Government under pressure to lower 2011 growth forecast

South Korea’s government is coming under pressure to adjust its 2011 growth forecast in the face of mounting downside risks caused by the sluggish global economy, sources said.

The prediction comes as the finance ministry cut this year’s growth estimate from 5.0 percent to 4.5 percent in June and follows moves by foreign and domestic economic organizations that have started to announce lower growth for Asia’s fourth-largest economy.

Local think tanks such as the Korea Institute of Finance and Hyundai Research Institute claimed the country may be able to pull off 4.1 percent and 4.2 percent growth each this year.

The ministry, in charge of the country’s macroeconomic policies, said first-half growth stood at 3.8 percent, or 0.1 percentage point less than anticipated. It also said 4.8 percent growth that must be reached in the July-December period may be adjusted due to uncertainties triggered by the U.S. credit rating downgrade and worsening fiscal woes in some European countries.

Other downside risks include such developments like high energy prices and inflationary pressure. In addition, reports by the Paris-based Organization for Economic Cooperation and Development warned that the global economy may be heading toward stagnation as the Group of Seven advanced industrialized economies failed to meet economic growth expectations in the first half.

The OECD said prospects for advanced countries did not look bright in the second half. The organization called on members not to raise key interest rates and advised central banks to get more involved in their financial markets.
The International Monetary Fund also said that overall conditions were not favorable and called on leading economies to take aggressive and concerted steps to reduce risks.

Related to mounting pressure on the government, a senior finance ministry official said the 4.5 percent target reflects the government’s goal for this year, which could change if the need arises.

He stressed that while growth may not be moving forward as expected, there is a need to wait and see what develops. The official said that despite concerns, there is almost no risk that the country will experience stagflation.

Other indicators that the economy is gripped by uncertainties can be seen in the volatility on the local bourse in the past month.

According to the Korea Exchange, the average daily volatility of the country’s benchmark KOSPI reached 2.78 percent after Aug. 6, when Standard & Poor’s Rating Service lowered the sovereign rating for the United States.

This, it said, was on par with 2.84 percent reached by the French bourse, and higher than the 2.32 percent volatility tallied for the Dow Jones.

Experts said the level of fluctuation reflects the KOSPI’s dependence on foreign investors, who stand at around 31 percent.

It said such reliance could result in sudden withdrawal of funds, which could upset foreign exchange rates and hurt trade. 

(Yonhap News)