BOK cuts 2017 growth forecast to 2.8%

South Korea’s central bank cut its 2017 growth forecast to 2.8 percent from the July projection of 2.9 percent, citing bigger uncertainty in the global economy and risks from ongoing corporate restructuring here.

The Bank of Korea said it left the 2016 growth outlook unchanged at 2.7 percent, 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 percent target, but rosier than those by private think tanks which range from 2.2 percent to 2.6 percent.

“Next year, increased uncertainty from global issues like Brexit will negatively affect the global economy. Possible rate hikes at the US Federal Reserve, although gradual, are likely to make other vulnerable countries’ financial market more volatile,” BOK Gov. Lee Ju-yeol told reporters in Seoul.

“Within the Korean economy, the biggest risk is corporate restructuring, which could hamper the business sentiment of economic participants.”

Lee noted that the central bank took into account the possible fallout from Samsung’s Galaxy Note 7 when updating the 2016 gross domestic product growth outlook.

Korea’s top conglomerate Samsung’s proportion in Korean exports is not small. According to data from the Korea International Trade Association, the company’s mobile shipments took up 8.6 percent of total exports worth 593 trillion won ($522 billion) in 2015.

Despite such worries, Korea’s exports are expected to improve next year, mainly buttressed by a moderate growth of the global economy and a recovery of the global trade, Lee said.

The anti-graft law, which might weigh down retail sales and foods, is also reflected in the 2.7 percent growth forecast, he said, adding that the law is unlikely to affect domestic demand “very much.”

With the gradual rise in GDP growth, consumer prices will rise from 1 percent this year to 1.9 percent next year, the BOK said.

Earlier in the morning, the BOK’s seven members of its monetary policy board kept its key rate unchanged at 1.25 percent for the fourth straight month for October, as was widely expected by the market.

“It was an unanimous decision of the board,” Lee told reporters.

Excessively increasing household debt was the key point behind the rate freeze, as the BOK has been facing a tough balancing act between worries over rising household debt and the desire to support growth.

The nation’s household debt hit 1,257.3 trillion won as of June, boosted by low borrowing costs at banks and high demand for new apartments.

Despite a series of government measures since Aug. 25 to cool down speculative sentiment in the property market, retail banks’ lending to households did not abate, but went up by 6.1 trillion won in September from a month earlier, BOK data showed.

An economist said the BOK is unlikely to attempt another interest rate cut, not only this year but also next year.

“In the big picture, I don’t think the BOK’s stance has changed much from a month earlier. With household debt burden already excessive, it doesn’t have much room to lower the rate,” said Kim Yu-kyum of LIG Investment & Securities.

“If the Fed raises the rate in December, it will increase worries over foreign capital exit from Korea. I think the BOK will freeze the rate at least until the first half of next year,” he said.

On the news of the rate freeze, the local currency weakened against the greenback and fell 12.3 won to close at 1,135.9 won, Thursday. The benchmark Kospi also lost 0.9 percent to finish at 2,015.44, mainly due to selling by institutional investors. 

By Kim Yoon-mi (yoonmi@heraldcorp.com)