With the presidential election slated for December 2012, the Korean administration is likely to focus on firmer fiscal policy and welfare promotions rather than growth-oriented measures in a bid to appease the low-to-mid-income group, Morgan Stanley said.

In a new research report titled “2012 Election Year: Market Implications,” Morgan Stanley forecast that the Korean government will not go for any stimulus plans aimed at stressing economic growth as creating jobs and taming inflation remain the top priority.

The company also predicted that the central Bank of Korea will raise the key interest rate only once to 3.5 percent for the remainder of the year, departing from general views that BOK might hike the rate twice during the period.

“The continuous rise in inflation, coupled with negative real interest rates, high household debt, weak equity market performance and property prices, are certain to have an impact on voters,” it said.

Unlike other countries where growth takes the center stage ahead of elections, the Korean government has not carried out aggressive stimulus measures to boost growth for election purpose, Morgan Stanley said.

The primary reason is that Korea logged consecutive years of fiscal surplus from 2000 to 2008 and the rate of its tax revenue against gross domestic product is higher than other emerging economies in Asia, while its debt level of 32 percent of GDP is the lowest among the Organization for Economic Cooperation and Development countries.

As for the low possibility that stimulus measures will be taken in the following months, Morgan Stanley said the Korean president serves only one term in a system that makes it less convincing to introduce aggressive stimulus polices. In addition, President Lee Myung-bak and the ruling Grand National Party are divided on the planned tax cut for the wealthy, making it hard for the policymakers to introduce major policy changes before the elections.

Morgan Stanley cautioned that “Koreans are overspending,” citing the record high credit cards issued to consumers and surging household loans.

The rising household loans and debt burden are expected to force the central bank to refrain from raising the interest rates at a faster clip, despite the galloping consumer prices, which registered a 4.4 percent gain in June. Morgan Stanley projected that “the anti-inflation campaign will continue but using administrative measures rather than monetary policies,” adding that only one more rate hike of a quarter percentage point in the next 18 months.

The BOK kept the rate at 3.25 percent unchanged last month after staging a surprise hike in June amid growing worries over the spiraling prices that could undercut the economic health.

By Yang Sung-jin (insight@herldm.com)