By Jihoon Lee and Cynthia Kim
SEOUL (Reuters) – South Korea’s economy will see its slowest pace of growth in three years in 2022 as the world faces supply bottlenecks, soaring inflation and a rapid rise in interest rates, the finance ministry said on Thursday.
Outlining its first economic policy initiatives, President Yoon Suk-yeol’s new government said it had lowered this year’s growth forecast to 2.6% from 3.1% and raised the inflation forecast by 2 .2% to 4.7%, the fastest since 2008.
“Our economy and our markets are reeling as we are plunged into a complex crisis amid fears of stagflation,” Yoon said in a speech Thursday.
“We will take bold steps to remove any regulations that hinder business competitiveness and entrepreneurship and take action against unfair practices that disrupt the market order in accordance with laws and principles.”
To help South Korean businesses facing inflationary pressures, the government has proposed lowering the top corporate tax rate to 22%, the average for Organization for Economic Co-operation and Development (OECD) countries.
The rate for around 100 of the biggest companies has been 25% since 2018, when the former government increased it to pay more social protection.
South Korea’s economy, Asia’s fourth-largest, recorded its fastest annual growth since 2010 last year. But when the Yoon administration came to power last month, the country suddenly faced challenges. global supply chain disruptions and difficulties supporting exports.
The ministry said the global economy was suffering from bottlenecks, as well as the Ukraine crisis, inflation, faster monetary tightening in major countries and COVID-19 lockdowns in China.
Yoon pledged during his election campaign to support a “private sector-led economy”. His measures would help South Korean businesses cope with higher minimum wages, rising borrowing costs and limits imposed by the previous administration on working hours.
Markets expect the Bank of Korea to continue to act aggressively after raising interest rates by 125 basis points since mid-2021. The further increases expected will likely affect the private consumption of the most indebted households in the world.
On Thursday, the ministry said increasing capital investment in key technology sectors was one of its key policy initiatives. Between 8% and 12% of investments by large conglomerates in the manufacture of semiconductors and organic light-emitting diodes will be deductible from corporate tax, compared to 6% to 10% currently.
In addition, South Korea would improve foreign traders’ access to US dollar/Korean won (USD/KRW) exchanges. This will help the country in its quest for inclusion in the MSCI Developed Markets Index.
The government plans to extend the USD/KRW spot market trading time to 5pm – 0000 GMT to 1700 GMT. It will also allow overseas-based dealers to participate, with details to be disclosed in Q3.
Currently, onshore USD/KRW trading hours are 0000 GMT to 0630 GMT and only locally licensed financial institutions can participate.
To revive stock prices after the market fell nearly 18% this year, the government decided to scrap capital gains taxes on retail investors, except for holdings of a worth more than 10 billion won ($7.74 million) in one stock.
The government also plans to reduce the stock transaction tax to 0.20% from 0.23% from next year.
($1 = 1,291.1900 won)
(Reporting by Jihoon Lee and Cynthia Kim; Editing by Bradley Perrett and Kim Coghill)