South Korea's incoming president Park Geun-hye may be saddled with an economy that underperforms for a prolonged period, increasing the allure of stimulus spending that could undermine the nation's fiscal strength.
Growth might stay below potential for a "considerable time", the Bank of Korea said yesterday after officials voted to keep interest rates on hold. Policymakers are concerned about the need to regain momentum after last year's 2 per cent expansion, the weakest since 2009. Governor Kim Choong-soo sees a potential rate of 3.8 per cent.
The yen's slide against the won, which has gained about 23 per cent against the yen in the past six months, is adding to challenges for Park by aiding the Japanese rivals of Korean companies such as Hyundai and Samsung. Deutsche Bank said Park, who takes office on February 25 after campaigning on pledges to boost welfare spending, may announce a 10 trillion won (HK$69.7 billion) extra budget in March.
"Fiscal stimulus is like a shot in the arm, but when growth is slowing in a protracted fashion, then that really doesn't help," said Erik Lueth, a Hong Kong-based economist at Royal Bank of Scotland. Leuth said the government needed to boost productivity in the services industry, aid small businesses and increase female participation in the labour force.
Standard & Poor's, Moody's and Fitch boosted South Korea's debt rating last year, with all three citing strong fiscal fundamentals and room to respond to external shocks.
Asia's fourth-biggest economy grew an average 4.3 per cent over the five years through 2007, before a US housing market crash triggered a global recession.
In the fourth quarter of last year, gross domestic product expanded 1.5 per cent from a year earlier, less than the forecasts of 1.8 per cent.
"If growth stays low for long, it's difficult, or even impossible, for it to return to its potential," Kim, the central bank governor, said last month.
The Bank of Korea said yesterday that growth remains at "a weak level" after declines in consumption, and the pace of the country's expansion will be capped by a slow global recovery.
Simultaneously, the domestic economy is showing signs of gradual improvement, according to the central bank. Frontloading of government spending in the first half of the year may help to support growth.
South Korea is among nations to voice concern about Japan's economic policies as Japanese Prime Minister Shinzo Abe drives down his nation's currency as part of a campaign to revive growth and end deflation.
Exchange rates will top the agenda for Group of 20 finance ministers and central bankers as they commence two days of talks in Moscow today.