South Korea may get a growth boost next year as incoming president Park Geun Hye abandons fiscal restraint and increases spending on welfare.
Park, who takes office in February, may plan as much as 20 trillion won ($18.6 billion) in additional spending, according to Nomura International Ltd. Extra government outlays will account for 0.8 percentage point of a likely 3 percent economic expansion in 2013, Standard Chartered Bank Korea estimates.
Outgoing President Lee Myung Bak’s fiscal record offers Park “significant leeway in policy,” according to Moody’s Investors Service, which raised South Korea’s sovereign rating this year, as did Fitch Ratings and Standard & Poor’s. One possible cost: missing the target that Lee set for further reducing the nation’s budget deficit next year to a six-year low of 0.3 percent of gross domestic product.
“A sizable fiscal stimulus will help increase the momentum of an economic recovery but fall short of undermining the country’s fiscal health,” said Kong Dong Rak, a Seoul-based bond analyst at Hanwha Investment & Securities Co., one of South Korea’s 20 primary dealers. “Any economic recovery will be painfully slow in coming months as persistent external risks and record household debt keep businesses and consumers from aggressive spending.”
The won was little changed today at 1,074.35 per dollar, according to data compiled by Bloomberg. It’s gained 7.3 percent this year, the best performance among Asia’s 11 most-used currencies. The Kospi index of stocks fell 1 percent at the close in Seoul, paring gains for the year to 8.5 percent. The MSCI Asia Pacific Index fell 0.6 percent to 128.43 as of 3:39 p.m. in Tokyo.
If the government decides on a supplementary budget, yields on the three-year treasury bond will probably rise to 3.05 percent, Kong said. The yield on the government’s benchmark three-year debt has risen four basis points, or 0.04 percentage point this month, to 2.88 percent at the close yesterday in Seoul, according to Korea Financial Investment Association prices.
The nation’s economy expanded 1.5 percent in the third quarter, the slowest pace in three years. The central bank sees growth at 2.4 percent this year as Europe’s debt crisis and gains in the won curtail exports and record household debt weighs on domestic demand.
Kwon Young Sun, a Nomura economist based in Hong Kong, said stimulus may cause the economy to expand more than his 2.5 percent estimate for next year. Ronald Man, a Hong Kong-based analyst at HSBC Holdings Plc., said he has already factored an extra budget of about 1 percent of GDP into his 3.8 percent growth forecast for 2013.
“Government fiscal support is a must for an economic recovery next year,” said Oh Suk Tae, a Seoul-based economist at Standard Chartered Bank Korea. “The extended fiscal support for about a year won’t hurt South Korea’s credit standing.”
Park has vowed to spend 131.4 trillion won on programs such as free childcare and support for the indebted poor. Raising taxes is a “last resort,” Park said in a televised debate on Nov. 26, and a supplementary budget is a policy card that can be used “whenever needed,” the Seoul Economic Daily newspaper cited her as saying in a Nov. 20 interview.
Standard & Poor’s, Moody’s Investors Service and Fitch Ratings boosted South Korea’s rating between late August and September, with all three citing the country’s ability to weather shocks. The rating moves came as the government unveiled 14.4 trillion won of economic support measures within the budget, including spending and tax cuts.
S&P said in an e-mailed statement after the election yesterday that it sees “no major policy shifts” and that “much hinges on the details” of how Park delivers on her pledges. Fitch said in a statement that the election result looks “neutral” for ratings.
One reason Park is expected to ramp-up fiscal stimulus is that the Bank of Korea has limited room for further monetary easing, said Kong. The BOK, which cut rates in July and October, will hold throughout next year in part to discourage household debt, he said.
Park has proposed an 18 trillion won fund to help avoid defaults by the indebted poor to address household debt that rose to a record 937.5 trillion won in the third quarter.
“I will revive the legend of the economic miracle, making the country a place where people have no worry about living and young people merrily go to work,” Park said in a public address broadcast live on television yesterday. “The economy is still in difficult situation.”
Even before candidates finalized their election proposals, the parliamentary budget office said the assumptions made in Lee’s budget plan were unrealistic. Lee’s target for a fiscal deficit of 0.3 percent next year assumes 4 percent growth.
South Korea’s fiscal deficit may widen as much as 2 percent of gross domestic product more than estimated in Lee’s 2013 budget, Goldman Sachs Group Inc. economists Kwon Goo Hoon and Chung Sung Soo said in report last month.
Park will probably look to table a supplementary budget in late February or March to fund spending plans, said Wai Ho Leong, a senior regional economist at Barclays Plc in Singapore. Assuming that the economy expands 3.3 percent next year and there are no unexpected shocks, the government could still balance the budget by 2014, he said.
“Considering the weak global environment we are in, there are good reasons for the new government to spend more,” he said.
In Europe, S&P cut Cyprus’s long-term debt rating for the third time in five months, citing a rising risk of default. The U.K. will report a final reading on third-quarter growth figures and market-research firm GfK SE (GFK) will give consumer confidence for Germany and the U.K.
In the U.S., personal spending and personal income probably climbed in November, according to a Bloomberg survey. The Chicago Fed releases its National Activity Index for November and the University of Michigan unveils a consumer confidence index for December.
Canada reports on gross domestic product and inflation. Elsewhere in the Americas, Brazil’s unemployment rate probably fell in November and Argentina’s economic growth may have expanded, according to surveys.
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