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Fed policy shakes up Korean growth forecasts

More think tanks may lower growth outlook amid U.S. money tightning

Though some state and private think tanks had painted a rosy picture for Korea’s GDP growth in the second half, recent remarks by U.S. Federal Reserve Chairman Ben Bernanke have emerged as a fresh factor for uncertainty.

Deputy Prime Minister and Finance Minister Hyun Oh-seok said last Monday that economic growth is projected to reach 3 percent or more in the latter half of 2013 and 4 percent in 2014.

Some private research institutes also predicted higher growth rates, compared to the estimated 2 percent growth in the first half of the year.

Bernanke’s remarks hinting at tighter monetary policy in the U.S. came last Thursday, three days after Minister Hyun’s optimistic comments in his policy briefing to the National Assembly.

While there had been speculations in the market that the Finance Ministry was moving to revise its outlook on the 2013 GDP up from its earlier estimate of 2.3 percent to 2.7 or 2.8 percent, market participants say that the government will have no choice but to take the recent U.S. policy to reduce monetary easing into serious consideration.

On Sunday, Hyundai Economic Research Institute cited the U.S. exit strategy to retrieve state funds as one of the several key factors that may negatively affect the Korean economy.

“Korea’s composite stock prices will drop and the dollar will rise against the Korean won from a capital outflow led by foreign investors,” HERI research fellow Rim Hee-jung said in a report.

The private think tank lowered its yearly GDP forecast to 2.6 percent, from its earlier estimate of 3.1 percent.

Last week, major foreign investments also revised their outlook down from 2.9 percent to 2.8 percent on average.

Deutsche Bank and JPMorgan were the most pessimistic of the Korean economy by suggesting a figure of 2.5 percent.

As an unusual case compared to past years, the Finance Ministry had suggested a lower figure than the average private-sector prediction.

Though the government had reportedly sought to raise its outlook by 0.4 or 0.5 percentage point to boost positive sentiment for recovery, its stance will likely be more prudent in revising the estimate up by a large margin, according to macroeconomists in the private sector.

In an apparent response to the government’s drive to boost the economy, the Bank of Korea lowered the yearly benchmark interest rate by 25 basis points to 2.5 percent in May.

The BOK, however, is expected to raise the rate again to block negative effects from a “decoupling” with the U.S., which is seeking higher interest rates.

By Kim Yon-se (kys@heraldcorp.com)
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