

After the governor post is filled, President Moon will soon face another personnel decision at the BOK, with board member Hahm Joon-ho's four-year term ending in May. The remaining members' terms end in 2020.

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net.

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Peter Pae

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