South Korean authorities likely to adopt additional reflationary policies to boost economy

The South Korean authorities are likely to adopt additional reflationary policies to boost the country’s economy in the coming months. Finance Minister Yoo Il-ho, on Thursday, cautioned against rising downside risks to the economy and promised to bolster risk management of increasing household debt. Just recently, the finance minister stated that the country’s budget 2017 would be planned in an expansionary manner with fiscal discipline and asked the parliament to agree to supplementary budget that requires being executed before Chuseok holidays in September.

Private consumption and facilities investment have been adversely impacted by Korea’s declining exports. This has been a drag on the nation’s economic growth. In the second quarter, capital investment fell 2.6 percent year-on-year after declining 4.5 percent in the first quarter as global uncertainties daunted local firms from investing in new facilities.

Cash reserves held by South Korea’s corporate reached a record high of KRW 614.4 trillion as of the end of June. Moreover, private consumption dropped 0.2 percent in the first quarter sequentially, predominantly because of increasing household debt.

Stem risk management of consumer debt is needed to stimulate domestic consumption and improve financial stability.  This will then make way for the Bank of Korea to deliver additional rate cuts when required, although the KRW ND IRS has priced in “ a decreasing chance of a rate cut in the months  ahead”,  noted Scotiabank in a research report.

“We think continued reflationary policies are generally supportive of local financial markets given sluggish real economy, sending stock index higher and dragging down bond yields”, added Scotiabank.