Korea’s Bahk Rules Out Additional Fiscal Stimulus

South Korean Finance minister Bahk Jae Wan ruled out additional fiscal stimulus for now, saying it could do more harm than good because the global economy is too weak to make it meaningful.

“You don’t plant a tree in winter,” Bahk said yesterday in an interview with Bloomberg News in Seoul. While Asia’s fourth-largest economy retains room to boost growth both through monetary and fiscal measures, 3 percent growth “is not bad, given the global economy,” he said. Gross domestic product rose 2.8 percent in the first quarter from a year before.

South Korea’s government and central bank have stepped up efforts to ease the impact from Europe’s debt crisis, a Chinese slowdown and muted US job creation. The Bank of Korea unexpectedly cut its benchmark rate on July 12 and the finance ministry announced economic support measures on June 28.

Bahk, 57, said there was no way to say if the effect on South Korea’s economy from the European debt crisis has peaked, though the situation may improve later this year with “occasional hiccups.” Policy makers in Seoul “still have ammunition” and would favour joining other nations in a coordinated approach if the global economy worsens significantly, he said.

The central bank lowered its main rate a quarter percentage point to 3 percent on July 12, the first reduction since February 2009, as it joined a global stimulus push from Europe to China. The following day, the BOK pared its 2012 growth forecast to 3 percent from 3.5 percent, the second cut this year.

Won Gains

The won strengthened for a third day, rising 0.3 percent to 1143.25 per dollar at 10:25 a.m. in Seoul, according to data compiled by Bloomberg. The benchmark Kospi stock index rose 0.4 percent.

“They do not need too much additional policy support beyond monetary easing” to achieve 3 percent growth this year, Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore, said in an e-mail today. “The real issue that the Finance minister and BOK are concerned with is what happens to growth next year and the year after.”

Speaking hours after North Korea’s official news agency announced the removal of its military chief, Bahk said he hoped his northern neighbours move toward reform. The finance ministry has a team analysing North Korea and contingency plans, he said.

Ri Downfall

The downfall of Ri Yong Ho, who oversaw the North’s 1.2 million-strong army, followed a push by leader Kim Jong Un to deploy military resources for infrastructure projects. North Korea’s economy, isolated from most of the world’s markets over the country’s pursuit of nuclear weapons, contracted in four of the past six years, according to South Korea’s central bank.

“I hope they move toward reform and greater cooperation with surrounding nations,” said Bahk, a Harvard University- educated former bureaucrat who was labour minister before taking the helm at the finance ministry last year. He also said that predicting what’s ahead for North Korea is harder than forecasting the future of the euro region.

The Bank of Korea’s more pessimistic outlook for the South’s economy came less than a month after the finance ministry on June 28 lowered its 2012 growth estimate to 3.3 percent from 3.7 percent. The government also said it would provide 8.5 trillion won ($7.4 billion) to support demand, including assistance for small businesses and low-income earners.

Capital Flows

Policy makers last month also announced incentives to attract foreign-currency deposits to banks to protect against volatility in capital flows. The central bank’s rate cut last week might have been intended to prevent so-called hot money from flooding into Korea, Bahk said.

“It was either a preemptive step to boost growth or a means of keeping interest-rate differentials intact after rate cuts overseas,” Bahk said, adding that he couldn’t speak for the central bank.

The European Central Bank on July 5 cut borrowing costs to a record low after Spain and Cyprus joined Greece, Ireland and Portugal in asking for external aid. People’s Bank of China also reduced borrowing costs, while the Bank of England boosted the size of its asset-purchase programme.

Watching China

“Given the government’s determination to support the economy, China will start to recover in the third quarter,” Bahk said yesterday. “This will have a positive impact on South Korea.”

South Korea’s consumer prices are expected to rise 2.7 percent this year, down from an earlier forecast of a 3.2 percent price gain, the central bank said on July 13. The inflation rate slid to a 32-month low of 2.2 percent in June as commodity prices moderated and the government expanded free school lunch and child care services.

South Korean manufacturers’ confidence fell to the lowest level in four months for July while consumer confidence dropped to a three-month low in June, according to Bank of Korea reports last month.

http://www.businessweek.com/news/2012-07-16/south-korea-s-bahk-rules-out-additional-fiscal-stimulus

 

Category: Korea