South Korea yesterday lowered its growth forecast and said it would revise capital controls to guard against higher US interest rates and other external risks to Asia’s No. 4 economy.
The economy is expected to expand 3.8 percent next year, less than a July estimate of 4 percent, the South Korean Ministry of Strategy and Finance said, citing weaker-than-expected domestic demand. The ministry next year might revise rules on currency forwards and foreign currency liabilities to prevent abrupt outflows, it said.
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 US cloud the growth outlook.
South Korean President Park Geun-hye has loosened mortgage rules and introduced 31 trillion won (US$28.29 billion) of stimulus and a record budget for next year to spur growth, officials said.
“Our policies have remained expansionary, but consumer and investment sentiment in the private sector did not improve as much as they should have,” finance ministry Director-General Lee Chan-woo 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 at the end of September.
However, conditions are not improving because firms are reluctant to boost investment, National University of Singapore economics professor Shin Jang-sup said.
“Growth will not improve from this year unless policies to boost investment become more aggressive, which would create trickle-down effects that increase wages,” Shin said.
Exports are expected to climb 3.7 percent next year, the ministry said, accelerating from an estimated 2.7 percent increase this year.
Inflation is likely to be 2 percent next year, less than an earlier estimate of 2.3 percent, it added.
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 said it would work to gradually raise the minimum wage and encourage corporate dividend payouts to increase household income.
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