South Korea will stick to its expansionary macroeconomic policy and carry out wide-ranging structural reforms as it tries to improve its national competitiveness and fuel growth amid persistent market uncertainties, the government said Monday.
In its 2015 economic directives, the finance ministry made clear it will make use of all available resources at its disposal so the public can actually feel positive changes in the economy.
It added the country will execute sweeping reforms in key areas that can strengthen the country’s economic structure for the better and allow it to lay the foundation for sustainable growth.
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]Highlighting such goals, Finance Minister Choi Kyung-hwan said in a meeting of economy ministers that the structural reforms will take precedence in 2015, with emphasis on changing the labor market.
“Countries like Germany, Britain and the Netherlands that pushed forward labor market reforms in a steady manner have persistently outperformed those that have not, in such areas as growth and distribution of wealth,” he said.
He added that the aim of reform is to enhance flexibility while at the same time ensuring social security.
Choi claimed money is not flowing to where it is needed, and that this congestion is hindering growth.
The minister said there is a pressing need to breath new vibrancy into the country’s financial sector.
The policies were laid out as the finance ministry marked down next year’s growth estimate from 4 percent to 3.8 percent, which is on par with the global growth forecast by the International Monetary Fund in October.
The latest forecast added that some 450,000 jobs to be created compared to 530,000 predicted for 2014.
He said that while some numbers have been adjusted downwards, Asia’s fourth largest economy is expected to show signs of improving in the new year, thanks to a drop in crude oil prices and the expansionary macroeconomic policy posture.
The government’s growth forecast for 2015 is slightly higher than predictions made by the state-run Korea Development Institute (KDI) and the Korea Institute of Finance (KIF), which were 3.5 percent and 3.7 percent for the new year, respectively.
Related to the growth estimates, Lee Chan-woo, director general of the finance ministry’s economic policy bureau, said weaker than expected consumption and business investments that will carry on into 2015 compelled the government to reassess growth.
He added that the same set of problems caused the ministry to lower growth estimated for this year from 3.7 percent to 3.4 percent.
The finance ministry projected employment figures for people between 15 to 64 will reach 66.2 percent, up from 65.3 percent this year. The incumbent Park Geun-hye administration has said it wants to reach 70 percent employment within its five year term that ends in early 2018.
It set next year’s inflation projection at around 2 percent, up from 1.3 percent forecast for this year with private spending likely to advance 3 percent. The overall inflation numbers, however, dip to 1.4 when not counting the government’s decision to spike up cigarette prices by 2,000 won (US$1.82).
The country’s current account surplus could reach $82 billion in 2015, from $89 billion in 2014. Exports should move up 3.7 percent, while import gains will hover at 3.2 percent, mainly due to weaker crude oil prices that may fall to as low as $75 per barrel in the new year from $98 average this year, the ministry said.
In addition to expansionary spending that would frontload 58 percent of available budget and funds in the first half, the government is committed to getting people to spend more, creating more well-paying jobs, as well as expanding support for senior citizens and ordinary people, the official said.
“In 2015, domestic consumption may actually play a greater role in growth compared to trade,” Lee speculated, adding that notwithstanding, downgraded growth forecasts, there are signs that the economy as a whole may be gaining buoyancy.
He stressed, that meaningful changes must take place in the new year to ensure South Korea can grow for the next 30 years, although cautioning that debt issues, deteriorating competitiveness in manufacturing and chronic inefficiency in the labor market and other key areas posed downside risks.
For the new year, the government said there will be efforts to encourage businesses to invest, with the government supporting new growth industries and defraying risks associated with large-scale development.
A new corporate investment program will be set up that can handle more than 30 trillion won ($27.2 billion) worth in new projects in innovative business areas and infrastructure building.
Of the total, the state-run Korea Development Bank could foot some 15 trillion won.
The government will help bolster the competitiveness of such sectors as semiconductors, shipbuilding, machinery, steel and chemicals, and a 150 billion won semiconductor fund will be created, according to the plan for 2015.
To attract more foreign direct investment, cash grants will be given with special emphasis on attracting businesses that can hire large numbers of workers.
It said efforts will be made to make use of the 26 trillion won export support fund to help small and medium enterprises.
South Korea will seek prompt ratification of free trade agreements (FTA) with China, Vietnam and New Zealand, and take part in the ongoing Regional Comprehensive Economic Partnership, Trans-Pacific Partnership and Free Trade Area of the Asia-Pacific talks.
The ministry said it plans to foster growth of the local service sector by getting rid of discriminatory practices. In the past, the country favored manufacturing over the service sector.
Policymakers will take steps to make the home rental business a key domestic industry, a measure that can stabilize the local housing market and rein in steep hikes in rent.
Despite pursing measures that are expansionary, the government said it wants to control any risks, including the mounting household debt, and facilitate “market-friendly” corporate restructuring, allowing easier and timely mergers and acquisitions.
On household debt, it cited the need to convert some 200 trillion won worth of mortgaged household loans, which are usually short-term borrowings and have fluctuating interest rates, to long-term fixed rate schemes. Of the total, 42 trillion won in mortgaged loans that come due in 2015 will be switched to fixed rate schemes.
The government will also carefully monitor the overall size of debt and the ability of borrowers to honor such obligations, the ministry said.
In the new year, the government will strengthen the ability to respond quickly to sudden changes in the international financial market and build up its capability to cope with large scale outflows of capital. This entails strengthening ties with foreign countries to better manage financial emergency situations.
On structural reforms, the efforts will be in improving public sector efficiency, reducing waste and pushing government employee pension revisions.
“Government employee pensions will get top priority in the new year,” the government said, indicating it will aggressively persuade lawmakers.
The government will, moreover, come up with blueprints to reform the military and private school pensions and overhaul how state spending is carried out from a zero base. Such changes will be implemented in the 2016 budget. On the issue of health insurance, the ministry said there is a need to inject more state funds while ensuring proper governance.
Under the annual plan, policymakers will try to vitalize the financial sector by getting rid of red tape and revising the country’s foreign exchange law.
The government will introduce a system making it mandatory to eliminate one piece of red tape for every new one added. It said 20 percent of existing red tape will be axed by 2017.
In addition, the government will seek to both enhance flexibility and stability in the labor market and use FTAs reached with other countries to attract more foreign workers.
Emphasis will be placed on getting companies to hire more regular workers, strengthen social security, reduce working hours and adjust minimum wage rules.
It could even consider reforming the current visa system to make it easier for skilled foreigners to reside in the country with family members.
Other areas that will receive state attention in the new year are the training of students to meet business requirements.
The ministry is also considering having the school year start in September and getting rid of spring break. This, it said, can better meet the movement of students across borders, since South Korea, Japan and Australia are the only countries that begin a new school year in the spring.
Starting the school year in fall and getting rid of spring break can also allow for a longer summer vacation, allowing students to gain more on-the-job, work-related experience.
Local economists assessing the plan said while the general direction is sound, there were external and internal pitfalls that must be resolved.
“Externally, the weak Japanese yen fueling foreign exchange market volatility is a source of grave concern, while forecasts that China and the eurozone countries may experience slower growth could impact trade, a key growth engine for the country,” KDI researcher Jung Kyu-chul said. China is South Korea’s largest export market, outdoing the United States.
Others said that while the U.S. market is expected to grow, the good news may be affected by worries that the Fed raising key interest rates could affect the world’s largest economy.
Some said the plan lacked the kind of boldness that can give a forward push when there is relatively little concern of inflation.
“The government, in cooperation with the central bank, needs to pursue a more aggressive monetary policy stance,” said Sung Tae-yoon, professor of macroeconomics at Seoul’s Yonsei University.
Unless strong measures are taken, the economy may not recover as hoped for, he said, stressing that the Bank of Korea needs to send a clear message to the market that it is committed to tackling deflation worries.
Some argued that the policy goals lacked real time table for implementation and details.
“Goals of pushing forward government pension reform are bound to stir up opposition, while drawing up plans to change the military personnel and private education sector pension scheme could really cause an uproar,” an economic observer said. (Yonhap)
