Economic Forecast for 2012 Likely to Revised Downward

Government's growth forecast likely to be readjusted from 4.8 % to mid-4 % level

The government may revise downward its economic forecast for next year to the mid-4 percent level. Minister of Strategy and Finance Bahk Jae-wan said on Sept. 9, his 100th day in office, "The government's prediction of the nation's economic growth for 2012 may be changed when it submits the 2012 budget bill (to the National Assembly by Sept. 30)."
Commenting on Minister Bahk's remark, an official of the Ministry of Strategy and Finance (MOSF) said there is a possibility the government might readjust its economic growth prediction for 2012 downward to the mid-4 percent level from 4.8 percent.
If the 2012 economic forecast is revised downward, it will be the second time this year the government will have made readjustments. Early this year, the government initially forecast that the national economy will grow 5 percent for next year. But in its report on second half economic policy directions to Cheong Wa Dae in June, the government lowered its 2012 growth forecast to 4.8 percent.
The government's downward revision of its economic forecast is owed to economic uncertainties prevailing in Korea and abroad. To name a few, worries are mounting over the possible danger of a U.S. double-dip recession and fiscal woes of the European Community on top of the nation's rise in household debts, analysts said.
Minister Bahk said, "The national economy is in danger of slowing down, and the government will make a 2012 economic growth forecast closest to its final prediction by examining dangerous factors when it submits the budget bill."
If the 2012 economic growth estimate is lowered further, some experts predict that the government's priority on curbing general prices might shift to growth-oriented policies. Many experts say that inflation, which peaked at 5.3 percent in August over the same month of 2010, may drop since raw materials prices might go down due to the worsening of global economic uncertainties on top of signs of subsiding demand since the Chuseok holidays. In particular, inflation is predicted to be lower in the second half of this year compared to last year when prices began to shoot up late in the year, even though prices continue to rise in the second half of this year.
Minister Bahk said, "There is no change in government policies focusing on the stabilizing of prices and creating jobs. The most worrying thing is how much the global fiscal crisis will have an impact on the real economy."
The minister told a session of the National Assembly's audit into his office on Sept. 19 that the government will inaugurate the tentatively-named Fiscal Forecast Committee designed to ensure balanced finance, calling for examining fiscal conditions for the next 50 years.
Replying to a question by Rep. Yoo Il-ho of the Grand National Party on the causes of the fiscal woes affecting Southern European countries, Minister Bahk said what is happening there is greatly blamed on welfare populism trends, so the government will commit itself to ensuring balanced finance.
Meanwhile, Minister Bahk said in his keynote speech at the Economist Bellwether Conference in Seoul on Sept. 15, "Korea will closely examine the situation in domestic and overseas financial markets and prepare for volatility in capital flows."He was speaking about the steps the Korean government will take to stabilize the financial market, recover fiscal soundness, reinforce the structure of the economy and ensure continued growth.
"To prevent sudden changes in the flow of foreign capital, the government has implemented three main measures: it lowered the ceiling on banks' foreign exchange forward position, revived a tax on capital gains from bonds held by foreigners, and placed a macro-prudential levy on banks for non-deposit foreign currency liabilities. In another move, the government introduced a tax to reduce the improper use of domestically-issued foreign currency bonds, or "kimchi bonds,"in the recently announced tax revision for 2012."
He said Korea's second step to deal with the crisis is the increase of mid- and long-term efforts to recover fiscal soundness. "Through the goal of achieving fiscal balance by 2013, the government will push for an early recovery of fiscal soundness. It will carry out tight fiscal management, such as maintaining the yearly average of the expenditure increase at 3 percentage points lower than the revenue increase. It will also expand the tax base by modifying tax exemption and reduction systems, and manage the country more frugally by cutting expenditures on under-performing state projects.
"As for the third step, the government will reinforce the structure of the economy and act preemptively in response to potential risks such as household debt and savings bank insolvency to ensure that the economy will not be shaken by external shocks.
"Finally, Korea will increase its growth potential and build an economy strong enough to absorb external shocks by boosting domestic demand and promoting shared growth and a green economy,"he said. nw

MOSF Minister Bahk speaks at the Economist Bellwether Conference in Seoul on Sept. 15.

Photo on Courtesy of MOSF