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The Korean government will adopt a conservative stance on fiscal policy next year according to its 2016 budget proposal unveiled yesterday. Total budget spending will increase to KRW 386.7trn, only KRW 2trn more than this year's. Net fiscal deficit will be reduced to 2.3% of GDP, down from the 3.0% this year.
While the scale of next year's spending plan is smaller than expected, the support of fiscal policy on the economy will remain in place. This is because the 2015 supplementary budget has just been approved in July, the positive effects of which will continue through 2H15-1H16. The size of the supplementary budget amounts to KRW 12trn, which alone, should boost GDP growth by 0.7ppt in the next four quarters. There is little reason to argue that the Bank of Korea will face greater pressures to ease monetary policy as fiscal stimulus is wound down.
"We think the odds are high that the BOK will keep rates unchanged at 1.50% when they meet to review monetary policy this Friday," notes DBS Bank.
"In fact, the recent economic data were not too bad. The headline news focused on the sluggishness in exports, industrial production and PMI figures. But the improvement in retail sales, consumer confidence and services activities was neglected. The full set of data still bolsters the BOK's core view that the growth cycle has bottomed in 2Q15 and will pick up in 2H15. As such, interest rate cycle should have also hit the bottom."
