South Korea’s newly-named finance minister, Hyun Oh Seok, may set limits on the scale of fiscal stimulus to spur growth even as a rising won adds to drags on Asia’s fourth-largest economy.
Hyun cautioned last year against letting the nation’s financial health deteriorate, while seeing room for additional fiscal and monetary measures, according to local media reports. The 62-year-old will also be deputy prime minister for the economy under President-elect Park Geun Hye, her transition team said in Seoul yesterday.
After advising the outgoing government as head of the Korea Development Institute, Hyun now faces the challenge of helping to bolster an economy that expanded last year at its slowest pace since the global financial crisis. In a November report, his institute said that the government should ensure fiscal soundness while implementing more expansionary policies and using monetary measures more actively.
“Hyun will not open the floodgates for aggressive fiscal spending as he can’t compromise the country’s fiscal health,” Jeong Young Sik, Seoul-based chief researcher at Samsung Economic Research Institute said in a telephone interview. “Given that Hyun has been a close aide to policy makers of Lee Myung Bak’s government, I don’t expect him to make drastic changes.” Lee will hand over to Park and her new administration on Feb. 25.
Appointments including Hyun’s need to be confirmed at a parliamentary hearing at the National Assembly, where Park’s New Frontier Party has a majority.
“The short-term challenge is how to secure a rapid economic recovery,” Hyun said at a briefing in Seoul yesterday, without commenting on the currency or fiscal stimulus. “The long-term challenge is how to coordinate between growth and welfare and improve our growth potential.”
In an interview with the Korea Economic Daily in July, Hyun said the government should “refrain from a hasty supplementary budget as deteriorating fiscal health may hurt our international credibility and thus trigger foreign capital flight.” Rather than printing money to boost the economy, it was more urgent to encourage companies to invest, he said.
In an October interview with ChosunBiz, a unit of the Chosun Ilbo newspaper, Hyun said policy makers should not use up all available tools quickly in case the global economic slump is prolonged, although he saw more room for fiscal and monetary policy easing.
He argued against monetary tightening in May 2010, citing escalating military tension with North Korea and Europe’s debt crisis. Two months later, the Bank of Korea unexpectedly raised interest rates to 2.25 percent from a record-low 2 percent.
“The new finance minister, now elevated to deputy prime minister, will have unusually strong power, probably unseen since Park Chung Hee’s regime, encompassing all economic policies from budget to international trade,” Lee Sung Kwon, an economist at Shinhan Investment Corp. in Seoul, said before the announcement. He was referring to the incoming president’s father, who oversaw South Korea’s economic rise through the growth of automaking, steel and shipping until his assassination in 1979.
GDP increased 1.5 percent last quarter from a year earlier, less than analysts forecast, and a 25 percent gain in the won against the yen over the past six months threatens to restrain exports by aiding rival companies in Japan.
Hyun has a Ph.D. in economics from the University of Pennsylvania and worked for the World Bank and South Korea’s finance ministry before becoming head of the nation’s top research body in 2009, according to KDI’s website. He is a long- time policy adviser to the Bank of Korea and the government. One of his predecessors at KDI was central bank Governor Kim Choong Soo.
Becoming finance minister and deputy prime minister for the economy “is the greatest responsibility of my career, especially at a time when the global economy is in such a difficult situation,” Hyun said yesterday. “I will contribute to the new Park government’s commitment to revive the middle class through the virtuous circle of growth and welfare.”
His predecessor Bahk Jae Wan resisted pressure from lawmakers last year for additional spending to support growth, submitting a 2013 budget that targets a fiscal deficit amounting to 0.3 percent of gross domestic product, the lowest in six years. Three global credit-rating companies upgraded the nation’s sovereign rankings last year, citing fiscal soundness and economic resilience.
“The new finance chief will face pressure to introduce a supplementary budget as fiscal stimulus is set to play a bigger role in Korea’s recovery,” Ronald Man, a Hong Kong-based economist at HSBC Holdings Plc, said before the announcement.
Park’s government has allocated 72 percent of the budget in the first half of the year, to aid a recovery. The new president also promised to increase spending on welfare and unveil an 18 trillion won ($16.6 billion) fund to help avert loan defaults. Park said in a New Year’s speech that she will focus on improving people’s lives and “resolving the difficulties of the poor and the needy.”
Park has vowed to spend 131.4 trillion won on welfare programs such as free childcare and support for the indebted poor over the next five years. Raising taxes is a “last resort,” Park said in a televised debate on Nov. 26. 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.
South Korea’s economy expanded 2 percent in 2012, the slowest pace since annual growth fell to 0.3 percent in 2009. That compares with a potential rate of 3.8 percent estimated by central bank governor Kim.
The Bank of Korea on Jan. 11 projected a growth rate of 2.8 percent for 2013, cutting its previous estimate of 3.2 percent. It kept interest rates on hold at 2.75 percent on Feb. 14.
Policy makers also face a working population that’s expected to start shrinking in 2017, according to a finance ministry report last year.
“In the long term, Korea needs to outline a fiscal strategy to slow the impact of an aging demographic” to keep growth momentum, said Wai Ho Leong, a senior regional economist at Barclays Plc in Singapore.