Government remains confident in 2.8% growth

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Government remains confident in 2.8% growth

The government continued to express confidence that the economy would be able to achieve 2.8 percent growth by the year’s end, arguing that its stimulus policies would be able to stave off growing anxieties stemming from new risks like the influence-peddling scandal involving a longtime friend of President Park Geun-hye.

In its monthly economic assessment report, the Ministry of Strategy and Finance said Tuesday that all areas of the economy, including industrial output, investment and even consumption, which had long been one of the primary factors preventing the economy from falling further, were showing negative signs.

The government noted that consumption had fallen 4.5 percent in September from a year earlier, largely due to Samsung Electronics’ recall of its Galaxy Note7 smartphone as well as lower energy use with the cooler weather and a surge in the price of agricultural produce.

Investment in production facilities also dropped 2.1 percent during the same period, a turnaround from the previous month’s 13.4 percent surge. Exports remained sluggish, suffering 5.9 percent drop in September from a year earlier and continuing a downward trend from August.

“We will have to see until the final sales reports are in, but because of the [stimulus] policies that were executed last month and economic growth in China hitting expectations of 6.7 percent, we expect economic indicators in the third quarter to mildly improve,” said Joo Hwan-ok, a Finance Ministry official. “There are various uncertainties, but if we continue to spend the remaining supplementary budget as planned and continue to push forward with our policies, we expect the economy to grow according to our forecast of 2.8 percent.”

Joo said the government was aware of possible risks from abroad like the outcome of the U.S. presidential election. He said the ministry was closely monitoring the election and has a contingency plan prepared, as the election result could influence the Federal Reserve’s decision on an interest rate hike next month that in turn would affect the Korean market.

But when asked about the economic impact of the Choi Soon-sil influence-peddling scandal, which hits closer to home as it has led to a presidential cabinet reshuffle, Joo simply brushed off the concerns. “Although it poses a risk, the government will push through with [stimulus] policies objectively so that economic participants’ confidence will not be excessively influenced by [the scandal].”

Think tanks, though, including the state-run Korea Development Institute, believe the scandal will have a negative impact on consumer confidence. They have been lowering their growth outlook to the mid- to low-2 percent range. The situation could turn worse as Korea’s leading conglomerates, including Samsung, have also been ensnared in the scandal, which could dampen corporate sentiment.

In fact, the credit default swap premium of Korean companies has risen since the political crisis. The five-year maturity corporate bond premium as of Nov. 4 was 62.25 basis points, up 7 percent compared to 58.18 basis points on Oct. 24. The higher the premium the riskier the bond becomes.

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