[Issue Interview] "Korean Economy Needs Supplementary Budget for 1.6% Growth... Discretionary Spending Should Increase"

"Supplementary Budget Should Be Implemented Swiftly," Says Seo Eunjong, Head of Financial Markets at BNP Paribas Seoul Branch
Avoid "Helicopter Money"; Direct Support Needed for Vulnerable Sectors
Concerns Over "Korea Passing" by the U.S. Are Unfounded
South Korea Expected to Be Treated Similarly to Japan
Trump Tariffs Projected to Average in the 10% Range

There is an analysis suggesting that a supplementary budget is essential for South Korea's economic growth this year. If a supplementary budget is implemented, it is advised that the government should increase the proportion of discretionary spending by providing direct financial support to vulnerable industries or small business owners, rather than distributing general subsidies to the public.

Seo Eunjong, Head of the Financial Markets Division at BNP Paribas Seoul Branch, stated in an interview with our publication on March 17, "Assuming that a supplementary budget of 20 to 25 trillion won is implemented as part of fiscal policy, I expect South Korea's economic growth rate this year to be 1.6%." He added, "If a supplementary budget is not implemented, there is a risk that the growth rate could fall to 1.4%."

Eunjong Seo, Head of Financial Markets Division at BNP Paribas Seoul Branch, is being interviewed by Asia Economy at the BNP Paribas Seoul Branch headquarters in Jung-gu, Seoul. Photo by Dongjoo Yoon

Last month, Seo participated in a meeting of foreign investment banks hosted by Choi Sangmok, Acting President and Deputy Prime Minister and Minister of Economy and Finance. At the meeting, he remarked that, due to heightened uncertainty at the beginning of the Donald Trump administration in the United States, strong monetary, financial, and fiscal policy responses would be needed in the first half of this year. He also emphasized the need for the government to continue its efforts to attract stable inflows of foreign capital, given the growing market expectations for South Korea's inclusion in the World Government Bond Index (WGBI) and the importance of expanding incentives such as tax benefits to revitalize the domestic stock market.

Seo shared his outlook on the South Korean economy this year, as well as his views on the overall tariff policies of the Trump administration and other macroeconomic issues, in an interview with our publication. The following is a Q&A with Seo.

-In January, the Bank of Korea lowered its economic growth forecast for South Korea to 1.5%. How do you view South Korea's economic growth prospects this year? Also, if a supplementary budget is implemented, what measures do you believe would be most effective?

▲I expect the growth rate to be 1.6%. This forecast is based on the assumption that a supplementary budget of 20 to 25 trillion won will be implemented as part of fiscal policy. However, if this policy proves less effective than expected, there is a risk that the growth rate could drop to 1.4%.

The sooner the supplementary budget is implemented, the better. The quarterly growth rate was very low in December of last year. When the January figure from last year drops out and this low figure is included, the base effect could make it difficult for this year's growth rate to get off to a strong start.

Even if a supplementary budget is implemented, fiscal management must be handled carefully. When dividing between mandatory and discretionary spending, it is important to increase discretionary spending. This means that, rather than distributing helicopter money (cash handouts) or direct subsidies, it would be better to inject funds directly into specific industries or vulnerable sectors. If the proportion of direct subsidies becomes too large, people may come to expect handouts every time a supplementary budget is announced, and for middle- and upper-income earners, the funds may be diverted into investments rather than being spent as intended, undermining the policy's effectiveness.

Eun-Jong Seo, Head of the Financial Markets Division at BNP Paribas Seoul Branch, is being interviewed by Asia Economy at the BNP Paribas Seoul Branch headquarters in Jung-gu, Seoul. Photo by Dongju Yoon

-The Donald Trump administration in the United States has started what is being called a "tariff war," beginning with tariffs on steel and aluminum. The administration has also threatened to implement reciprocal tariffs. How do you think these actions will affect the South Korean economy?

▲According to research released last year regarding Trump's tariffs, the impact of these tariffs could begin to be felt from 2026. Before that, I do not foresee the "Korea passing" risk that the market is concerned about. South Korea is likely to be classified similarly to Japan. In fact, over the past two years, South Korea has been the world's top investor in the United States.

However, there are two risks. First, South Korea's trade surplus with the United States has increased significantly over the past two years. Second, the United States has become South Korea's number one export destination. The increased trade surplus could draw unwanted attention from the U.S. The shift in export destination means that, if the U.S. imposes tariffs, the economic impact on South Korea would be even greater.

By industry, the automotive sector deserves attention. Automobiles are a category for which the U.S. is somewhat more likely to impose strong tariffs. Since automobiles account for a significant portion of South Korea's exports, the economic impact could be considerable. The export share of steel and aluminum has declined significantly compared to the past. As for semiconductors, it may be difficult for the U.S. to impose tariffs, as it imports nearly 100% of its DRAM and high-bandwidth memory (HBM) from South Korea. If tariffs were imposed on semiconductor chips, U.S. companies higher up in the supply chain would also be significantly affected, so the market expects the U.S. to approach this issue with caution. Although the probability of tariffs being imposed is low, if it happens, it would be a very serious issue for South Korea.

Eunjong Seo, Head of Financial Markets Division at BNP Paribas Seoul Branch, is being interviewed by Asia Economy at the BNP Paribas Seoul Branch headquarters in Jung-gu, Seoul. Photo by Dongjoo Yoon

-Recent U.S. economic indicators suggest that growth is losing some momentum. In this situation, do you think the Trump administration will maintain its current tariff policy? Some argue that these tariff policies could create excessive trade barriers and further weaken the economy. What is your outlook for the U.S. economy?

▲Even if the Trump administration's tariff policy is a bluff, many countries around the world are falling for it. Whether the policy is being used as a threat or a negotiation tactic is unclear, but during the first Trump administration, the average tariff rate was 1-3%. Nevertheless, the prevailing view is that tariffs will rise in the second Trump administration. Rather than imposing a 20% tariff on all countries, the market expects the average tariff rate to be set in the 10% range, which I believe is reasonable.

Currently, various entities, including global investment banks, are raising their forecasts for the possibility of a recession in the United States. Just a few days ago, during a U.S. conference call, there was a viewpoint that put the probability of a recession at 40%. It is expected that inflation caused by tariffs will first affect the U.S. economy, followed by the impact of deflation somewhat later.

-What is the Trump administration trying to achieve through its tariff policy?

▲Both the Joe Biden and Donald Trump administrations pursue the same goal: to make America stronger. However, President Trump and former President Biden prefer different sectors and use different methods. In short, Biden's approach is, "If you come to America, you'll get a carrot," while Trump's is, "If you don't come, you'll get the stick."

Eunjong Seo, Head of Financial Markets Division at BNP Paribas Seoul Branch, is being interviewed by Asia Economy at the BNP Paribas Seoul Branch headquarters in Jung-gu, Seoul. Photo by Dongjoo Yoon

-The U.S. Federal Reserve appears likely to take a very conservative approach to rate cuts. How do you think this will affect the South Korean economy?

▲I expect the U.S. to take a very conservative approach to interest rates this year, and then adopt a more aggressive rate-cutting stance in 2026. Personally, I think there will be one or two rate cuts toward the end of this year.

In South Korea's case, both fiscal and monetary policy will likely be used to stimulate the economy. Over the next year to 18 months, I expect the benchmark interest rate to be cut an additional one to three times. If this happens, the interest rate differential between South Korea and other countries will become an important issue for the foreign currency bond market. Recent analysis of capital inflow and outflow data in the Korean market shows that overseas bond investments by domestic residents have been increasing significantly. This demonstrates that, compared to the past, overseas investment funds can now influence the interest rate differential. While it remains to be seen whether overseas bond investments, like overseas stock investments, will become a long-term trend, it is important to closely monitor the interest rate differential.

However, regardless of the interest rate differential, if exports improve, there is historical precedent for capital inflows into South Korea and a stable exchange rate, even when the interest rate differential is large. In situations where Korean stocks or the won are undervalued, it is a good idea to implement policies that structurally encourage overseas investors to increase their investments in Korean assets.

-What is your outlook for South Korea's export sector this year?

▲The investment cycle for semiconductors is favorable. SK Hynix is also performing well in the HBM sector. I am also very optimistic about the shipbuilding and defense industries. Specifically, in shipbuilding, South Korea still maintains a lead over China in LNG carriers, and in memory, high-end memory such as DDR5 and HBM. Export companies face challenges when competing with China, with petrochemicals being a prime example. The same goes for automobiles. As Chinese technology continues to advance, it will be important for South Korea to navigate these challenges wisely.