Korean economy may have soft landing in 2007

The airplane “Korea” may have a soft landing in 2007, but on the runway may be rocks and bumps, such as a sudden fall of the nation’s inflated property market, a slower-than-expected global economy and deterioration of the North Korea issue. The landing may get even trickier due to fog stirred up by the 2007 presidential election.

So say local and foreign think tanks. For now, though, the rocks and bumps appear manageable. Last week, the Korea Development Institute, a leading state-run think tank, upgraded its forecast for the nation’s 2007 gross domestic product growth to 4.4 percent from the former 4.3 percent. The institute explained that the domestic economy is likely to grow faster in the second half, as a slowdown in global economies eases. LG Economic Research Institute, a major private think tank, also raised its projection for the domestic economy’s 2007 growth to 4.2 percent from 4 percent. Both institutes said concerns about a slowdown of the world economy and the North Korea issue impacted their original projections. “In the third quarter of 2006, when we made the former forecast, it was difficult to say how the North Korea nuclear crisis would develop. But recently, the situation has stabilized somewhat,” the Korea Development Institute said in its latest outlook. “The North Korea nuclear issue is still threatening the domestic economy, but now the possibility of a diplomatic solution has heightened,” LG Economic Research Institute said in its report. “And the U.S. economy is not likely to cool rapidly this year, as the fall in the country’s housing prices have now decelerated.” The United States is the second- biggest export market of Korea. Accordingly, Korea’s exports, which account for about 40 percent of the nation’s GDP, could maintain a two-digit growth level this year, led by information technology products, though the growth would slow from last year, most think tanks said. Some think tanks also narrowed their forecasts for the current account deficit this year, though they said the nation is likely to mark a deficit for the first time in 10 years due to the stronger won against the dollar and high raw material prices. Most institutes, including the Bank of Korea and the International Monetary Fund, forecast Korea’s economic growth would moderately slow to between 4 and 4.5 percent this year from the projected growth of 5 percent in 2006. The Korea Economic Research Institute, which had forecast the domestic economy would grow at less than 4 percent in 2007, also said the growth could be above 4 percent now that the North Korea issue is showing signs of improvement. The Finance Ministry is scheduled to announce its official forecast and economy management plan on Thursday. But the institutes say there remain risks that might pull down next year’s growth further. As for the U.S. economy, Samsung Economic Research Institute said that despite the latest forecast of a soft landing of the economy, conditions could deteriorate rapidly, particularly if the Federal Reserve raises interest rates to counter expanding inflationary pressure. Because the correction of the U.S. property market is not yet finished, if interest rates rise, real estate prices could tumble, on selling by those with mortgage loans, the institute said. As for the seriousness of Korea’s housing bubbles, economists hold mixed views.

William Pesek, a Bloomberg News columnist, wrote in November, “The combination of a strong won, high oil prices and excessive property speculation may put Korea at risk for the kind of funk Japan suffered in the 1990s.” He said a sudden collapse in property values could take the economy down with them. And the effect would be serious because “it would come at a time when China is trying to slow growth and U.S. demand is expected to cool,” he said. On the other hand, Chae Jung-tae, the Korean representative at Standard and Poor’s Ratings Services, told a media roundtable in December, “Bubbles exist, but except for some regions, they are not at a serious level. For now, Korea is not likely to repeat the same crisis triggered by property bubbles that Japan went through.” He added, “Korean banks are doing more risk management on their mortgage loans than Japanese banks did in the 1980s.” But economists also say that an increase in lending rates could hurt Korean households and small and medium enterprises given their high leverage. Accordingly, the central bank should be cautious in operating its monetary policy, the Korea Development Institute said. Consumer price inflation would accelerate but would stabilize at around 2.7 percent, it pointed out. The Bank of Korea on Dec. 7 kept its key interest rate unchanged at a five-year high of 4.5 percent. Many economists voiced negative views about aggressive financial or fiscal moves. “Directors of the IMF considered that it would be appropriate to maintain a neutral fiscal stance,” said the IMF’s annual consultation report on the country, which was released in October. For Seoul stocks, many foreign institutions recently released rosy-colored outlooks. S&P said Seoul stocks would have “a bumper year,” increasing the most among Asian markets. It forecast the benchmark Kospi index to reach 1,770 points in the second half of 2007. On the view that value is finally going to beat momentum in the Asian market in 2007, Citigroup’s regional head of equity strategy, Markus Rosgen, said that global investors would choose Korean markets with still low valuation rather than Indian markets that fluctuate on momentum. A presidential election scheduled late this year is another variable, the economists said. “In 2007, a presidential election will be held amid a slowdown of the local and global economies,” said Kwon Soon-woo of Samsung Economic Research Institute. “Accordingly, it is highly likely that the domestic economy will react more sensitively to unexpected changes, and there will be confusion and conflict in policies to counter the changes. The effects of risk might expand, rather than being solved early. The government and politicians should remember this.” by Moon So-young