South Korea Cuts 2015 Growth Forecast, Warns on External Risks

South Korea lowered its growth forecast and said it will revise capital controls to guard against higher U.S. interest rates and other external risks to Asia’s fourth-biggest economy.

The economy will expand 3.8 percent next year, less than a July estimate of 4 percent, the finance ministry said, citing weaker-than-expected domestic demand. The ministry may revise rules in 2015 on currency forwards and foreign currency liabilities to prevent abrupt outflows, a statement showed.

South Korea’s domestic economic conditions have weakened since July, the ministry said, and increasing financial market volatility stemming from a weak yen and a looming interest rate increase in the U.S. cloud the growth outlook. President Park Geun Hye has loosened mortgage rules and introduced 31 trillion won of stimulus and a record budget for 2015 to spur growth.

“Our policies have remained expansionary, but consumer and investment sentiment in the private sector didn’t improve as much as they should have,” Lee Chan Woo, director general at the ministry told reporters.

The Bank of Korea has cut interest rates twice since August and the relaxed mortgage rules have helped push the nation’s household debt to a record 1,060.3 trillion won ($965 billion) at the end of September. At the same time, economic conditions aren’t improving because companies are reluctant to boost investment, Shin Jang Sup, an economics professor at National University of Singapore, said before the release.

“Growth won’t improve from this year unless policies to boost investment become more aggressive, which would create trickle-down effects that increase wages,” Shin said.

Accelerating Exports

Exports will climb 3.7 percent next year, the ministry forecasts, accelerating from an estimated 2.7 percent increase this year. Inflation will be 2 percent in 2015, less than an earlier estimate of 2.3 percent.

For this year, the ministry forecasts economic growth of 3.4 percent, down from its July projection for a 3.7 percent expansion.

The mid- to long-term policy focus will be on carrying out structural reforms in the labor market and wage system, the ministry said. To fight a shrinking workforce, the government plans to ease eligibility rules for skilled foreign workers to obtain permanent residency. The ministry will work to gradually raise the minimum wage and encourage corporate dividend payouts to increase household income.

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