The ROK Gov’t Cuts Nation’s Growth Rate Forecast in 2017 From 3% to 2.6% Citing Greater Uncertainty in the Global Economy
The OECD has cut its growth projection for the Korean economy to 2.6 percent for the year 2017, which is down 0.4 percentage points from its earlier forecast in June. This due to the recent political scandal that has stalled state affairs, as well as the government's ongoing corporate restructuring drive, that's taken a toll on the nation's manufacturing sector. On top of that, an anti-graft law that took effect in September and the termination of Samsung's flagship Galaxy Note 7 may likely continue to weigh on the economy going forward.
The government cut its 2017 growth forecast from 3% to 2.6%, the first time it has cut its outlook to below 3% since 1999, when the nation was recovering from the Asian financial crisis. The government also lowered its 2016 forecast to 2.6% from 2.8%, citing strikes at automakers, the Galaxy Note 7 recall and the implementation of an anti-graft law. This means the nation's growth rate will have come in at 2.6% for three straight years since 2015, a signal that the nation has fallen into a low growth trap, something unprecedented for Asia's No. 4 economy. With the government abandoning the 3% growth projection, major institutions' growth outlooks on Korea Inc. are hovering around 2%, except for the International Monetary Fund (IMF), which suggested 3%. Private consumption growth is expected to slow to 2% next year from 2.4% in 2016, as consumers will remain squeezed by shrinking real income and mounting household debt, which has already surpassed KRƒ 1.3 trillion. "Slowing domestic consumption, the tight job market, weak corporate investment and the low birthrate will keep the economy from posting any meaningful recovery," said the Ministry of Strategy and Finance (MOSF) said in a statement at a ministerial meeting on economic affairs, on December 29, Thursday. The ministry added that growing external uncertainties - higher U.S. interest rates, a growing protectionism trend, Brexit and debt problems in China - will also weigh heavily on the economy. The government pledged to spend more than KRƒ 21 trillion (US$17.39 billion) to boost the weak economy KRƒ 13.3 trillion from the budget and KRƒ 8 trillion in loans from policy lenders. It plans to front load budget expenditure in the first quarter of next year at 31% of the total. The ministry expects exports to grow 2.9% next year on rising demand for chips and displays, with imports jumping 7.2% on a gain in oil prices. Consumer prices are expected to grow 1.6% next year, compared with a 1% gain in 2016. According to the MOSF, it will take steps to prevent political uncertainties, including the impeachment of President Park Geun-hye and the likelihood of an early presidential election, from having any major negative impact on the economy. "The political situation can change down the road," said Deputy Prime Minister and Finance Minister Yoo Il-ho at the meeting of economic affairs ministries. "However, it is important to set up a policy with a backbone so I don't think the plan is a month-long one," said Yoo. Minister Yoo also said that on the global front, the expected U.S. rate hikes and growing trade protectionism are factors that will weigh down on Korea's growth next year. "We should prepare for a situation in which global downside risks are coupled with our domestic weaknesses like massive household debt and insolvent companies."
More than KRƒ 20 trillion (US$16.5 billion) worth of fiscal measures will be implemented to bolster growth next year, including about KRƒ 13 trillion of government expenditure and KRƒ 7 trillion of support from public financial institutions. The government will raise its annual spending by 1 percentage point, or KRƒ 3 trillion, to add to fiscal spending. The finance ministry also decided to front-load 31% of the government's annual budget in the first quarter of next year, spending as much as possible in a bid to stimulate the economy in the shortest span of time. At the ministerial meeting, acting President Hwang Kyo-an emphasized the role of fiscal policies. He said, "When the economy is in a slow phase, fiscal policies should be strong enough to bolster it." "From early next year, the government will mobilize all available fiscal sources." Meanwhile, according to the report of the Bank of Korea on its monetary strategy for next year. "The Korean economy is expected to continue its modest growth amid high uncertainties." "The slowing of private consumption and construction investment will become greater, despite a slight improvement in exports and facility improvement." The BOK cut its 2017 growth forecast to 2.8% from the July projection of 2.9%, citing greater uncertainty in the global economy and risks from ongoing corporate restructuring here. It left the 2016 growth outlook unchanged at 2.7%, despite a possible dent in Korean exports in the wake of the halt of production of Samsung Electronics' smartphone Galaxy Note 7. The central bank's 2017 growth projection is gloomier than the Finance Ministry's 3% target, but rosier than those by private think tanks, which range from 2.2% to 2.6%. "Next year, increased uncertainty from global issues like Brexit will negatively affect the global economy. Possible rate hikes at the U.S. Federal Reserve, although gradual, are likely to make other vulnerable countries' financial market more volatile," said BOK Gov. Lee Ju-yeol. "Within the Korean economy, the biggest risk is corporate restructuring, which could hamper the business sentiment of economic participants." South Korea's debt in the public sector, including borrowing by the government and state-run enter-prises, exceeded KRƒ 1,000 trillion (US$832 billion) as of the end of 2015, a government report showed on December 23. However, its rate to gross domestic product slightly fell by 0.1 percentage point to 64.4% in 2015 from a year earlier, according to the report by the MOSF.
According to the government tally, the public sector debt (D3) and which takes into account both general government and non-financial corporation debt and deducts internal transactions, rose to KRƒ 1,003.5 trillion as of the end of 2015. The figure is a 4.8% gain (KRƒ 46.2 trillion) from a year earlier. General government debt (D2), referring to that of the central and provincial governments, and nonprofit public institutions, was up by KRƒ 55.6 trillion to KRƒ 676.2 trillion over the cited period. Its ratio to GDP, often cited by foreign credit ratings as a benchmark for the government's fiscal soundness, inched up 1.6 percentage points to 43.4% last year. Of the KRƒ 55.6 trillion gain in the general government debt, KRƒ 48.6 trillion was incurred by government-issued bonds to stabilize the foreign exchange market and the rest, to cover the deficits in its general account, according to the MOSF. National debt (D1), stood at KRƒ 591.5 trillion, accounting for 37.9% of the GDP in 2015. Debt at non-financial state-run firms inched down to KRƒ 398.9 trillion last year, with its GDP ratio shrinking by 1.9 percentage points to 25.6%. The growth pace in both public sector debt and general government debt has slowed in 2015, compared to 2014, mainly due to improvements in financial performances at the state-run firms, according to the finance ministry. Korea's general government debt-to- GDP ratio at 43.4% is relatively low compared to that of other OECD countries. The figure in Germany stands at 71%, the United Kingdom at 96% and the United States at 126%, according to the ministry. "The government plans to limit national debt-to-GDP ratio to the low-40% level by 2020," said the ministry in a statement. Korea's sound position in public finances is often cited as a resilient factor in the faltering economy amid political risks over the impeachment of President Park Geun-hye, rising interest rates in the wake of the U.S. Federal Reserve's rate hike this month and the high level of household debt, according to an economic expert.
After the historic national assembly's impeachment on December 9, the Korean economy is expected to be thrown into a vortex of uncertainty amid aggravating concerns over sluggish exports and intensifying external volatility from foreign exchange and oil prices. Related ministries and financial authorities held meetings right after the vote, seeking ways to contain any economic fallout and to strengthen the monitoring of internal and external factors on the market. Experts have already expressed concerns over a possible change in the economic relationship between Korea and United States, citing Trump's campaign pledges on rewriting the bilateral free trade deal. The impeachment was the death knell for many of the key economic policies endorsed by the Park Geun-hye administration encircled under the theme of the "creative economy." Upon inauguration, Park vowed to restructure the public, education, finance and labor sectors. Reform of regulations and improving labor market polarization have been key tasks for the government. The government's push to reform the system of year-end tax settlement and health insurance payment system has also been shelved, as the ruling Saenuri Party feared negative public sentiment. Without doubt, the hardest-hit project is Park's creative economy, which aims to foster startups and innovative businesses and to transform the manufacturing-heavy economy into a services-oriented one. Seventeen creative economy and innovation centers have opened nationwide over the past two years. But the centers found themselves at the center of the presidential scandal by being allegedly connected to Choi Soon-sil, Park's secret confidante. The prosecution is currently investigating whether Cha Eun-taek, a close associate of Choi and former head of the creative economy promotion team, was involved in the establishment and operation of the centers. Korean companies have been expressing fears about the rise of protectionism, not only from the United States but also from Europe, aggravated by Britain's departure from the European Union in June. The absence of a state-run control tower for dealing with trade issues could further discourage Korean businesses' operation overseas. Some observers are worried that the political uncertainty could further drag down already shrinking shipments of Korean products as well as the domestic consumption, possibly driven by a rise in an anti-business sentiment.