This is the fourth in a series of interviews with economic experts who analyze the state of the Korean economy and make policy suggestions. ― ED.
By Kim Jae-kyoung
Fitch Ratings is moving to downgrade its growth outlook for South Korea due to weak consumer sentiment and worsening factors abroad, the global credit ratings agency said Monday.
It added that President Moon Jae-in's income-led growth strategy has its foundation in good intentions but won't be able to address Korea's structural issues, such as low productivity.
"We are in the process of updating our forecasts for all sovereigns that we rate and we are likely to slightly lower our growth forecasts for Korea," Thomas Rookmaaker, director at Sovereigns and Supranationals Group at Fitch Ratings, said in a recent interview.
"The slightly lower growth forecasts are caused by both a decline in domestic confidence and an intensification of the trade tensions between the United States and China."
Fitch earlier forecast Korea's real gross domestic product (GDP) growth at 2.8 percent for 2018, which is below the Bank of Korea (BOK) prediction of 2.9 percent. GDP is the total value of goods and services produced in a country over a certain period of time.
"Consumer confidence has taken a hit recently and sharp increases in the minimum wage appear to have dampened employment demand," he said.
He pointed out that exports, in particular of semiconductors, continue to support GDP growth but warned of growing risks associated with deepening trade confrontations.
"An intensification of trade tensions between the U.S. and China remains a significant risk to Korea's growth outlook as 28 percent of its exports are destined for China, and are partly intermediate goods that are subsequently re-exported," he said.
Fitch's lowering of Korea's outlook comes as Asia's fourth-largest economy is showing signs of losing growth momentum.
The nation's GDP grew 0.6 percent in the second quarter on a quarter-on-quarter basis, down 0.4 percentage points from the previous quarter.
With worsening figures, many economic organizations, including the BOK, are expected to further downgrade their 2018 forecasts.
Rookmaaker, who is in charge of Fitch's global macroeconomic research and analysis, said slight budgetary loosening should provide some support to the economy.
He stressed that such a move should be particularly targeted at boosting slow employment growth, which is in keeping with the government's policy agenda since Moon took office in May last year.
"Korea's public finances can accommodate the short-term fiscal easing announced in the budget for 2019, and the increase in spending may help to stimulate sluggish job creation," he said.
However, he voiced concerns that a further widening of the deficit out to 2022, as is now projected by the government, could put the government in a weaker position to address the long-term fiscal challenges posed by population aging.
He cited the authorities' estimation a few years ago that demographic trends, depending on the assumptions, would push up the ratio of government debt to GDP to 90 percent by 2060 in the absence of counteracting policies.
The veteran economist said Moon's income-driven growth policy with an overweight focus on distribution won't help the country solve various challenges caused by long-term structural issues, such as population aging.
"The continued economic policy focus by this government on public-sector hiring and income-led growth would be unlikely to deliver the type of boost to productivity growth that could help to ease pressures from population aging and a declining workforce," he said.
Nevertheless, he believes that ongoing reforms that increase transparency and generally encourage greater separation between the government and the corporate sector could structurally improve governance standards.
"Korea's policymakers also have a track record of taking proactive policy measures to address economic issues at an early stage, and still have time to develop a strategy to deal with population aging," he said.
By Kim Jae-kyoung
Fitch Ratings is moving to downgrade its growth outlook for South Korea due to weak consumer sentiment and worsening factors abroad, the global credit ratings agency said Monday.
It added that President Moon Jae-in's income-led growth strategy has its foundation in good intentions but won't be able to address Korea's structural issues, such as low productivity.
 |
| Thomas Rookmaaker, director at Sovereigns and Supranationals Group at Fitch Ratings |
"The slightly lower growth forecasts are caused by both a decline in domestic confidence and an intensification of the trade tensions between the United States and China."
Fitch earlier forecast Korea's real gross domestic product (GDP) growth at 2.8 percent for 2018, which is below the Bank of Korea (BOK) prediction of 2.9 percent. GDP is the total value of goods and services produced in a country over a certain period of time.
"Consumer confidence has taken a hit recently and sharp increases in the minimum wage appear to have dampened employment demand," he said.
He pointed out that exports, in particular of semiconductors, continue to support GDP growth but warned of growing risks associated with deepening trade confrontations.
"An intensification of trade tensions between the U.S. and China remains a significant risk to Korea's growth outlook as 28 percent of its exports are destined for China, and are partly intermediate goods that are subsequently re-exported," he said.
Fitch's lowering of Korea's outlook comes as Asia's fourth-largest economy is showing signs of losing growth momentum.
The nation's GDP grew 0.6 percent in the second quarter on a quarter-on-quarter basis, down 0.4 percentage points from the previous quarter.
With worsening figures, many economic organizations, including the BOK, are expected to further downgrade their 2018 forecasts.
Rookmaaker, who is in charge of Fitch's global macroeconomic research and analysis, said slight budgetary loosening should provide some support to the economy.
He stressed that such a move should be particularly targeted at boosting slow employment growth, which is in keeping with the government's policy agenda since Moon took office in May last year.
"Korea's public finances can accommodate the short-term fiscal easing announced in the budget for 2019, and the increase in spending may help to stimulate sluggish job creation," he said.
However, he voiced concerns that a further widening of the deficit out to 2022, as is now projected by the government, could put the government in a weaker position to address the long-term fiscal challenges posed by population aging.
He cited the authorities' estimation a few years ago that demographic trends, depending on the assumptions, would push up the ratio of government debt to GDP to 90 percent by 2060 in the absence of counteracting policies.
The veteran economist said Moon's income-driven growth policy with an overweight focus on distribution won't help the country solve various challenges caused by long-term structural issues, such as population aging.
"The continued economic policy focus by this government on public-sector hiring and income-led growth would be unlikely to deliver the type of boost to productivity growth that could help to ease pressures from population aging and a declining workforce," he said.
Nevertheless, he believes that ongoing reforms that increase transparency and generally encourage greater separation between the government and the corporate sector could structurally improve governance standards.
"Korea's policymakers also have a track record of taking proactive policy measures to address economic issues at an early stage, and still have time to develop a strategy to deal with population aging," he said.
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