Korean Government Holds Firm on Growth Forecast as BOK Cuts

By Cynthia Kim and Whanwoong Choi

Photographer: SeongJoon Cho/Bloomberg

Joo Hyung Hwan, South Korea's vice finance minister, poses for a photograph following... Read More

South Korea’s Finance Ministry plans to stick with its growth forecast for this year, putting it at odds with the central bank on the outlook for Asia’s fourth-largest economy.
The government stands by its December projection for gross domestic product to expand 3.8 percent in 2015, Vice Finance Minister Joo Hyung Hwan said in an interview in Seoul. The differing views partly reflect a divergence of opinion on the likely impact of government policies, Joo said on Jan. 16, a day after the Bank of Korea cut its estimate to 3.4 percent.
“There are certain differences in terms of how these variables will affect consumption, investment and exports,” said Joo, 53, referring to support measures from the administration of President Park Geun Hye including fiscal stimulus and relaxed lending rules. The “basic
tone” for the economy this year is improvement and recovery, he said.
Joo’s upbeat stance points to the strongest economic performance in four years and contrasts with analysts from BNP Paribas SA and Nomura Holdings Inc., who expect expansion even lower than the BOK’s new estimate. Risks to the government’s forecast cited by Joo include the extent of probable interest rate increases in the U.S., further weakness in the Japanese yen and the slowdown in Europe.

Bond Yields

Government bonds fell after the comments from Joo and as U.S. Treasuries ended a five-day rally.
The yield on sovereign notes due December 2017 rose five basis points, or 0.05 percentage point, to 2.05 percent as of 10:59 a.m. in Seoul, Korea Exchange prices show. It touched an unprecedented 1.97 percent last week. The five-year yield climbed five basis points to 2.14 percent, while that on 10-year notes advanced six basis points each to 2.40 percent.
“The Finance Ministry’s growth forecast may include the impact of possible stimulus measures, while that of the Bank of Korea may not,” said Kong Dong Rak, a Seoul-based fixed-income analyst at Hanwha Investment & Securities Co. “Bond yields are also reflecting moves in U.S. Treasuries.”
The Korean won is trading around the highest level in more than six years against the yen, making it harder for exporters from Hyundai Motor Co. to Samsung Electronics Co. to compete.
The currency weakened 0.3 percent to 1,080.78 versus the dollar this morning, prices compiled by Bloomberg show.

Expansionary Policies

Economic policies in South Korea will remain expansionary in 2015, said Joo. Plans for this year include speeding up the use of a 46 trillion won ($42.7 billion) stimulus package that was announced last year, and allocating the record 375.4 trillion won budget.
The government estimates the economy to have grown 3.4 percent last year, short of an average annual expansion of 3.2 percent from 2009 to 2013.
Commenting on the nation’s foreign exchange policy, Joo said authorities would continue to carry out smoothing operations in cases of volatility, and would be “vigilant” about monitoring the market.
He said uncertainties related to outlook for emerging market economies, oil prices and events in Greece were adding to the volatility in the financial market.
The government was also looking to create incentives to market makers to boost trade in recently established won-yuan direct trading, Joo said.
This included a review onto cutting the levy on short-term foreign-currency debt at brokerages, which was imposed to slow curb rapid swings in capital movements.

Won-Yuan

Since Park and Chinese President Xi Jinping agreed in July to establish the direct trading market, South Korea has selected 12 banks as market makers to help build liquidity by providing bid and offer prices for the currency pair.
Joo said the government has plans to make South Korea an offshore yuan hub by encouraging the development of won-yuan forwards from brokerages. He said the nation is open to talks on establishing won-yuan direct trading market in China on request from the Chinese government. Currently, the won-yuan direct trading market is operating in Seoul only.
Daily trading volume for the won-yuan market, which started December last year, has averaged 5.4 billion yuan ($870 million) per day, more than the yen-yuan market in Japan, according to statements from the Bank of Korea and the Finance Ministry.