SEOUL/SEJONG, Feb. 11 (Korea Bizwire) – South Korea’s new economic policy team led by Finance Minister Yoo Il-ho is facing tough challenges as domestic and overseas developments threaten to drag down growth down the road, local observers said Thursday.
The warning comes as slowdowns in China and emerging markets, contracting exports and weakening domestic consumption are all casting doubts about the country’s ability to achieve accelerated growth in 2016.
The government said it is aiming for 3.1 percent growth in the new year, following a disappointing growth rate of 2.6 percent in 2015.
Such developments have forced Yoo, who took office in January, to reassess the country’s larger economic policy goals.
On taking office, the ruling Saenuri Party lawmaker emphasized that there will be changes to the government’s economic policy direction, with an emphasis on pushing forward key structural reforms that can boost the long-term competitiveness of the country.
The policymaker said that while he plans to adhere to the main principles of the three-year-old Park Geun-hye administration, implementing structural reforms will take center stage in the future, even if such measures take time.’
“Every effort will be made to push for reforms since real change is the only way to bolster growth,” Yoo said. “Economic policy agendas will move away from large-scale fiscal stimulus measures carried out in the past few years.”
To highlight this point, Yoo, who doubles as deputy prime minister in charge of economic affairs, has been calling for swift passage of labor sector reforms, and a special law that will improve corporate vitality.
The corporate vitality law that can allow companies to engage in restructuring even before they are in serious trouble was passed by lawmakers on Friday. The passage is expected to fuel mergers and acquisitions and permit the sweeping reorganization of struggling sectors such as shipbuilding, steel and shipping.
Despite the initial goal set by the new finance minister, he was forced to announce a 21 trillion won (US$17.6 billion) “mini” pump-priming plan on Feb. 3 just three weeks after taking office in the face of plunging exports and signs of people cutting back on spending.
Outbound shipments of Asia’s fourth-largest economy nosedived 18.5 percent on-year to $36.7 billion in January compared to minus 14.1 percent contraction reported for December. For the whole of 2015, exports were down 8 percent to $526.9 billion.
Domestic spending slowed as the positive effects of last year’s extra budget lost steam coming into the new year.
The stimulus plan is centered on front-loading this year’s 386.4 trillion won budget in the first quarter and extending the lower excise tax benefits for automobile purchases by six months until June. The excise tax rates will be maintained at 3.5 percent from the normal 5 percent rate that can fuel consumption.
“While the government’s economic team did not initially strive to implement short-term stimulus measures and focused more on improving economic fundamentals and fiscal health, it was forced to do so out of necessity,” a government official said.
“The change in policy is designed to keep alive the tenuous growth momentum in the January-March period so as to lay the foundation for more solid growth for the rest of the year.”
Others in the finance ministry said that Yoo’s actions are in response to the negative interest rate policy announced by Japan and other measures by countries around the world to inject more liquidity into the market. Such moves are artificially affecting foreign exchange rates that can impact trade.
They pointed out that with risk on the rise for both the United States and China, financial market volatility will likely rise down the line.
On the other hand, local economists say that while the government has made a slight detour to stabilize the economic situation early on, it must take concrete measures to strive to restructure the way the economy is run and try to build up new growth industries as well as get rid of the administrative red tape that is hurting growth.
“It makes perfect sense for Yoo and other policymakers to implement economic bolstering measures because conditions took a sharp turn for the worse,” said Sung Tae-yoon, an economics professor at Yonsei University in Seoul.
He, however, said that mini stimulus measures are not enough to cope with the downward economic spiral at this juncture.
“Monetary, fiscal and structural reforms must all be implemented at the same time to have a positive effect,” the scholar said.
This view reflects warnings that one reason why South Korea’s growth loses steam the minute state support dries up is because the country’s growth potential has been weakened over the years.
Sung also said that it is time for the finance ministry and the central bank to work more closely on such matters as monetary policies and interest rates.
“Things have changed, and now is the time for the government and the Bank of Korea to have closer ties so they can coordinate outstanding issues, even though Yoo cannot explicitly speak out on monetary and interest rates,” the scholar said.
Lee Geun-tae, a senior researcher at the LG Economic Research Institute, meanwhile, said while the government does seem to be resorting to short-term fixes to counter sharp drops in growth, what is important at this juncture is the need to change the country’s overall economy through meaningful structural reforms.
Other experts argued that while it may be tempting to try to come up with “easy solutions” like building up the country’s service sector to take the slack off weak manufacturing and exports, these measures can’t resolve deep-rooted challenges facing the country.
Moreover, South Korean companies need to make inroads into new markets outside of China that can reduce their exposure to risk coming from the world’s No. 2 economy, they said, adding that with the signing of the U.S.-led Trans-Pacific Partnership, countries such as Vietnam and Malaysia have become attractive overseas markets.