Skepticism growing over Korean economy

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Skepticism growing over Korean economy

Global economists urge Moon to reexamine economic policies

By Park Jae-hyuk

A growing number of experts worldwide are expressing skepticism about the government's rosy outlook for the country's economic growth for 2019.

Contrary to the Ministry of Economy and Finance's outlook of a range of 2.4 percent to 2.5 percent, many global economists forecast that the 2019 growth rate will fall below 2 percent.

They point to a toxic mixture of three key factors ― ineffective government economic policies, the U.S.-China trade dispute and Japan's exports curbs ― that are weighing heavily on Asia's fourth-largest economy.

"I think it will be difficult for the Korean economy to grow 2 percent in 2019 despite optimism among some government officials," Sohn Sung-won, an economics professor at Loyola Marymount University in the U.S., told The Korea Times.

"There are direct negative economic effects from the government's economic policies, the trade war between the United States and China, and now the friction with Japan."

Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, also said Korea will see a lower growth rate in 2019 due to heightened external uncertainties and sagging domestic demand.

"With the dispute between Japan and Korea hitting the pillar industry of semiconductors, we expect such a trade feud to stall the economic recovery of Korea, on top of other negative factors," she said.

"Korea is under very strong external headwinds. Exports are languishing due to weakness of global demand, the downturn of the tech cycle and prolonged and unsettled U.S.-China trade tensions."

Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School, emphasized the uncertainties, saying growth forecasts were tricky right now because of so many variables, such as the U.S. Federal Reserve's possible interest rate reduction and the ongoing trade friction.

Their projections are in stark contrast to Finance Minister Hong Nam-ki's stance on the current situation.

Hong said at the National Assembly, July 10, that Korea's economic growth should rebound in the second quarter, adding that the country's employment rate is at its highest.

His claims, however, have been regarded as wishful thinking, given that these global credit rating agencies and investment banks have continued to cut their forecasts for Korea's economic growth.

Even before Japan's restrictions on tech exports to Korea, Fitch, Moody's, Standard & Poor's and Goldman Sachs lowered their forecasts for Korea's growth to 2 percent to 2.1 percent. They implied that further downward revisions were possible, if the tension between Korea and Japan escalated.

Morgan Stanley, which revised its growth outlook following the outbreak of the Korea-Japan trade dispute, sees the Korean economy growing 1.8 percent in 2019. ING Group and Nomura Securities also lowered their growth rate projections to 1.5 percent and 1.8 percent, respectively.

Possible credit rating downgrade

Global economists have also warned that Korean companies may face lower credit ratings, unless the government takes appropriate measures.

Sohn said Korean companies will suffer credit rating downgrades if the ongoing trade feud continues.

"It is quite possible, but not imminent. The rating agencies are watching Korea very carefully," the professor said. "If the government can steer the economy in a positive direction during the remainder of the year, the current ratings will stand."

He urged the Moon Jae-in administration to re-examine its economic policies designed to boost consumer and business confidence that would lead to more household consumption and foreign direct investment.

Garcia-Herrero said the negative outlook may weigh on the credit profile of Korean businesses on top of already stalled earnings and rising debt.

"Especially for export-driven sectors, the Japan-Korea dispute may result in challenges in business operations and weakening operating cash flows," she said. "Moreover, if companies adopt more aggressive financing policies to counter the drop in earnings, their credit conditions may deteriorate further."

The economist, however, added worsening credit conditions were unlikely to be immediate and largely depended on the future roll-out of trade negotiations.

Economists said the government should come up with pre-emptive measures to tackle challenges from the global slowdown by pursuing an optimal mix of fiscal and monetary policies.

"The biggest risks for the Korean economy are global. The risks of a global slowdown are increasing. With the U.S. coming towards what looks like the end of a long expansion, it is likely that it will slow down. Europe is already slowing down, the same as China," said Antonio Fatas, an economics professor at INSEAD.

"The Korean government should be ready for a slowdown in growth," he added, calling for it to use fiscal policy if signs of a slowdown continue or accelerate.

Sohn stressed that the Bank of Korea should play its role, saying, "It should start by reducing its key interest rate."


Global economists urge Moon to reexamine economic policies

By Park Jae-hyuk

A growing number of experts worldwide are expressing skepticism about the government's rosy outlook for the country's economic growth for 2019.

Contrary to the Ministry of Economy and Finance's outlook of a range of 2.4 percent to 2.5 percent, many global economists forecast that the 2019 growth rate will fall below 2 percent.

They point to a toxic mixture of three key factors ― ineffective government economic policies, the U.S.-China trade dispute and Japan's exports curbs ― that are weighing heavily on Asia's fourth-largest economy.

"I think it will be difficult for the Korean economy to grow 2 percent in 2019 despite optimism among some government officials," Sohn Sung-won, an economics professor at Loyola Marymount University in the U.S., told The Korea Times.

"There are direct negative economic effects from the government's economic policies, the trade war between the United States and China, and now the friction with Japan."

Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, also said Korea will see a lower growth rate in 2019 due to heightened external uncertainties and sagging domestic demand.

"With the dispute between Japan and Korea hitting the pillar industry of semiconductors, we expect such a trade feud to stall the economic recovery of Korea, on top of other negative factors," she said.

"Korea is under very strong external headwinds. Exports are languishing due to weakness of global demand, the downturn of the tech cycle and prolonged and unsettled U.S.-China trade tensions."

Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School, emphasized the uncertainties, saying growth forecasts were tricky right now because of so many variables, such as the U.S. Federal Reserve's possible interest rate reduction and the ongoing trade friction.

Their projections are in stark contrast to Finance Minister Hong Nam-ki's stance on the current situation.

Hong said at the National Assembly, July 10, that Korea's economic growth should rebound in the second quarter, adding that the country's employment rate is at its highest.

His claims, however, have been regarded as wishful thinking, given that these global credit rating agencies and investment banks have continued to cut their forecasts for Korea's economic growth.

Even before Japan's restrictions on tech exports to Korea, Fitch, Moody's, Standard & Poor's and Goldman Sachs lowered their forecasts for Korea's growth to 2 percent to 2.1 percent. They implied that further downward revisions were possible, if the tension between Korea and Japan escalated.

Morgan Stanley, which revised its growth outlook following the outbreak of the Korea-Japan trade dispute, sees the Korean economy growing 1.8 percent in 2019. ING Group and Nomura Securities also lowered their growth rate projections to 1.5 percent and 1.8 percent, respectively.

Possible credit rating downgrade

Global economists have also warned that Korean companies may face lower credit ratings, unless the government takes appropriate measures.

Sohn said Korean companies will suffer credit rating downgrades if the ongoing trade feud continues.

"It is quite possible, but not imminent. The rating agencies are watching Korea very carefully," the professor said. "If the government can steer the economy in a positive direction during the remainder of the year, the current ratings will stand."

He urged the Moon Jae-in administration to re-examine its economic policies designed to boost consumer and business confidence that would lead to more household consumption and foreign direct investment.

Garcia-Herrero said the negative outlook may weigh on the credit profile of Korean businesses on top of already stalled earnings and rising debt.

"Especially for export-driven sectors, the Japan-Korea dispute may result in challenges in business operations and weakening operating cash flows," she said. "Moreover, if companies adopt more aggressive financing policies to counter the drop in earnings, their credit conditions may deteriorate further."

The economist, however, added worsening credit conditions were unlikely to be immediate and largely depended on the future roll-out of trade negotiations.

Economists said the government should come up with pre-emptive measures to tackle challenges from the global slowdown by pursuing an optimal mix of fiscal and monetary policies.

"The biggest risks for the Korean economy are global. The risks of a global slowdown are increasing. With the U.S. coming towards what looks like the end of a long expansion, it is likely that it will slow down. Europe is already slowing down, the same as China," said Antonio Fatas, an economics professor at INSEAD.

"The Korean government should be ready for a slowdown in growth," he added, calling for it to use fiscal policy if signs of a slowdown continue or accelerate.

Sohn stressed that the Bank of Korea should play its role, saying, "It should start by reducing its key interest rate."




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