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Korea lowers growth outlook to 1.4% on slow recovery

Government expects recovery in 2024, calls for export-led growth

By Im Eun-byel

Published : July 4, 2023 - 15:48

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Containers for exports and imports are stacked at a pier in Busan, country's largest port city, Sunday. (Yonhap) Containers for exports and imports are stacked at a pier in Busan, country's largest port city, Sunday. (Yonhap)

The Korean government revised down its economic growth rate projection to 1.4 percent on Tuesday, as the exports sector struggles to rebound, delaying the economy's recovery to next year.

The revision came as the Finance Ministry and other related ministries announced economic policy measures for second half of this year. The gross domestic product growth forecast was cut from the previous 1.6 percent to 1.4 percent.

The ministry initially suggested that the Korean economy would see a rebound in mid-2023, but the new forecast has dialed it back to a slow recovery in the second half, followed by more growth next year.

"The latter half of this year is an important inflection point which will show the potential of the Korean economy as it recovers from difficulties," President Yoon Suk Yeol said after being briefed on the measures.

"Expansion of exports, the basis of our economy in a country with the highest foreign dependency in the world, and the source of jobs, should be the foremost agenda for the economic policies," Yoon said.

Furthermore, the Finance Ministry suggested a 3.3 percent consumer price inflation rate for this year, pulling down the previous projection by 0.2 percentage point.

Supporting the forecast, Korea’s consumer price rate fell to 2.2 percent in July, falling into the 2 percent range for the first time in 21 months and drawing near the Bank of Korea target rate set at 2 percent.

Export-led growth

Korea plans to go all out for exports and investments to lead momentum for an economic recovery, the government said, expecting a trade account balance of a $23 billion surplus for 2023.

This year, Korea will dispatch delegations to 10 countries with high prospects of exports to connect businesses and buyers. The list of the 10 countries has not yet been confirmed, but it is to include nations that Korea has held, or plans to hold, summits with.

It will inject 184 trillion won ($141 billion) in trade financing within this year, providing loans to export-focused small and medium-sized enterprises. It also plans to give tax benefits to SMEs to boost global sales exports.

Korea will work on being one of the top four weapon sellers in the world by 2027, as previously vowed by the president. Korea is now No. 8, according to multiple research institutions.

To invigorate the venture industry, the government plans to expand support and state funds to include venture businesses founded overseas by Korean nationals.

Furthermore, it will encourage the reshoring of businesses in the 17 advanced strategic industries, such as semiconductors, displays and secondary cells, increasing the rate of state-funded investments to 50 percent.

To attract foreign talents, it will prolong the sunset provision on tax reduction on the income tax for foreign engineers offered for the first five years.

Financially advanced market

Some of the government-led changes to improve the local financial market are expected to come within the year.

The requirement for foreigners to register in advance before investing in the local stock market has been dropped. The revision was made in June and the new law will come into effect from mid-December.

Local brokerages' yearslong plan to launch the first alternative trading system here is anticipated to gain approval within this year, too. The Korea Exchange is the country's sole bourse operator.

The government plans to issue foreign exchange equalization bonds of up to $2.7 billion this year for currency stability.

As slated, offshore financial firms will be able to participate in the local foreign exchange market, as the revision of the Foreign Exchange Transition Act is to be implemented within this year.

The government also vowed that World Government Bond Index inclusion would happen soon -- a move expected to attract more foreign investments -- after failing to make the list again this year.

Improving livelihoods

With increasing utility charges pressuring households this year, the government has vowed to refrain from raising public utility charges temporarily by increasing the efficiency of the state-run companies.

It assessed that the real estate market has been making a soft landing, as housing prices are falling. However, Korea's unique "jeonse" market has been facing uncertainties, as the selling price could fall lower than the housing deposits. The government has decided to allow landlords to take out loans to return deposits to tenants. It will put in an extra 23 trillion won for loans to buy housing and rent deposits.

The cut on oil tax will continue until December. The decision to prolong the cut will be made after August, depending on international oil prices.