New South Korean finance chief makes his mark with plan for economic reform
New finance chief has given the economy a quick-fix boost but analysts are calling for more long-term solutions to tackle key problems
Tony Munroe and Christine Kim
Three frenetic weeks into the job, South Korea's new finance minister Choi Kyung-hwan has made such a splash that his name already describes Seoul's plans to rev up faltering growth.
But while "Choinomics" is proving an effective quick fix, lifting markets and giving an unpopular government a boost, it falls short thus far of a full-fledged manifesto similar to the "Abenomics" launched by Japanese Prime Minister Shinzo Abe in 2012 to shake his country from its economic torpor.
Economists say bolder measures to reform structural weaknesses are needed to head off what Choi warns is a serious threat that Asia's fourth-largest economy could slide into Japan-style stagnation.
The veteran lawmaker's plan combines extra spending with an easing of mortgage curbs to boost the property market, a proposal to tax excess corporate cash reserves, and not-so-subtle pressure on the central bank to ease interest rates. It has already helped dispel some of the gloom hanging over the economy since the April 16 sinking of the Sewol ferry that killed more than 300.
Since Choi's appointment, the benchmark stock index has risen 4 per cent in anticipation of higher dividends, while bond prices are also up, reflecting rate cut bets. "He's certainly made a splash since he came into office," said Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong.
Still missing, though, are long-term solutions to South Korea's problems: over reliance on manufacturing and exports at the expense of consumption and services, a rapidly ageing population, inefficiencies in the labour and housing markets, high household debt, and the often-stifling dominance of giant conglomerates such as Hyundai, Samsung or LG, known as chaebol.
President Park Geun-hye in February spoke of plans to rebalance the economy, but like many before has made little headway in following up. Choi's tax plan, to be detailed tomorrow, is the most ambitious part of his package. It aims to boost investment, wages and dividend payouts in order to stimulate consumption.
In theory, it would go some way towards promised rebalancing. The question is whether it can work.
Park Ju-gun, co-president of corporate watchdog CEO Score, said he doubted taxing reserves will force businesses to spend more: "There are many ways they can avoid doing this."
Some economists also point out Choi's US$40 billion stimulus, equivalent to 3 per cent of the economy, is less than meets the eye. Only about US$11 billion is represented by fiscal spending and much of the rest is in the form of financial support from the central bank and state banks that may have limited impact on growth.
ANZ Banking Group, however, considered the stimulus boost and expected monetary easing sufficient to raise its 2014 South Korea growth forecast to 3.6 per cent from 3.4 per cent and next year's to 3.7 per cent from 3.4 per cent.
Choi - nicknamed "the Bull" for his hard-charging style - is promising more, including an expansionary budget next year and possibly beyond. Further potential steps include relaxing construction regulations, incentives for companies to hire part-time workers and encouraging investment in services and smaller enterprises.
Some commentators credit Choinomics for the ruling party's strong showing in last week's by-elections, where it won 11 of 15 contested seats, strengthening its majority and making it easier for Choi and Park to push further reforms. "The opposition will be more receptive to the government's push to boost domestic demand," said JP Morgan economist Lim Ji-won.
However, Choi is unlikely to pursue policies that would inflict much pain on chaebol, which power South Korea's exports and back Park's conservative Saenuri Party. Choi has already sought to manage expectations.
"Regulatory reform cannot solve everything in a day and there are limits, but we will strive to have money flowing into the markets from investment and reform," he told parliament soon after taking office.
Critics also say Choi's steps to boost the property market risk undermining efforts to rein in high consumer debt for the sake of a short-term boost.
"Stocks will rise even at the thought of dividends, even if they do not materialise. But the real estate market is depressed and will be difficult to engage," said Oh Suk-tae, economist at Societe Generale in Seoul.