By Lee Hyo-sik
Staff Reporter
The Korean economy is expected to experience a V-shaped rebound in 2010 on the back of strong exports and recovering private consumption and domestic demand.
However, analysts say that the nation should remain vigilant against a number of downside risks at home and abroad, as well as make more efforts to prop up the sluggish job market and improve fiscal soundness in order to achieve sustainable growth down the road.
They also suggest that Asia's fourth-largest economy should nurture new growth engines in the areas of renewable energy development and other ``green'' growth sectors, and lower the entry barrier across service-oriented businesses and support competitive small firms.
But analysts differ over the timing of an ``exit strategy,'' with some urging the government and the central bank to discontinue extraordinary monetary and fiscal measures enacted in the wake of the global financial meltdown, citing a possible property market bubble and other potential side effects.
But others say that a range of special measures should remain in place for the time being to facilitate the ongoing recovery, adding that the private sector's activities will not be strong enough next year to make up for the waning fiscal stimulus package.
``We think that the economy has entered a full-fledged recovery phase since July. We expect the country's GDP to expand 5.5 percent in 2010, following a 0.2 percent gain this year.
Against this backdrop, now is the time for the government to strategize on how to effectively move away from the steps it took to minimize the economic downturn, in order to head off the aftershock of the expansionary measures or a real property bubble,'' Korea Development Institute (KDI) economist Lim Kyung-mook said.
But policymakers and central bankers have pledged to continue expansionary fiscal and monetary policies until they see a sustainable recovery, citing slowing growth momentum and growing external uncertainties, such as Dubai's recent debt problem.
Lim then said Korea should strengthen its monitoring of the global financial market to more effectively cope with a range of potential downside risks. ``Some Eastern Europeans countries could fall into deep trouble over rising debts, on top of the continued U.S. market jitters. At home, we should watch out for snowballing debts for households and small businesses.''
The economist stressed the importance of deregulating the service sector in order to jumpstart the economy and create jobs, adding the government should lower the entry barrier in the service industry and foster the startup of new businesses.
Samsung Economic Research Institute (SERI) economist Hwang In-seong echoed Lim's view, saying Korea should advance the service sector and find new growth engines as soon as possible to enter the league of advanced economies.
``Domestic businesses need to boost their risk management and constantly monitor changes in the global market against a number of remaining downside risks. The Korean won will likely continue to strengthen against the dollar next year, weakening local exporters' price competitiveness, with rising crude oil and other raw material prices,'' he said.
In contrast to KDI economist Lim's view, Hwang said the government should maintain its expansionary policy stance for the time being to bolster the ongoing economic recovery. ``We expect the economy to expand 4.3 percent in 2010 from this year. Private sector activities ― domestic consumption and investment ― will likely continue to remain weak throughout 2010, not to mention the stagnant job market conditions. Without fiscal spending, the economy may fall back again.''
LG Economic Research Institute economist Lee Geun-tae echoed Hwang's view, saying the government should continue to spend more than it earns next year and that the central bank should keep its key policy rate at 2 percent for the foreseeable future to promote the recovery.
``We think the ongoing rebound will continue to gain pace down the road and the extent of the fiscal stimulus will weaken. But there is no need for the government and the BOK to rush to withdraw expansionary steps. They should do this in accordance with their foreign counterparts. For businesses, they should make an all-out effort to enhance their competitiveness and develop new markets to cope with the strengthening of the local currency and other negatives,'' Lee said.
In the aftermath of the collapse of Lehman Brothers in September last year, international investors dumped local stocks and bonds, and took dollars out of Korea en masse, sending share prices and the Korean won into a nosedive.
Many foreign investors and media outlets said the country would be the hardest-hit Asian nation, citing its huge short-term borrowing from abroad, the sharp depreciation of the local currency and other unfavorable conditions. They even raised the possibility that the country could face a recurrence of the foreign exchange crisis.
The Korean economy contracted by 5.1 percent in the fourth quarter of 2008 from the previous three-month period and grew only by 0.1 percent in the following quarter.
However, the nation has emerged as one of the fastest recovering economies in the world since the second quarter of 2009, thanks largely to the timely government stimulus package and stronger-than-expected outbound shipments.
Gross domestic product (GDP) expanded 3.2 percent in the third quarter from the second quarter, the largest quarterly growth since the first quarter of 2002, when output rose 3.8 percent. It also grew 0.9 percent from July to September from the same period last year, the first year-on-year increase since the third quarter of 2008.
Reflecting a faster-than-expected growth over the past two quarters, the government has become substantially more upbeat about next year's economic outlook, while private economic research institutes at home and abroad have also rushed to revise upward Korea's growth projections for this year and the next.
The government projects the economy will expand by 5 percent in 2010 from a year earlier, with the Bank of Korea (BOK) setting the 2010 growth forecast at 4.6 percent. Last month, the OECD raised its 2010 growth projection for the nation to 4.4 percent from the previous 3.5 percent, with the International Monetary Fund (IMF) boosting Korea's 2010 outlook to 3.6 percent from the previous 2.5 percent.