Outlook lowered by weak exports, government optimistic

Finance Minister Choo Kyung-ho speaks during the National Assembly's Strategy and Finance Committee meeting in Yeouido, western Seoul, on Monday. [NEWS1]

Global institutions are slashing Korea's growth outlook this year to a low 1 percent, citing weak exports and fiscal deficit. But the government remains optimistic, saying the economy will recover in the fourth quarter.

Credit ratings agency Moody’s Investor Service on Friday revised Korea’s expected annual economic growth to 1.5 percent, down one percentage point from its March forecast. S&P Global Ratings cut its outlook from 1.4 percent to 1.1 percent on May 3, and Fitch Ratings slashed its prediction from 1.9 percent to 1.2 percent in March.

The International Monetary Fund last month expected Korea’s economy to expand by 1.5 percent, down 2 percentage points from 1.7 percent in January. The Organization for Economic Cooperation and Development adjusted its forecast by 1.6 percent and the Asian Development Bank (ADB) by 1.5 percent.

The outlook by eight global investment banks including Goldman Sachs and JPMorgan Chase averaged at 1.1 percent as of the end of April, according to the Korea Center for International Finance.

The central bank here joined the mainstream view. The Bank of Korea had expected Korea’s economy to grow by 1.7 percent in the economic outlook report released in November but trimmed it down to 1.6 percent in February. The growth estimate is likely to drop further in the revised report due Thursday.

“Korea’s economic growth rate is expected to be slightly lower than the original forecast of 1.6 percent,” Bank of Korea Governor Lee Chang-yong told CNBC during the 56th ADB Annual Meeting held at Songdo Convensia in Incheon earlier this month.

Despite such skepticism, the Ministry of Economy and Finance remains adamant with its 1.6-percent growth outlook announced in December, which Choo described then as “frank,” one that reflects the data the ministry had at that time.

“The trade deficit will shrink past May and a totally different result will be seen in the fourth quarter,” Finance Minister Choo Kyung-ho said during the National Assembly’s Strategy and Finance Committee meeting Monday.

Korea's trade deficit for this year has reached $29.5 billion, accounting for more than half of the record-high annual trade deficit of $47.8 billion in 2022.

Choo blamed the energy import, which nearly doubled, for showing grim figures in the first half. Korea bought 4,639 tons of natural gas last year, up 1 percent on year, but had to pay almost double for the amount.

Trade deficits following increased energy imports total between $80 to $90 billion this year, and May is experiencing last year’s base effect, added Choo.

“Excluding chip and IT sectors, the economy will grow by 2 percent in the first half,” the minister said.

Korea’s semiconductor exports last month plummeted by 41 percent on year, further dropping from its 34.5 percent plunge in March. A 10-percent slip in chip exports is equal to a 0.78 percent dip in GDP, according to Korea Development Institute (KDI).

China’s slower-than-expected economic recovery contributed to discouraging outlooks for the Korean economy. Production, consumption and investment in China all lingered below market consensus and the yuan continued to lose ground against the dollar, falling to its lowest point in five months.

“Even a 1.5 percent growth may be out of reach if semiconductors and China’s economy do not recover as projected,” Jung Kyu-chul, senior researcher at KDI, said. The growth rate may just be over 1 percent if the scenario does not play out well, Jung added.

The government expects to spend 65 percent of its annual budget of 242.9 trillion won ($184.2 billion) within the first half. It also had less money coming in, with tax revenue in the first quarter this year dropping by 24 trillion won from the previous year.

“A fiscal hole may further hamper the government from meeting its targeted economic growth,” said Woo Seok-jin, an economics professor at Myongji University, pointing out that growth in the second half may be weaker than expected.

BY KIM KI-HWAN, SOHN DONG-JOO [sohn.dongjoo@joongang.co.kr]