"Supplementary Budget May See Both Approval and Expansion"
Base Rate Cut Could Come Sooner on Economic Slowdown Concerns
Positive Outlook for Stock Market
However, Won-Dollar Exchange Rate May Take Time to Decline
With the impeachment motion against President Yoon Suk-yeol being upheld, there are expectations that political uncertainty will be resolved and that there will be greater room for fiscal policy maneuvering. It is anticipated that the supplementary budget could boost the economic growth rate by up to 0.08 percentage points.
On April 4, Kim Jinwook, an economist at Citi, stated this in a recently released report. He said, "As a new administration is formed by June 4, we expect political uncertainty to gradually subside and the scope for policy operations to expand."
He first projected that annual economic growth could be raised through fiscal policy. Kim assumed that a supplementary budget of 10 trillion won, equivalent to 0.4% of Korea's GDP, would be allocated in the second quarter of this year, with an additional 20 trillion won supplementary budget in the third quarter. He said, "With a 10 trillion won supplementary budget, the annual economic growth rate could rise by about 0.04 to 0.08 percentage points." He also suggested that the likelihood of the National Assembly approving the supplementary budget would increase following the impeachment, and that the scale of the first supplementary budget could be expanded to between 15 trillion and 20 trillion won.
There are also predictions that the base interest rate could be cut rapidly this month. He forecast that the Bank of Korea would lower the base rate by 25 basis points (0.01 percentage points) each in May, August, and November this year, ultimately bringing it down to around 2%. However, he added, "If concerns about an economic slowdown intensify due to U.S. tariff policies and other factors, we cannot completely rule out the possibility that the Bank of Korea may cut rates faster than expected at the Monetary Policy Board meeting on the 17th of this month."
The outlook for the stock market is bright. Citi has raised its KOSPI forecast for this year from the previous 2,800 to 2,900, as the short-selling ban is set to expire at the end of March. Kim predicted, "If this measure is lifted, a combination of increased foreign capital inflows and the relative attractiveness of the Korean stock market will lead to a strong inflow of market liquidity."
However, it is expected to take some time before the won strengthens against the dollar. He said, "Even if political uncertainty eases, we expect the exchange rate to remain at 1,450 won for three months before falling to around 1,435 won within 12 months." He cited three reasons: first, the structural trend of increased overseas portfolio investment by Korea; second, the approaching dividend season; and third, the limited scale of dollar selling by corporations.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
