Will the Economy
Still Grow in H2?

Private research bodies estimate lower rates than BOK's 2006 GDP Growth forecast at 5 %

Can the Korean economy achieve a growth rate range of 5 percent this year's The Central Bank surely agrees on the forecast. In contrast, privately-run research institutes estimate lower growth rates, showing a difference of up to 0.5 percentage points. The private think tanks indicates a possibility of an economic downturn in the second half of this year, citing the effects of crude oil price hikes and a strong Korean currency.
The Bank of Korea said the Korean economy will grow, but at a slower pace.
On July 4, BOK said in its forecast for the second half of the year that the economy will grow at the annual range of 5 percent this year as it predicted earlier. The central bank indicated that a steady growth in exports and consumption, both pillars of the economy, are combined with a turnaround in facility investments to achieve the growth range target of 5 percent.
Kim Jae-cheon, chief of BOK's Survey Bureau, noted that the economy would see a slower growth during the second half than the previous half, but not decline. He also said that the economy is forecast to have higher year-on-year growth rate in the first half of next year than in second half of the year.
The central bank foresees that the economy will still grow at a slower pace during next year. The growth rate is forecast to stay somewhere between 4.5 percent and 5.0 percent, equivalent to the nation's potential growth rate.
BOK said it was concerned that a stiff rise in industrial products and service charges, including some public ones, will likely push up core inflation to almost 3 percent which will slow economic growth.

The current account surplus will end up shrinking to $4 billion from $16 billion forecast at the end of last year due to the effects on the price hikes of such raw materials like crude oil.
However, privately run research institutes unanimously disagree on the 2006 growth forecast at the 5 percent range by BOK and other state-run think tanks.
The 2006 growth forecast by state-run think tanks range from 5.1 percent for Korea Institute for Industrial Economies and Technology (KIET) to 5.3 percent for Korea Development Institute.
On the other hand, the forecasts by privately-run research institutes range from 4.5 percent for Hyundai Research Institute, an affiliate of the Hyundai Group, to 4.8 percent for Samsung Research Institute, all shy away of the 5 percent range.
Kim Beom-shik, a researcher at Samsung Research Institute, said the economy is feared to be unpredictable in the second half, saying that side-effects, caused by crude oil hikes and a strong won, would not easily disappear.
In the meantime, the Ministry of Commerce, Industry and Energy said in its forecast for the second half of 2006 that exports will rise 9.8 percent over a year earlier to $162.4 billion, while imports will surge 15.2 percent over the second half of 2005 to $157.6 billion. As a result, the trade surplus will decline to $4.8 billion in the second half of the year, a 56.5 percent plunge from $11 billion during the same period of last year.
Given the second half trade volume forecast, exports are predicted to achieve their original target of $318 billion during the whole of 2006, but imports are estimated to surge to $306 billion, $11 billion more than expected due to the likes of crude oil price hikes. Accordingly, the trade surplus is expected to end up falling to $12 billion, some $11 billion lower than early estimated.
MOCIE Officials said that a slower export growth rate was attributable to such factors as the Korean economy's slower first half growth rate vs. major countries, slower export growth rates of SMEs arising from the effects of the appreciation of the Korean currency and a four working day drop.
Na Do-sung, director general for trade policy at the MOCIE, said, "Major economies are expected to adopt such tight monetary polices as an interest rate hike, and the global slower economic growth would have a negative impact on the domestic economy." nw

BOK Gov. Lee Seong-tae

BOK Freezes Overnight Call Rate
Signals another short-term rate hike to fight inflation
The Bank of Korea has frozen its overnight call rate to 4.25 percent per annum in an apparent effort to calm down the uncertainties on the financial market in the wake of North Korea's test-launch of seven missiles, including a long-range one.
However, the central bank indicated a possibility of another overnight call rate hike as soon as the financial market is stabilized.
The BOK's possible another call rate hike may form a striking contrast with the Uri Party's move to boost the economy in the wake of the ruling party's humiliating defeat in the May 31 local elections.
The Monetary Policy Committee under control of the BOK held its monthly policy meeting on July 7 and decided to freeze the benchmark short-term interest rate to 4.25 percent.
Following the meeting, BOK Gov. Lee Seong-tae said the BOK decided to free the overnight call rate for the time being as it takes a "wait and see"attitude on the developments following North Korea's test-firing of missiles. "Even though North Korea's missile launch appears not to have a big impact on the local financial market, it remains to be seen how it would affect the global and Korean economies for the time being,"he said.
However, BOK Gov. Lee stressed the need for raising the overnight call rate once again, saying that exports, private consumption and facility investments are on a steady rise, whereas an economic turnaround and crude oil price hikes have increased pressure to increase consumer prices and inflation. Gov. Lee's remark may be construed as his signal that it is inevitable to raise the short-term rate because the pressure to push up prices is in place as the economy keeps on rising in the second half of this year.
Gov. Lee said the current call rate at 4.25 percent per annum and 3-year public debts accruing an interest rate of 4.8 percent are enough to maintain economic growth. Given the fact the current interest rates are providing a boost to the economy, he said the BOK would decelerate money-easing policies. nw