Value context and insight. lkm@koreatimes.co.kr
High prices, project financing woes to hamper Korea's growth in 2024: experts
2023 GDP growth slumps to 3-year low amid weak exports
By Lee Kyung-min
Stronger-than-expected chip exports will not be able to offset the country’s weak consumption brought on by high prices, high interest rates and a sustained construction slowdown amid real estate project financing woes, experts said Thursday.
Advancing the grim outlook is Korea registering a growth of only 1.4 percent last year, as measured by the Bank of Korea’s gross domestic product (GDP) advance estimate. It was the weakest growth since the economy contracted 0.7 percent in 2020 amid the COVID-19 pandemic. Previous weak growths were seen in 2009 during the global financial crisis when it grew only 0.8 percent. The economy shrank by 5.1 percent amid the Asia financial crisis in the late 1990s and 1.6 percent in the 1980s during the Middle East oil crisis.
Uncertainties
Concerns over the sluggish construction sectors will continue throughout the year, according to Lee In-ho, former chairman of the Korean Economic Association.
“Construction investments account for a significant part of the country’s growth profile, and recent negative developments suggest more defaults and insolvency issues will be brought to the fore,” he said.
The much-anticipated recovery of DRAM semiconductor chips will lift the country out of a months-long slowdown in exports, but the domestic economic conditions will not see material improvements.
“Many are still strained by high borrowing rates and high prices, and the central bank’s monetary easing cycle will not take shape for at least a couple of quarters," Lee said. "Tightened consumer sentiment will continue throughout the year.”
Similarly, Hana Institute of Finance chief economist Kim Wan-joong said the economic recovery will not materialize as soon as needed, hamstrung by lingering project financing woes.
“Exports are showing signs of recovery, sure," he said. "But construction and facility investments are still slumping, a major project financing concern posing a great risk to the economy. Recovery will not come sooner than the fourth quarter.”
At the center of the collective assessment is the case of Taeyoung Engineering & Construction. The troubled local builder is undergoing three months of debt restructuring approved early this month. A number of local brokerages have since slashed their target prices for construction industry shares.
The deteriorating financial soundness of local developers is a great risk, as reaffirmed by global credit ratings agencies including Standard & Poor’s (S&P).
They say the struggles of a greater number of local construction and project financing businesses will deepen in the months to come, due to an industry-wide slowdown and high borrowing costs. Also factored in is a lack of near-term government stimulus packages to reinvigorate the real estate market.
Better this year?
The central bank said the growth prospects will be better for Korea this year, underpinned by the recovery of IT exports. However, it acknowledged that stagnant consumption will not pick up due to sustained elevation of interest rates as well as prices of goods and services.
“Growth in both private consumption and exports slowed last year due to high prices and high interest rates. But the fourth quarter of last year’s chip exports will lead the country’s growth this year,” the central bank said.
Korea grew a moderate 0.6 percent for three consecutive quarters from the second quarter to the fourth quarter of last year.
This was an improvement since the country snapped out of back-to-back quarters of cyclic contraction in the first quarter of last year with a 0.3 percent growth. The economy contracted 0.4 percent in the fourth quarter of 2022.
However, the central bank warned of the worst-case scenario whereby the growth rate would fall to the 1.9 percent range this year, 0.2 percentage points lower than its previous estimate of 2.1 percent.
“The escalating geopolitical risks will result in a spike in raw material prices, causing a widening ripple effect across the country,” it said. “Oil price fluctuations are a major variable for Korea. The trajectory of oil prices remains certain.”
Similarly, Bank of Korea Governor Rhee Chang-yong said on Dec. 20 that the growth rate of 2.1 percent is premised on a robust recovery in IT exports, mostly semiconductors.
“IT exports excluded, the figure might fall to 1.7 percent, lower than the country’s potential growth rate.”