South Korea’s incoming President Park Geun Hye may be saddled with an economy that underperforms for a prolonged period, increasing the allure of stimulus spending that could undermine the nation’s fiscal strength.
Growth may stay below potential for a “considerable time,” the Bank of Korea said yesterday after officials voted to keep interest rates on hold. Policy makers are concerned about the need to regain momentum after last year’s 2 percent expansion, the weakest since 2009. Governor Kim Choong Soo sees a potential rate of 3.8 percent.
The yen’s slide against the won is adding to challenges for Park by aiding the Japanese rivals of Korean companies such as Hyundai Motor Co. and Samsung Electronics Co. Deutsche Bank AG says Park, who takes office on Feb. 25 after campaigning on pledges to boost welfare spending, may announce a 10 trillion won ($9 billion) extra budget in March.
“Fiscal stimulus is like a shot in the arm, but when growth is slowing in a protracted fashion, then that really doesn’t help,” said Erik Lueth, a Hong Kong-based economist at Royal Bank of Scotland Group Plc. Leuth said the government needs to boost productivity in the services industry, aid small businesses and increase female participation in the labor force.
Standard & Poor’s, Moody’s Investors Service and Fitch Ratings boosted South Korea’s debt rating last year, with all three citing strong fiscal fundamentals and room to respond to external shocks.
Asia’s fourth-biggest economy grew an average 4.3 percent over the five years through 2007, before a U.S. housing market crash triggered a global recession. In the fourth quarter of last year, gross domestic product expanded 1.5 percent from a year earlier, less than the 1.8 percent median forecast in a Bloomberg News survey.
“If growth stays low for long, it’s difficult, or even impossible, for it to return to its potential,” Kim, the central bank governor, said last month.
The Bank of Korea said yesterday that growth remains at “a weak level” after declines in consumption, and the pace of the country’s expansion will be capped by a slow global recovery. At the same time, the domestic economy is showing signs of gradual improvement, according to the central bank. Frontloading of government spending in the first half of the year may help to support growth.
South Korea is among nations to voice concern about Japan’s economic policies as Japanese Prime Minister Shinzo Abe drives down his nation’s currency as part of a campaign to revive growth and end deflation. Exchange rates will top the agenda for Group of 20 finance ministers and central bankers as they begin two days of talks in Moscow today.
The won gained about 23 percent against the yen in the past six months.
Commenting on currencies yesterday, Governor Kim, who will attend the meetings in Moscow, told reporters that it’s “most desirable” for foreign-exchange rates to be set by market fundamentals. He added that the currency plays an important role in his nation’s interest-rate decisions without being the deciding factor.
The Bank of Korea kept the benchmark seven-day repurchase rate at 2.75 percent yesterday after a 25 basis-point cut in October. For a second month, the decision was not unanimous. Fourteen of 15 economists surveyed by Bloomberg News predicted the decision and one forecast a cut.
Asian stocks fell today from an 18-month high with the MSCI Asia Pacific Index down 0.4 percent as of 10:48 a.m. in Tokyo. In South Korea, the Kospi Index rose 0.1 percent. Elsewhere in the Asia Pacific region, New Zealand reported today that retail sales rose the most in six years in the fourth quarter, adding to signs of a recovery.
In Europe, the U.K. will release retail sales data today.
In the U.S, a report today may show that industrial production climbed 0.2 percent in January after a 0.3 percent advance the previous month, according to the median estimate in a Bloomberg survey of economists. The Thomson Reuters/University of Michigan consumer sentiment gauge may have climbed in February, another survey showed.