Experts upbeat about Korean economy

Two months into 2010, clouds are gathering on the economic horizon, mostly coming from the overseas.

Despite a great deal of uncertainty in the global economic environment, market consensus on Korea remains positive that Asia`s fourth-largest economy will continue its upward trend in 2010. The Korean government forecast that GDP will grow about 5 percent this year.

The Korea Herald met two economists to discuss the current state of Korean economy and challenges it faces.



`5% growth achievable`



Sharon Lam, a Morgan Stanley economist covering Asian countries, says 5-percent growth is "very easily achievable."

Low inventory is one of the key data backing her view. "Inventory is lagging production by a margin that we have never seen before." "This means (Korean firms) will need to accumulate bigger inventories, going forward," Lam said.

She said Morgan Stanley has projected GDP growth rates of the world`s 15 major economies for the period of 2009-2011 and Korea came out in the third place, after India and China.



"This means we can say that Korea is still a fast-growing economy."

Morgan Stanley has held a more bullish outlook on Korea than the market consensus in 2009, and the Korea economy`s performance has justified their stance.

"Korea is likely to see above-trend growth in 2010 again and it will not be just driven by exports, as we have seen in 2009. It will be a more balanced growth," Lam said.

She forecast the Bank of Korea to start raising the interest rate from the current record-low level in the first quarter. The central bank`s monetary policy board is scheduled to meet today to decide whether to move the key rate from 2 percent.

"The current interest rate is not in line with economic conditions," Lam said. "If the BOK continues to delay the rate hike, the real interest rate will be in the negative. Have you ever seen real interest rates in the negative while economy is growing? That`s not in line," she said.



Stable upward trend



Oh Suk-tae, the chief economist of Standard Chartered First Bank, says that, to the eyes of outsiders, Korea`s economy is recovering smoothly.

"After pulling off a V-shaped recovery in 2009, Korea`s economy is expected to show a more stable upward move," he said.

Still, the pace of export growth will slow from last year, as the global inventory restocking cycle fades. Korea`s exports will largely hinge on real demand, he said.

As for global concerns over fiscal deficits, Korea`s government is in better shape than its peers in the West, having already planned a 3 percent cut in fiscal spending in 2010 from last year.

A fourth wave of external shocks may hit Korea, Oh warned, if and when data point to a slower than expected improvement in the United States.

The three other shocks that have already reached Korea are the European debt worries, the U.S. government`s move to tighten bank controls and a possible withdrawal of stimulus measures in China.

On Korea`s interest rate level, Oh said he expects the BOK to raise the benchmark rate today and again next month, each by 0.25 percentage point.

"As an economist, I see the necessity of interest rate hikes, but there seems to be other factors working against it such as the current global market conditions and the government`s opposition," he said.

Whether the BOK decides to raise it or not, uncertainty about Korea`s monetary policy stance will be cleared to some degree by today`s decision, he said.

(milaya@heraldm.com)







By Lee Sun-young