Call for supplementary budget expected to grow

By Kim Jae-won

The government faces growing pressure for a supplementary budget after the Bank of Korea cut its growth forecast amid increasing deflationary risks, analysts said Friday.

The government has drawn up a 375 trillion won budget. But analysts say it will be insufficient to help boost economic growth and fight growing deflationary pressure.They also expect the central bank to cut its key rate further in the second quarter to boost domestic consumption and investment.

Bank of Korea (BOK) Governor Lee Ju-yeol cut its growth forecast to 31 percent from 34 percent. He also cut its forecast on consumer price index (CPI) growth for the year to 09 percent from 19 percent, referring to declining demand and low oil prices.

It is the lowest growth in consumer prices in about 16 years.

Foreign investment banks said the government should expand its budget if it did not want to repeat last year’s fiscal drag.

“The government has to implement extra fiscal measures in the middle of this year to bolster economic growth in the second half of 2015, on top of the existing expansionary macro measures,” said Citibank economist Chang Jae-chul in a report.

Chang said the government was highly likely to face fiscal drag in the fourth quarter due to shortfalls in tax revenue and the front loading of the budget in the first half of this year by 58. 6 percent.

But the Ministry of Strategy and Finance is reluctant to do so, saying it is too early to consider extra fiscal measures. The ministry’s forecast on gross domestic product (GDP) is 38 percent while its estimation on CPI is 19 percent.

Meanwhile, BNP Paribas said the BOK’s forecast on Asia’s fourth-largest economy was still too optimistic and that the country’s GDP would not expand more than 3 percent in 2015.

The Paris-based global bank expected the Korean economy to grow 27 percent this year, and forecast the central bank would cut the key rate in the second quarter

“A split vote at the BOK meeting suggests the policy outlook is far from clear cut, and we remain of the view that near-term growth will likely disappoint the BOK sufficiently to prompt another rate cut this quarter,” said BNP Paribas economist Mark Walton in a report.

Walton also said Korea’s exports would be hit by weaker economic activity in the US, one genuine source of demand strength for local exporters over the past few quarters. He said a recent bout of weaker US activity pointed to a likely drag on Korea’s GDP growth in the first quarter from net exports.

Shin Dong-joon, of Hana Daetoo Securities, said in a report that the central bank might have to cut the interest rate again to achieve revised economic growth of 31 percent.

“I expect discussions about a supplementary budget and additional rate cuts will start in the second quarter,” he said.

Park Jong-yeon, of NH Investment amp Securities, also said the central bank was expected to cut its key rate in June.

“If the central bank finds it difficult to achieve the 31 percent growth forecast, an additional rate cut is possible,” he said.

SOURCE: The Korea Times

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