The market was caught by surprise from the central bank’s earlier-than expected rate cut last week, providing support to the government’s policy on corporate restructuring amid a gloomy economic outlook.
With the Bank of Korea lowering its base rate to record low of 1.25% in addition to committing to offering 10 trillion won ($8.5 billion) for policy bank recapitalization, analysts say it is now the finance ministry’s turn to further cushion the economy from the negative outlook with expansionary fiscal measures, Yonhap reported.
As the central bank is not expected to further lower its rate anytime soon given its cautious stance over the country’s high household debt, financial institutions are recommending further fiscal stimulus by allocating extra spending.
“Speedy implementation of additional fiscal stimulus should be a priority and should be complemented by monetary easing,” said the International Monetary Fund in a statement.
“Given South Korea’s low public debt, there is space to use fiscal policy in a complementary fashion, both to cushion the impact of structural reforms and to incentivize such reforms.”
BoK Governor, Lee Ju-yeol, also mentioned that Korea’s economy is “not showing clear signs of recovery,” adding that monetary easing alone cannot prevent the economy from further falling and deteriorating its growth prospects. The central bank noted that the government’s supplementary budget boosted South Korea’s growth by 0.15 to 0.36 percentage points last year.
“We must pursue structural reforms at the same time, as it would be difficult to sustain growth only with monetary policy,” Lee told reporters after holding a monetary policy committee meeting last week.
Fiscal Drag
The Organization for Economic Cooperation and Development also earlier suggested more fiscal measures, besides extending the period of excise tax cuts on automobile purchases and increasing policy lending for small businesses.
“Additional fiscal stimulus is called for in 2016 to eliminate any fiscal drag, all the more so given Korea’s sound public finance position,” the OECD said in a report.
OECD lowered South Korea’s growth forecast from 3.1% to 2.7% this year.
The state-run Korea Development Institute also suggested extra spending through a supplementary budget, or at least devising next year’s budget by taking into account the negative impact of corporate restructuring on the job market.
The country’s political circles are also cautiously raising the need for further spending for thousands of workers who are expected to be let go from the ailing shipping and shipbuilding industries, as well as from other traditional manufacturers such as steel and petrochemicals.
Although Finance Minister Yoo Il-ho had indicated that it could raise extra finances as a result of debt restructuring, political and social challenges remain.
“The government’s restructuring plan will likely lead to job losses in the coming quarters, threatening to dampen private consumption further,” said HSBC economist Joseph Incalcaterra in a report.
