South Korea has ample policy capacity to weather reform adjustments
KUCHING: RAM Ratings expects South Korea to maintain its steady GDP growth performance, in view of supportive government measures that will enable it to withstand economic adjustments arising from structural reforms.
“South Korea’s sufficient fiscal headroom and policy credibility will help anchor growth resilience amid bold reform measures,” noted Esther Lai, RAM’s Head of Sovereign Ratings in a review.
The country has continued its income-led growth strategy, aimed at boosting household income through phased hikes in the minimum wage – up 16.4 per cent in 2018 and expected to increase a further 10.9 per cent in 2019 – and higher socio-welfare spending.
Policies such as reducing maximum weekly working hours and boosting incentives for the employment of permanent workers have also been implemented to bolster the labour market.
“While these initiatives are targeted at accelerating reforms, near-term economic uncertainties are inevitable, as seen in the recent slowdown in employment creation and subdued business and consumer sentiments,” RAM added.
“The government’s proactive fiscal measures, in our view, will help to cushion such impact on the economy.
“South Korea had maintained a stable annual expansion rate of 2.8 per cent in the first half of 2018 compared to the previous year, with stronger consumption growth counterbalancing a deceleration in investments.
“The country’s GDP growth fares better than that of its advanced economic peers which averaged around 2.5 per cent during the same period.”
RAM further noted the government approved a supplementary budget in May worth 3.83 trillion won to drive youth employment and support businesses and employees affected by the restructuring of vulnerable industries. Additionally, it has announced an expansionary budget to the tune of 470.50 trillion won for 2019.
Health, welfare, and employment remain key spending priorities in the proposed budget, with an enlarged allocation to support job creation and strengthen the social safety net of low-income households.
South Korea’s operational fiscal deficit and debt ratios are projected to inch up marginally to 1.8 and 39.4 per cents of GDP, respectively, in 2019, albeit staying very manageable compared to sovereign peers’.
The forecasted shortfall in 2019 is expected to be funded by steadily improving tax revenue collection, instead of additional debts, in line with the government’s prudent fiscal management stance.
The escalation of the US- China trade dispute poses some risk, given that China is South Korea’s largest export market. Nonetheless, South Korean intermediate goods that could filter into China’s exports comprised only 7.2 per cent of the former’s total exports, mitigating the indirect impact of US tariffs imposed on China.
South Korea’s export diversity and competitiveness are anticipated to continue to underline its external resilience.
The country’s external performance remains commendable, with its current account recording a surplus of 3.7 per cent of GDP in 1H18 despite increased imports driven by rising energy prices.
Meanwhile, the renegotiation of the South Korea-US Free Trade Agreement has been concluded and is on track to being ratified by both countries by end- September 2018.
South Korea’s sovereign ratings on the global and Asean scales stand at gAA3( pi)/Stable/ gP1( pi) and seaAAA( pi)/Stable/ seaP1( pi), respectively, premised on the country’s track record of economic resilience, its sturdy external balance sheet and prudent fiscal management.
While the country faces geopolitical risk stemming from North Korea, closer engagement between both Koreas in recent months has helped defuse tension on the Korean Peninsular.