Korean economy to face stronger headwinds

Entering the New Year, the Korean economy finds itself besieged by a complex set of external and internal risks that threaten to continuously hamper its growth.

Government policymakers estimate the country’s gross domestic product will grow by 3.1 percent in real terms this year, marking a modest improvement from last year’s growth, which is estimated to have remained at 2.7 percent.

Announcing the 2016 economic policy directions last month, they pledged to revitalize the economy by boosting domestic demand and strengthening support for exporters.

Many economists, however, give little credibility to the government’s adherence to keeping the 2016 growth target above 3 percent. They even caution that Asia’s fourth largest economy may take a sharp downturn in the first quarter of the year as available stimulus measures have been nearly exhausted and exports are expected to continue to remain sluggish.

Private think tanks and investment banks have suggested far lower growth forecasts than the government’s outlook. Estimates from local research institutes range from 2.5 percent to 2.8 percent. Foreign investment banks have painted a gloomier picture of the Korean economy, with Morgan Stanley forecasting its growth rate will be as low as 2.2 percent.

Moody’s Investors Service, a credit rating agency, predicted in its global economic outlook for 2015-17 published in November that Korea’s economy would expand by an annual average of 2.5 percent over the cited period.

Economic policymakers are pinning hopes primarily on a continuous rise in domestic expenditure to prop up the fragile economy. The contribution of domestic demand to growth increased by 3.5 percentage points from a year earlier in the first three quarters of last year. The corresponding figure for exports fell by 1 percentage point over the same period.

The government plans to increase fiscal spending in the first three months of 2016 by 8 trillion won ($6.7 billion) more than the originally set 117 trillion won. It will continue to try to boost domestic consumption this year by holding nationwide sales promotion events, attracting more foreign tourists, particularly Chinese travelers, and encouraging more retiring homeowners to use reverse mortgages.

But many analysts express skepticism that these measures will result in increasing private spending by 2.4 percent this year, up from 2.1 percent last year, as estimated by the government.

The country’s exports and imports are projected to gain by 2.1 percent and 2.6 percent, respectively, in 2016, with current account surplus expected to be cut to $98 billion from last year’s $112 billion. But the increase may be largely seen as reflecting a low base effect as Korea saw its exports and imports shrink by 7.3 percent and 16.5 percent last year.

China’s deepening slowdown and the Korean won’s appreciation against major currencies aside from the U.S. dollar will continue to hamper a recovery in the country’s exports. The growing volatility in emerging market economies hit by a fall in commodity prices and exposed to the possibility of massive capital outflows amid U.S. interest rate hikes may amplify unfavorable external conditions for Korean manufacturing exporters.

“Local companies will have more difficulties competing with their rivals from China, Japan and European countries,” said Jang Soo-young, an official in charge of trade strategy at the Korea Trade-Investment Promotion Agency, emphasizing the need to produce more qualitative products and find new markets. He also said Korean companies might find more opportunities in growing efforts by developing economies to nurture manufacturing industries.

In the coming year, the government also plans to push for drastic deregulation to help promote private-sector investments. A special law is scheduled to be submitted to the parliament in June to set up 14 regulation-free zones designed to develop future strategic industries tailored to specific regional conditions.

Facilities and construction investments are projected to increase by 4.4 percent and 4.3 percent, respectively, in 2016, compared to 5 percent and 4.2 percent in 2015.

The pace of the consumer price hike is forecast to pick up from 0.7 percent last year to 1.5 percent this year, with the trend of loosening monetary policy expected to stay on course.

But monetary policymakers will find it difficult to take a proper position between the need to help bolster the economy and calls for a rate rise to prevent rising household, which is about to reach 1.2 quadrillion won, from hurting the economy.

If Korea achieves this year’s growth goal against the odds, it will still hover below the 2016 global growth rate, which is projected by the International Monetary Fund and the Organization for Economic Cooperation and Development to reach 3.6 percent and 3.3 percent, respectively.

Lee Geun-tae, an analyst at the LG Economic Research Institute, said in a report released last November that Korea’s sluggish growth might need to be seen not as a temporary phenomenon on an economic cycle but as a reflection of a “lowered level of balance for the economy.”

A study by the Korea Development Institute, a state-run think tank, in July estimated the country’s potential growth rate -- a maximum rate in which a national economy can grow without triggering additional inflation -- at 3.1 percent for 2011-15 and expected the figure to go down to the 1 percentage range from 2026.

This bleak outlook has raised the need for structural reforms to be undertaken with a greater sense of urgency. Time is especially running out for overhauling an increasing number of marginal companies saddled with heavy debt and overcapacity.

In this regard, President Park Geun-hye seemed to strike a right note in a Cabinet meeting last week when she described a global rating agency’s recent upgrading of Korea’s sovereign credit rating as a “message of warning” that it could be downgraded again if the country failed to carry out structural reforms.

Experts indicate Korea needs to shift its policy focus from boosting the economy with short-term stimulants to strengthening its growth potential. The efforts to enhance the country’s long-term competitiveness should include effective and persistent measures to cope with a shrinking workforce brought on by a low birthrate and an aging population, they say.

By Kim Kyung-ho (khkim@heraldcorp.com)