Bahk Eschews Stimulus as South Korea’s Slowdown Abates

South Korea's Finance Minister Bahk Jae Wan
South Korea's Finance Minister Bahk Jae Wan. Photographer: SeongJoon Cho/Bloomberg

South Korea’s finance minister said his nation’s economic growth will improve this quarter and policy makers should limit the scale of stimulus measures.

“Mobilizing all available fiscal, monetary and financial policy means in a bold move with a large size may have harmful effects” including a wider budget deficit, Bahk Jae Wan said in an interview at the Bloomberg News office in Seoul yesterday.

Bahk, 57, instead advocated “less costly and more salient policies,” such as cutting business regulation -- a stance that contrasts with calls from presidential candidates for tighter oversight of chaebols, the conglomerates that drive exports. The finance chief said “bold or harsh” moves against chaebols are unlikely to be enacted and “no more than a ploy to woo voters.”

Reluctance to endorse “all-out measures” to stoke growth reflects Bahk’s concern that “this will be a long economic crisis.” Speaking before he flies to Tokyo for this week’s International Monetary Fund and World Bank annual meetings, he urged European nations to set a timetable for implementing steps to resolve their debt woes. The Group of 20 should also maintain its “standstill” on protectionist trade measures, he said.

The central bank of Asia’s fourth-largest economy meets tomorrow to consider a second interest-rate cut for the year, with 13 of 16 analysts surveyed by Bloomberg News predicting a quarter-point move. While Bahk said that growth “could be weak” in the final three months of the year, “the third quarter will be a bottom.”

Fiscal Target

President Lee Myung Bak’s administration has refrained from compiling a supplementary budget to counter a weakening expansion, and targets a fiscal deficit of 0.3 percent of gross domestic product for next year, a six-year low. South Korea’s exports, which make up about half of GDP, fell for the third month in September.

The jobless rate was at 3.1 percent in September, unchanged from August, Statistics Korea said today. The median estimate in a Bloomberg News survey of 13 economists was for a rate of 3.2 percent.

The government is scheduled in December to review its forecasts for GDP to rise 3.3 percent this year and 4 percent in 2013. Bahk said that officials may revise the 2012 estimate to “a more realistic level,” and that “next year should be better than this year.” The IMF yesterday projected growth of 2.7 percent for 2012 and 3.6 percent for 2013.

Export Diversification

“The continued slowdown in trade flows is clearly negative for the near-term growth outlook” for South Korea, Standard Chartered Bank Plc analysts Eunhye Yoon and Suktae Oh wrote in an Oct. 5 report. “We maintain our base-case scenario that China’s recovery will drive a recovery in Korea’s exports and industrial production, though the timing of the recovery is likely to be delayed to the first quarter of 2013.”

South Korea’s success in diversifying both the types of exports it makes and the destinations for its goods has helped prevent a deeper slump, according to Bahk, a former labor minister and civil servant who previously served as a senior aide to President Lee. Mobile telephone sales have complemented traditional goods such as steel, petrochemicals and ships, he said. Samsung Electronics Co., the world’s top maker of mobile phones and televisions, reported a record profit last week.

South Korean’s benchmark Kospi index of shares has advanced 2.6 percent in the past month, and the nation’s currency has risen 1.8 percent against the dollar, second only to India’s rupee in Asia. The won touched an 11-month high of 1,109.57 on Oct. 8.

Won Gains

Asked about the won’s appreciation, Bahk said the government “shouldn’t intervene” in exchange rates, while reiterating the administration’s policy of implementing “smoothing” operations in cases of volatile fluctuation.

The won held its advance against the dollar yesterday even after South Korea and Japan agreed to let expire a $57 billion expansion of a currency-swap agreement. Tensions between the two nations escalated this year over ownership claims for a group of islands known as Dokdo in Korea and Takeshima in Japan.

Bahk said deeper economic ties can help ease such political conflicts. South Korea, Japan and China remain committed to pursuing a three-way free-trade agreement, and an announcement on beginning talks is likely next month, he said.

One of South Korea’s biggest concerns is a surge in protectionism, the finance minister said.

“The G-20 should call for some action” against protectionism, he said. Finance chiefs from the Group of 20 emerging and developed markets are scheduled to gather next month in Mexico.

Europe Frustration

Bahk urged stronger steps by European policy makers to address the euro-region’s continuing crisis. Finance ministers from the 17 euro nations this week declared the 500-billion euro ($648 billion) European Stability Mechanism operational.

Bahk said that to preserve a so-called announcement effect, Europeans should set a timetable for resolving outstanding issues and stick to it. The euro ministers this week said Spain isn’t on the verge of tapping the ESM, and put off decisions on Greece’s next aid payment and on an assistance program for Cyprus.

“The talks over the European fiscal crisis are really a tedious and time-consuming procedure,” Bahk said. “The euro-zone should take more decisive and speedy action.”

The finance minister said Europe’s challenges are deeper than those in the U.S., and expressed “irresponsible optimism” that American lawmakers will reach agreement avoiding a so-called fiscal cliff of budget cuts and tax increases at year-end.

Chaebol Policy

Turning to efforts in South Korea to reduce the sway of conglomerates, Bahk said that “whoever rules the country next year, it will be difficult to impose excessive regulations that may go beyond the global standards” applied to large multinational corporations.

Presidential candidate Moon Jae In, who’s vying with ruling-party nominee Park Geun Hye and independent candidate Ahn Cheol Soo in the Dec. 19 election, yesterday pledged to enact a law banning chaebols from some industries to aid smaller companies. Ahn, founder of South Korea’s biggest antivirus software maker, advocates banning cross-shareholdings of the family-run companies and limiting their investments in subsidiaries.

“Reforming chaebols is one of the most important aspects of democratizing the economy,” Moon said in an interview at his campaign headquarters in Seoul yesterday.

North Korea

Bahk said his ministry will release in two or three weeks its findings from a study on the economic aspects of the Korean peninsula’s potential unification. One conclusion from the effort has been that the long-run positive impact has been understated. While costly in the short run, economic integration would help counter the impact of South Korea’s aging labor force, and expand access to natural resources.

Officials are considering whether to release a range of cost estimates for unification, or different calculations based on specific scenarios, Bahk said. Joining with North Korea would cut the South’s total economic output by as much as 6.6 percent every year for a decade, the Korea Institute of Public Finance said in a report last month.

North Korea’s nominal GDP totaled 32 trillion won in 2011, compared with South Korea’s 1,237 trillion won, the Bank of Korea said in a July report. North Korea’s per capita income was 1.33 million won while South Korea’s was 25 million won, according to its estimates.

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