SEOUL—South Korea on Thursday unveiled a $40 billion stimulus package aimed at propping up a weakening economy, but some observers said the measures risk worsening already-high debt levels.
South Korea is one of Asia's most developed economies and a technology hub, but the high export-led growth of recent decades has given way to a more steady expansion, as the population ages and wages rise.
The economy grew a seasonally adjusted 0.6% on quarter in the April-June period, below expectations and its weakest pace in over a year, according to data released Thursday. The government reduced its 2014 growth forecast to 3.7% from 3.9%.
Authorities have increasingly relied on credit to fuel growth and reduce South Korea's dependence on exports. South Korea's household debt has more than doubled over the last decade to almost $1 trillion, sparking fears of default.
But on Thursday, the government took measures to boost domestic demand that will increase household debt. They included a relaxation of limits on mortgage loans—a move to try to jump-start the stagnant property market.
"We are concerned that the Korean economy could fall into a debt trap," said Nomura economist Kwon Young-sun.
The package marks a more aggressive tack under Finance Minister Choi Kyung-hwan to spur growth.
Since taking office a year and a half ago, President Park Geun-hye has targeted structural changes to reduce the Korean economy's dependence on exports, which account for about half of output.
Progress in developing the services sector by reducing red tape has been slow, however.
As growth has slowed, there is increasing pressure for action. Korea is still far away from the kind of slow growth and falling prices that plagued its neighbor Japan for years. But there are fears that could be South Korea's fate without action.
A ferry sinking in April, which killed over 300 people, has taken a surprisingly heavy toll on consumer spending, as Koreans became more reluctant to spend on travel and other major outlays. Private spending fell for the second quarter in a row between April and June; that was primarily to blame for growth missing expectations.
Meanwhile, a sharp rise in the Korean won has dragged on exports, as has slowing growth in China, Korea's main export market, and an uneven recovery in Western nations. On Thursday, Hyundai Motor Co. 005380.SE -0.66% and several other South Korean companies blamed the rise in the won for weak second-quarter results. Samsung Electronics Co. , the nation's biggest company, also has forecast a third successive decline in profit for the quarter.
Following the ferry disaster, Ms. Park reshuffled her cabinet and brought in Mr. Choi, a former trade minister, to run the finance ministry. Mr. Choi said he would introduce "bold macroeconomic policies" to boost growth and warned that Korea could face decades of stagnation like its neighbor Japan.
Economists increasingly expect the central bank will lower interest rates at its next policy board meeting on Aug. 14 to help growth.
The Bank of Korea has held interest rates steady for over a year, but there is increasing debate among members of the board about whether action is needed to avoid falling into a downward spiral of slowing growth and low inflation.
Ronald Man, an economist with HSBC, said the central bank would be cautious in cutting rates, given that household debt already will increase after Thursday's measures.
Ms. Park echoed the sense of urgency on Thursday at a meeting of economic officials. "We all need to gather our strength to push for a revival and prevent the economy from plunging into a long slump," she said.
To funnel more cash into the economy and boost incomes, the government said it would provide tax breaks to companies that use their cash reserves to pay more in wages and return money to shareholders. Samsung Electronics has come under pressure in recent months from investors to pay out more of its $60 billion cash pile.
Policy makers hope increased incomes will allow potential home buyers to bear the burden of larger mortgages and help get the property market moving. Apartment sales in Seoul have been declining since 2009. The new mortgage rules raise caps on loan-to-value and debt-to-income amounts.
A more fundamental shift in the economy to develop a sustainable long-term growth model remains on Ms. Park's agenda. But her time is running out: South Korea has a mandatory single-term five-year presidency.
Korea faces a range of economic challenges, including one of the lowest birthrates in the developed world and a low percentage of women in the workforce. A move away from a dependency on manufacturing exports has become all the more urgent as China catches up in areas such as smartphones and shipbuilding.
http://online.wsj.com/articles/south-korea-plans-spending-to-tackle-weakening-growth-1406163844
South Korea is one of Asia's most developed economies and a technology hub, but the high export-led growth of recent decades has given way to a more steady expansion, as the population ages and wages rise.
The economy grew a seasonally adjusted 0.6% on quarter in the April-June period, below expectations and its weakest pace in over a year, according to data released Thursday. The government reduced its 2014 growth forecast to 3.7% from 3.9%.
Authorities have increasingly relied on credit to fuel growth and reduce South Korea's dependence on exports. South Korea's household debt has more than doubled over the last decade to almost $1 trillion, sparking fears of default.
But on Thursday, the government took measures to boost domestic demand that will increase household debt. They included a relaxation of limits on mortgage loans—a move to try to jump-start the stagnant property market.
"We are concerned that the Korean economy could fall into a debt trap," said Nomura economist Kwon Young-sun.
The package marks a more aggressive tack under Finance Minister Choi Kyung-hwan to spur growth.
Since taking office a year and a half ago, President Park Geun-hye has targeted structural changes to reduce the Korean economy's dependence on exports, which account for about half of output.
Progress in developing the services sector by reducing red tape has been slow, however.
As growth has slowed, there is increasing pressure for action. Korea is still far away from the kind of slow growth and falling prices that plagued its neighbor Japan for years. But there are fears that could be South Korea's fate without action.
A ferry sinking in April, which killed over 300 people, has taken a surprisingly heavy toll on consumer spending, as Koreans became more reluctant to spend on travel and other major outlays. Private spending fell for the second quarter in a row between April and June; that was primarily to blame for growth missing expectations.
Meanwhile, a sharp rise in the Korean won has dragged on exports, as has slowing growth in China, Korea's main export market, and an uneven recovery in Western nations. On Thursday, Hyundai Motor Co. 005380.SE -0.66% and several other South Korean companies blamed the rise in the won for weak second-quarter results. Samsung Electronics Co. , the nation's biggest company, also has forecast a third successive decline in profit for the quarter.
Following the ferry disaster, Ms. Park reshuffled her cabinet and brought in Mr. Choi, a former trade minister, to run the finance ministry. Mr. Choi said he would introduce "bold macroeconomic policies" to boost growth and warned that Korea could face decades of stagnation like its neighbor Japan.
Economists increasingly expect the central bank will lower interest rates at its next policy board meeting on Aug. 14 to help growth.
The Bank of Korea has held interest rates steady for over a year, but there is increasing debate among members of the board about whether action is needed to avoid falling into a downward spiral of slowing growth and low inflation.
Ronald Man, an economist with HSBC, said the central bank would be cautious in cutting rates, given that household debt already will increase after Thursday's measures.
Ms. Park echoed the sense of urgency on Thursday at a meeting of economic officials. "We all need to gather our strength to push for a revival and prevent the economy from plunging into a long slump," she said.
To funnel more cash into the economy and boost incomes, the government said it would provide tax breaks to companies that use their cash reserves to pay more in wages and return money to shareholders. Samsung Electronics has come under pressure in recent months from investors to pay out more of its $60 billion cash pile.
Policy makers hope increased incomes will allow potential home buyers to bear the burden of larger mortgages and help get the property market moving. Apartment sales in Seoul have been declining since 2009. The new mortgage rules raise caps on loan-to-value and debt-to-income amounts.
A more fundamental shift in the economy to develop a sustainable long-term growth model remains on Ms. Park's agenda. But her time is running out: South Korea has a mandatory single-term five-year presidency.
Korea faces a range of economic challenges, including one of the lowest birthrates in the developed world and a low percentage of women in the workforce. A move away from a dependency on manufacturing exports has become all the more urgent as China catches up in areas such as smartphones and shipbuilding.
http://online.wsj.com/articles/south-korea-plans-spending-to-tackle-weakening-growth-1406163844
