Bleakest bet yet for growth

The economy is expected to grow below 3 percent in 2013 for the second straight year due to uncertainties stemming from overseas as well as slow domestic demand, the Korea Institute of Finance (KIF) said yesterday.

The institute projected that GDP would grow at a rate of 2.8 percent next year, slightly higher than its estimation of 2.2 percent for 2012.

“External uncertainties persist as major world economies are recovering slowly from the 2008 global financial crisis,” Lee Myung-hwal, a senior research fellow at the institute.

“This will lead [Korean] exports to rise slightly. It will be difficult for domestic demand to grow significantly. We believe the country’s economic growth will be lower than forecasts previously released by other institutes based on our research.”

Yesterday’s outlook was the lowest figure released by either a private or government institute. The Bank of Korea estimated 3.2 percent growth next year.

Two leading private think tanks, LG Economic Research Institute and Hyundai Economic Research Institute, predicted Asia’s fourth-largest economy will reap 3.3 percent and 3.5 percent growth, respectively, next year.

He added that the won will continue to appreciate against the U.S. dollar next year, with the exchange rate hovering around 1,084 won ($0.99), up from this year’s average of 1,128 won, due to excess global liquidity and Korea’s strong fundamentals.

The KIF said the top priority for the financial sector, including banks, insurers, investment firms and brokerage houses, should beef up their risk management as the industry will inevitably see a sharp drop in profits. It said the sector will enjoy limited growth due to a slowdown in the real economy amid growing demand for improved transparency and social responsibility.

“Financial firms must stabilize their management and cushion themselves from down-side risks by improving efficiency by cutting their marketing and operating costs,” said Gu Bon-sung, another KIF researcher. “They should also focus on creating financial products related to Korea’s graying society for people to use after they retire, to encourage long-term investments.”

The institute said growth within the banks will be limited as they are hit by falling interest margins in the wake of expected future rate cuts by the Bank of Korea.

The biggest challenge for the industry will be getting a handle on household and corporate loan payments due to the growing number of credit risks and the threat of delinquent borrowers, which are seen as ticking time bombs, the KIF said.

“The growth rate for domestic bank loans grew 5.9 percent on year, which is lower than the 8.3 percent growth rate recorded in 2011,” said Suh Byung-ho, a researcher at the KIF.

Non-life and life insurance industries are also likely to see waning growth and profits.

“Whereas the number of new insurance contracts is likely to plunge, the cancellation rate for existing contracts will keep climbing,” Lee said.

By Kim Mi-ju [mijukim@joongang.co.kr]