Gloomier Than Gloomy?
Foreign Analysts Paint Pitch-Black Outlook but How Valid Is It?
By Lee Hyo-sik
Staff Reporter
Major economic research institutes at home and abroad have cut Korea's 2009 growth rate to below 3 percent in recent months on growing concerns of a prolonged global recession and its fallout on the export-dependent economy.
In particular, foreign financial services firms are slashing the nation's growth projection at a much steeper rate based on the worst-case scenario, with UBS floating the possibility of economic contraction.
In response, government officials say foreign firms are overly pessimistic about the world's 13th largest economy, arguing Korea is in a much better position than the U.S. and other advanced countries to cope with the ongoing financial market turmoil and that the country will expand at between 3 percent and 4 percent next year.
On Friday, the Switzerland-based UBS projected that the Korean economy will shrink by 3 percent in 2009, the first contraction since 1998 when the nation was grappling with a financial crisis. The firm had previously forecast that the economy would grow 1.1 percent next year.
``Korea's credit bubble is popping at the seams even as policymakers now attempt to shore up the system. The worst pressures to come from weaker exports are unlikely to be felt until sometime in the first half of 2009,'' UBS chief Asia economist Duncan Wooldridge said in a report.
He said Korea's non-performing loans are rising, especially in the non-bank financial sector, and house prices have started to fall, adding the corporate bond market has frozen and department store sales are falling.
``Against unfavorable conditions, the government has unveiled a range of measures, including a 14 trillion won stimulus package, to bolster the economy. The Bank of Korea has cut rates aggressively and more are sure to follow. But we do not think the government fiscal and other policies can keep the economy afloat if Korea enters into deleveraging as it will,'' Wooldridge said.
But the company also said if it is wrong, then it will be the first one to upgrade, indirectly admitting that its projection may be too pessimistic and far lower than the market consensus.
Government discounts UBS forecast
Lee Ho-seung, director of economic analysis division at the Ministry of Strategy and Finance, strongly questioned the UBS's motive behind its projection of 3 percent contraction, insisting that the U.S. and European economies are at the center of the ongoing trouble, not Korea.
``We strongly believe that the economy will expand by around 3 percent next year. With additional fiscal spending and tax cuts, we think the gross domestic product (GDP) will grow by about 4 percent. Growth projections could vary but UBS are assessing our conditions too pessimistically,'' Lee said.
He stressed that despite falling exports and sluggish domestic demand, the nation will not suffer from the financial crisis and the following global economic downturn as severely as European nations and Japan, which have entered a recession.
``We do not know why UBS is putting Korea's growth estimate at the negative growth of 3 percent. Its projection is too pessimistic and unrealistic,'' Lee noted.
Private economists open to economic contraction
However, private economists seem to be more accepting to the possibility of economic shrinkage.
LG Economic Research Institute economist Song Tae-jung said the 3-percent economic contraction is not too far-fetched.
``If real estate prices plunge and several large commercial lenders collapse next year, the economy could contract. I think such a possibility is increasing day by day,'' Song noted.
He also said the institute will soon cut its 2009 growth projection in December to below 3 percent from the current 3.6 percent.
Citigroup economic Oh suk-tae embraced the UBS's projection in a much more positive note, saying the worst-case scenario turned out to be the best scenario for Korea in the past.
``Korea's exports are declining too sharply. It seems that international trade has come to a standstill, dealing a blow to the export-oriented economy. The nation may register a drop in economic output next year like the U.S. and other developed economies,'' Oh said. Citigroup expects the GDP to expand 2.2 percent next year.
Among other major research institutes, the International Monetary Fund (IMF) will likely lower Korea's growth projection for next year to below 3 percent from the 3.5 percent it predicted last month. In June, it forecast that the country would expand 4.3 percent in 2009.
The state-run Korea Development Institute (KDI) projected earlier this month that the GDP will grow 3.3 percent in 2009 from a year earlier, while Samsung Economic Research Institute (SERI) put Korea's 2009 growth rate at 3.6 percent. The SERI plans to cut its forecast to below 3 percent.
Moody's also estimated Asia's fourth largest economy would grow around 2 percent in 2009, saying it is facing increasing downside risks in the wake of the global economic downturn, as domestic demand continues to deteriorate, failing to offset falling outbound shipments.
The Organization for Economic Cooperation and Development (OECD) last week slashed its 2009 growth projection for Korea to 3.2 percent from 4.3 percent in June.