S Korea cuts growth forecast to 2.6%

South Korea’s economy is expected to grow at its slowest pace in three years this year, as the world faces supply bottlenecks, surging inflation and rapidly rising interest rates, the South Korean Ministry of Economy and Finance said yesterday.

Setting out its first economic policy initiatives, the new government of South Korean President Yoon Suk-yeol said it had lowered this year’s growth forecast to 2.6 percent from 3.1 percent and raised the inflation forecast from 2.2 percent to 4.7 percent, the fastest since 2008.

“Our economy and markets are being shaken as we are thrown into a complex crisis amid fears of stagflation,” Yoon said in a speech yesterday.

Photo: AP

“We will make bold moves to remove any regulations that hamper corporate competitiveness and entrepreneur spirit, and take action against unfair practices that disrupt market order in accordance with laws and principles,” he said.

To help South Korean businesses face inflationary pressures, the government proposed to lower the maximum corporate tax rate to 22 percent, the average of countries in the Organisation for Economic Co-operation and Development.

The rate on about 100 of the largest companies has been 25 percent since 2018, when the former government increased it to pay for more social welfare.

Asia’s fourth-largest economy last year recorded its fastest annual expansion since 2010, but as the Yoon administration came to office last month, the country was suddenly facing global supply chain disruptions and resulting difficulty in sustaining exports.

The ministry said that the global economy was suffering from bottlenecks, plus the Ukraine crisis, inflation, faster monetary tightening in major countries, and COVID-19 lockdowns in China.

The ministry yesterday said that boosting capital investment in key technology sectors was one of its main policy initiatives.

Between 8 and 12 percent of big conglomerates’ investments in making semiconductors and organic light-emitting diodes would be deductible from corporate tax, up from the current 6 to 10 percent.

Separately, South Korea would improve foreign dealers’ access to US dollar-won trading. This would help the country in its quest for inclusion in the MSCI developed markets index.

The government plans to extend trading time of the dollar-won spot market to 17 hours from 9am to 2am. It would also allow dealers based abroad to participate, with details to be disclosed in the third quarter.

Currently, onshore dollar-won trading hours are 9am to 3:30pm and only locally licensed financial institutions can participate.

To revive share prices after the market’s fall of almost 18 percent this year, the government has decided to remove capital gains taxes on retail stock investors, except for holdings worth more than 10 billion won (US$7.75 million) in any one stock.

The government also plans to cut tax on stock transactions to 0.20 percent from 0.23 percent beginning next year.