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Weekly Korea Economic Digest_ September 2015
Weekly Korea Economic Digest
7 – 13 September, 2015
Office of Commercial Affairs, Seoul
National debt to GDP ratio expected to surpass 40%
next year
<MK Business News – September 8, 2015>
South Korean small and medium companies have picked the stimulation of domestic
consumption and the labor market reform as the Park Guen-hye administration’s key
policy focus in the coming months, according to a poll released on Monday.
The poll of 300 chief executives at SMEs was conducted by the Korea Federation of Small
and Medium Business from August 26 to September 1 over the administration’s policy
priority in relation to SMEs.
CEOs picked the revival of domestic consumption (70.7 percent) and the completion of
ongoing
structural
reforms
in
regulations
and
labor
(38.3
percent)
as
the
administration’s major policy focus, while showing great expectations towards the
stabilization of inter-Koran relations and promotion in economic exchanges (79.3
percent).
As the best policy measures taken by the Park Geun-hye administration in the past two
years, they picked the creative economy initiative (41.3 percent), deregulations (29.3
percent) and efforts to build a foundation for unification (27.7 percent). Areas that need
the most improvement were the labor market reform (32.7 percent), regulatory reform
(31.7 percent) and the economic democratization issue (26.0 percent).
Office of Commercial Affairs, Seoul
Page 1
Weekly Korea Economic Digest_ September 2015
Six out of ten business leaders, or 58.7 percent, in the SME community expect that
President Park will perform well, while more than half, or 50.3 percent, forecasted that
the economy will turn around during her tenure.
Also, 79.3 percent of the respondents said they look forward to Park’s leadership in
stabilizing the inter-Korean relationship and invigorating economic exchange between
the two Koreas.
Export Prices Up, Import Prices Down in August
<KBS World Radio - September 10, 2015>
Export prices rose in August due to an appreciation in the exchange rate, but import
prices fell due to a drop in oil prices.
The Bank of Korea said Thursday that the export price index rose zero-point-seven
percent on month to 85-point-82 points in August.
Export prices have risen for the fourth month in a row since May.
On the other hand, the import price index fell zero-point-three percent on month and
13-point-six percent on year to 81-point-40 points.
A fall in Dubai crude oil prices from about 55 dollars a barrel in July to around 47 dollars
in August appears to have led to the decline in import prices.
Gov't proposes 3 pct increase in 2016 budget
<Korea Herald– September 8, 2015>
The government seeks to hike its spending for next year by a modest 3 percent from this
year to give the country's economy a much-need shot in the arm amid unfavorable
domestic and external conditions, the finance ministry said Tuesday.
Office of Commercial Affairs, Seoul
Page 2
Weekly Korea Economic Digest_ September 2015
The government will ask the National Assembly to approve its 386.7 trillion won ($324.6
billion) budget for 2016, larger than the 375.4 trillion won earmarked for 2015.
The budget proposal, endorsed by the Cabinet on Tuesday, will be sent to the National
Assembly on Friday, with the Constitution giving lawmakers until Dec. 2 to approve it.
The increase marks the lowest gain in government spending since the 2.9 percent
growth tallied for 2010.
The expansionary budget comes amid escalating worries that Asia's fourth-largest
economy may lose steam further down the road due to slumping exports and anemic
domestic demand, which is feared to drag the country into a prolonged period of low
growth.
South Korea's exports plunged 14.7 percent from a year earlier to $39.33 billion in
August, the largest on-year drop in six years.
August also marked the eighth consecutive month of decline, sparking concerns over the
performance of the economy that relies heavily on overseas demand for growth.
Consumer spending, another driver of the country's growth, has remained in the
doldrums. Private consumption was hit hard by the outbreak of Middle East Respiratory
Syndrome in late May that claimed 36 lives.
Against such a backdrop, the finance ministry predicts the Korean economy to expand
3.3 percent on-year in 2016, down from its initial growth estimate of 3.5 percent made
in June. It has downgraded the 2015 growth projection to 3.1 percent from an original
3.3 percent.
Senior policymakers stressed that despite a slow gain in tax revenue, South Korea needs
an expansionary budget stance in order to weather unfavorable factors at home and
abroad. Gross tax revenue is estimated to reach 391.5 trillion won this year, up just 2.4
percent from this year, due to the country's sluggish economic growth.
"(The budget increase) comes amid growing downside risks for the South Korean
economy, such as sluggish recovery in advanced economies, a slowdown in emerging
markets, China's risk and a possible U.S. interest rate hike," Finance Minister Choi
Kyung-hwan said of the 2016 budget proposal.
Office of Commercial Affairs, Seoul
Page 3
Weekly Korea Economic Digest_ September 2015
China's economic slowdown has been a major drag on the South Korean economy as the
neighboring country is Seoul's biggest export market.
Vice Finance Minister Bang Moon-kyu echoed Choi's view. "South Korea needs to expand
fiscal spending in order to cope with changes in the global economy," he told reporters in
a pre-announcement briefing.
The proposal calls for the government to spend the largest chunk of the 2016 budget on
health, welfare and labor sectors. Some 123 trillion won has been earmarked for the
areas, or 32 percent of the total.
In particular, 15.8 trillion won, or up 12.8 percent from this year, has been set aside to
help the country grapple with high youth unemployment. In July, the jobless rate for
those aged 15-29 stood at 9.4 percent, much higher than the 3.7 percent average for
the entire country.
The government seeks to mark up defense spending by 4 percent to 39 trillion won next
year to build up the country's capabilities against North Korea as well as raise wages for
soldiers.
Despite gains in such areas, the government plans to cut its spending on social overhead
capital by 6 percent from this year to 23.3 trillion won, while slashing expenditures on
industry and energy sectors by 2 percent to 16.1 trillion won.
The government expects to collect 391.5 trillion won in total tax revenue in 2016, up 2.4
percent from this year, with its fiscal deficit rising to 37 trillion won next year from 33.4
trillion won in 2015.
The increased fiscal deficit is expected to make overall government debt jump 50.1
trillion won on-year to 645.2 trillion won in 2016. The size of debt will stand at 40.1
percent of the gross domestic product in 2016, up from 38.5 percent forecast for this
year, marking the first time that the debt-to-GDP ratio will surpass the 40 percent mark.
The government also unveiled its mid- and long-term fiscal management plan that calls
for trimming the ratio of its fiscal deficit to GDP to 0.9 percent by 2019 by streamlining
spending and getting rid of tax breaks. It says the ratio will spike to 2.3 percent in 2016
from 2.1 percent in 2015.
Office of Commercial Affairs, Seoul
Page 4
Weekly Korea Economic Digest_ September 2015
The government, meanwhile, estimates that national tax revenue will likely grow at an
annual average of 4 percent until 2019, with spending rising 2.6 percent annually over
the same period. The tax burden ratio is projected to edge down to 18 percent in 2016
from 18.1 percent this year.
Transaction Volume of 3-Year Gov't Bond Futures Hits
Record High
<KBS World Radio - September 11, 2015>
The transaction volume of three-year government bond futures reached a record high on
Friday partly due to the Bank of Korea's decision to maintain the key interest rate.
The Korea Exchange said that 48-point-eight trillion won worth of Treasury bond futures
were transacted on Friday, the highest ever since bond futures were listed on the
exchange in September 1999.
The number of transactions recorded Friday was also the second highest to date at 445thousand.
The Bank of Korea's decision Friday to retain the key rate at a record low of one-pointfive percent is also believed to have spurred bond futures transactions.
Overseas Direct Purchase Volume Rises Rapidly to 1.2
Tril. Won Last Year
<Korea Economics Daily – September 10 , 2015>
A parliamentary study said the volume of purchase from overseas online retailers has
surpassed the 1-trillion-won level last year for the first time, according to Rep. Na
Seong-lin (New Frontier Party). According to the congressman who is also a member of
the strategy and finance committee in the National Assembly, based on data submitted
by the Korea Customs Service, the total import volume from such purchases was
Office of Commercial Affairs, Seoul
Page 5
Weekly Korea Economic Digest_ September 2015
US$975.19 million (1,163.9 million won) last year, from $331.97 million in 2011 and
$709.32 million in 2013.
Accordingly, import duties for the online purchases have increased to 19,623 million won
last year from 6,376 million won in 2011 and 11,439 million won in 2013. This year, the
amount of imports has reached $476.55 million as of the end of July, which is projected
to exceed the 1-trillion-won level for two consecutive years. The amount of import duties
for this year will also likely rise over 20 billion won from 13,820 million won until the end
of July.
Of the items bought through online retail sites such as Amazon and Rakuten, the most
popular included health food (19% in total), which has been ranked No. 1 for the past
four years in a row, with an average import volume of $114.67 million. It was then
followed by cosmetics, perfumes, and handbags.
Gov’t should focus on domestic consumption: Poll
<MK Business News - September 7, 2015>
South Korean small and medium companies have picked the stimulation of domestic
consumption and the labor market reform as the Park Guen-hye administration’s key
policy focus in the coming months, according to a poll released on Monday.
The poll of 300 chief executives at SMEs was conducted by the Korea Federation of Small
and Medium Business from August 26 to September 1 over the administration’s policy
priority in relation to SMEs.
CEOs picked the revival of domestic consumption (70.7 percent) and the completion of
ongoing
structural
reforms
in
regulations
and
labor
(38.3
percent)
as
the
administration’s major policy focus, while showing great expectations towards the
stabilization of inter-Koran relations and promotion in economic exchanges (79.3
percent).
As the best policy measures taken by the Park Geun-hye administration in the past two
years, they picked the creative economy initiative (41.3 percent), deregulations (29.3
percent) and efforts to build a foundation for unification (27.7 percent). Areas that need
Office of Commercial Affairs, Seoul
Page 6
Weekly Korea Economic Digest_ September 2015
the most improvement were the labor market reform (32.7 percent), regulatory reform
(31.7 percent) and the economic democratization issue (26.0 percent).
Six out of ten business leaders, or 58.7 percent, in the SME community expect that
President Park will perform well, while more than half, or 50.3 percent, forecasted that
the economy will turn around during her tenure.
Also, 79.3 percent of the respondents said they look forward to Park’s leadership in
stabilizing the inter-Korean relationship and invigorating economic exchange between
the two Koreas.
S. Korea keeps fiscal expansion to fuel growth
<Korea Herald– September 8, 2015>
South Korea has opted to maintain an expansionary fiscal policy stance for 2016 as the
country seeks to prop up its economy struggling with sagging exports and anemic
consumption, observers said Tuesday.
The government's 2016 budget proposal calls for a 3 percent on-year rise with spending
hitting 386.7 trillion won ($324.6 billion), compared with 375.4 trillion won in 2015.
The increase comes despite a government projection that a drop in tax revenue and
demand for more outlays will push up state debt to 40.1 percent of gross domestic
product in the new year from a 38.5 percent estimate for this year.
"The decision to spend more than what the government will bring in is designed to keep
the economy moving forward," said Finance Minister Choi-Kyung-hwan of the budget.
"The rise in national debt should be seen as an unavoidable process to bolster the
economy at this critical juncture."
The finance ministry has predicted Asia's fourth-largest economy is expected to grow 3.3
percent in 2016 from this year, down from a 3.5 percent projection made in June.
The 2016 growth outlook is slightly better than the government's target of 3.1 percent
for this year as the economy has been losing momentum due to a drop in exports, and
weak domestic spending and investment.
Office of Commercial Affairs, Seoul
Page 7
Weekly Korea Economic Digest_ September 2015
Outbound shipments, a key growth engine, plunged 6.1 percent on-year in the JanuaryAugust period mainly due to less demand from China and emerging economies.
Domestic demand has also remained in the doldrums, though the government estimates
it is showing budding signs of recovery following a virtual end to the Middle East
Respiratory Syndrome that claimed 36 lives.
The focus of the 2016 budget has been placed on creating more jobs, especially for
young South Koreans, and bolstering the country's growth momentum by overhauling
the economy's structure.
High youth unemployment has plagued South Korea with the jobless rate for those aged
15-29 standing at 9.4 percent in July, much higher than the 3.7 percent average for the
entire country.
In particular, Seoul has earmarked 15.8 trillion won for job creation, up 12.8 percent
from this year, with its overall spending in the welfare, health and labor areas rising 6.2
percent to 122.9 trillion won.
In addition to creating more jobs, the government aims to push up defense spending by
4 percent on-year to 39 trillion won to beef up defense along the demilitarized zone, and
build up South Korea's capabilities in anti-submarine warfare and land mines.
The emphasis on defense comes after the two Koreas placed their forces on high alert
last month after land-mine blasts in the DMZ maimed two South Korean soldiers.
Beyond job creation and military spending, more will done to strengthen the country's
ability to cope with disasters and disease control, that has taken on importance after the
outbreak.
The government's expansionary fiscal stance has sparked concerns that the country's
fiscal deficit will widen next year unless increased spending leads to higher economic
growth.
The practice of "overstating" economic growth has played a part in fueling the fiscal
deficit and national debt because tax earnings are directly linked to growth. Weakerthan-expected growth this year compelled the government to ask parliament for an
extra budget.
Office of Commercial Affairs, Seoul
Page 8
Weekly Korea Economic Digest_ September 2015
In order not to inflate GDP growth, the finance ministry said it is the country's nominal
GDP to advance just 4.2 percent in 2016, with tax revenue rising a modest 2.4 percent
on-year to 391.5 trillion won.
"The nominal GDP and earnings numbers are very low compared to the past, and reflect
the government determination not to suffer from tax shortfalls," a government official
said.
In addition to taking a conservative outlook on growth, the government said it will slash
projects getting state subsidies by 10 percent, and merge or ax some 300 projects that
got state funding support in the past. Such moves can save upwards to 2 trillion won in
taxpayers' money.
Despite such measures, the government said that the size of the fiscal deficit will worsen
in the new year to 2.3 percent of the GDP from 2.1 percent this year.
Government
officials
and
independent
analysts
said
success
or
failure
of
the
government's latest spending plan will depend on whether or not it can push up the
country's growth potential.
If the expansionary policy drive fuels growth, it can lead to more tax revenues down the
line that can naturally lead to less debt and rectify the fiscal imbalance.
Should the country fail to achieve the desired growth rate, increasing spending may help
the economy in the short run, but lead to a spike in debt and fiscal imbalance, they said.
"The government is fully aware that debt and the fiscal deficit must be maintained at a
certain level, or it can get out of hand," said a finance ministry official, who declined to
be identified.
Park Chang-gyun, a business professor at Chung-Ang University, said it is critical for the
expansionary budget stance to generate growth.
"Growth can resolve the fiscal health issue in one stroke, but if the country becomes
locked into a low growth pattern, things can become dangerous," he said.
Others such as Lee Young, who teaches economics at Hanyang University, said he
understands the government's dilemma in setting up next year's budget.
Office of Commercial Affairs, Seoul
Page 9
Weekly Korea Economic Digest_ September 2015
"In light of problems facing China and the rest of the world, the government probably
had no choice but to push for an expansionary budget, even despite ensuing risks," Lee
said.
Chuseok drives direct purchases from overseas
<The Korea Times – September 13 , 2015>
With Chuseok approaching at the end of this month, people have increasingly been
turning to overseas websites to buy gifts for the traditional thanksgiving holiday.
The popularity of direct purchases has surged in recent years because people can buy
foreign brands at the cheapest prices.
According to online retailer Gmarket, direct purchases in the past two weeks are up 30
percent from last year's Chuseok season.
The largest sales increase is in hand and foot care products, such as hand-cream gift
sets, which are up 701 percent.
Other popular items are air-tight lid containers, lip products and interior accessories,
with sales up 331 percent, 266 percent and 183 percent, respectively.
Office of Commercial Affairs, Seoul
Page 10