Election result puts gov't-led economic agenda on rocky road

Han Dong-hoon, interim leader of the ruling People Power Party, speaks after watching the exit poll results of the general elections with other party members at the National Assembly in Seoul, Wednesday. Korea Times photo by Shim Hyun-chul

The landslide victory of the main opposition Democratic Party of Korea (DPK) in Wednesdays' general elections is likely to dash many of the government's economic policy plans that require the National Assembly's approval for legislative revisions.

The failure to secure deals with the DPK and other opposition parties, which together will hold nearly two-thirds of the 300-member Assembly, is expected to stall the government's policy agenda. This includes anticipated measures for tax relief and regulatory easing, eagerly awaited by investors and businesspeople.

One of the main agenda items was the Corporate Value-up Program, aimed at addressing the so-called Korea discount — a lower valuation of Korean stocks compared to global peers — by prioritizing shareholder returns and improving transparency in corporate governance.

After the program was announced in January, the benchmark KOSPI displayed robust performance both in February and March, buoyed by an influx of foreign investments.

However, the ruling People Power Party's (PPP) defeat is casting a shadow over public expectations of the program.

Compounded by inflationary pressure from the U.S., the share prices of companies previously identified as beneficiaries of the initiative, particularly those with low price-to-book ratios (PBR), declined markedly, Thursday. The stock prices of insurance companies, in particular, saw a 4 percent decline, while retail and financial stocks also suffered 3.5 percent and 3.1 percent declines, respectively.

"Even though the Financial Services Commission will announce extra incentives for companies participating in the program (in May), the momentum will inevitably be weakened without the Assembly's support," Kang Dae-suk, an analyst at Yuanta Securities, said.

Earlier, the government had promised to reduce corporate taxes for companies participating in the initiative. But the DPK has consistently opposed the idea, criticizing the government's regulatory easing policies as being tantamount to a "tax reduction for the rich" and aggravating the fiscal deficit.

Dealers at Hana Bank work in a dealing room at the bank's headquarters in Seoul, Thursday, when the benchmark KOSPI started at 2,665.40 points, down 39.76 points or 1.47 percent from the previous session. Yonhap

However, some anticipate that it would be difficult, even for the DPK, to significantly alter the Corporate Value-up Program.

"The opposition's ability to substantially hinder the progress of this initiative is constrained by political dynamics," said Park Sang-hyun, an analyst at Clepsydra Capital.

In his report published through Smartkarma, Park presented evidence indicating that the National Pension Service (NPS), a significant contributor to investments into the Corporate Value-up Program, has already ramped up purchases of beneficiary stocks. These include holding companies such as GS Holdings and Doosan Corp., as well as HD Hyundai Infrascore and Netmarble, categorized as low-PBR stocks.

Abolition of financial investment income tax unlikely

The feasibility of implementing a series of policies proposed by the government also remains uncertain. The government's push for the relaxation of various taxes and regulations has sparked significant criticism from the DPK.

Experts now consider the repeal of the financial income tax as improbable.

This tax imposes a 20 percent charge on the total income from financial products — such as stocks, bonds, funds, and derivatives — exceeding 50 million won ($36,670), and a 25 percent rate on earnings over 300 million won. While the PPP wants to abolish the tax, the DPK insists on proceeding with its implementation in 2025, as planned.

"Following the opposition's notable victory in the elections, it will be inevitable to engage in a debate over whether abolishing the tax would result in tax reductions for the wealthy," said Lee Woong-chan, an analyst at Hi Investment & Securities.

Supporters cheer while Democratic Party of Korea (DPK) leader Lee Jae-myung, left on stage, makes remarks during a campaign in Jongno, Seoul, Monday, two days before the general elections. Korea Times photo by Shim Hyun-chul

As the Yoon Suk Yeol administration enters its third year, the continued status of the ruling party as a minority increases the likelihood of a lame-duck president.

In the current National Assembly, 41 percent of 844 bills that the government proposed have already been discarded. This represents the lowest acceptance rate for government proposals in history.

During 24 public forums hosted by the president right before the elections, policy plans were presented necessitating 85 pieces of new legislation or revisions to follow up on the president's promises.

"Given that the government's key economic policies were unveiled with the expectation of post-election legislative action, it's inevitable that a significant portion of the discussed measures will need to undergo reevaluation from scratch," Lee Kyoung-min, an analyst at Daishin Securities, said.

The DPK is also expected to expedite regulations on virtual assets, including the introduction of a bitcoin exchange-traded fund in the domestic market. However, financial authorities are opposing the idea.

Nonetheless, on matters such as enhancing protection for retail shareholders and expanding the tax advantages for Individual Savings Accounts, there seems to be a broad consensus between the ruling and opposition parties.