South Korea cuts 2022 growth outlook, raises inflation forecasts

SEOUL (REUTERS) - South Korea's economy will grow at its slowest pace in three years in 2022, as the world faces supply bottlenecks, surging inflation and rapidly rising interest rates, the Finance Ministry said on Thursday (June 16).

Setting out its first economic policy initiatives, the new government of President Yoon Suk-yeol said it had lowered this year's growth forecast to 2.6 per cent from 3.1 per cent, and raised the inflation forecast from 2.2 per cent to 4.7 per cent, the fastest since 2008.

"We are putting our utmost priority in stabilising prices as that is our shared understanding," Finance Minister Choo Kyung-ho said, referring to Bank of Korea (BOK) governor Rhee Chang-yong and other top policymakers, with whom he had met earlier on Thursday.

To help South Korean businesses reduce inflationary pressure, the government proposed that the maximum corporate tax rate be lowered to 22 per cent, the average of countries in the Organisation for Economic Cooperation and Development. The rate on about 100 of the largest companies has been 25 per cent since 2018, when the former government increased it to pay for more social welfare.

South Korea's economy, Asia's fourth largest, last year achieved its fastest annual expansion since 2010. But as the Yoon administration took office last month, the country was suddenly facing global supply chain disruptions and the resulting difficulty in sustaining exports.

The ministry said the world economy was suffering from bottlenecks, in addition to the Ukraine crisis, inflation, faster monetary tightening in major countries and lockdowns in China.

Mr Yoon pledged in his election campaign to support a "private-sector-led economy". His measures would help corporate South Korea cope with higher minimum wages, rising borrowing costs and the previous administration's limits on working hours.

Markets are predicting that the BOK will keep moving aggressively after implementing 125 basis points of interest rate rises since mid-2021. The expected further rises will likely hit private consumption for households saddled with the world's highest debt loads.

On Thursday, the ministry said boosting capital investment in key technology sectors was one of its main policy initiatives. Between 8 per cent and 12 per cent of big conglomerates' investment in making semiconductors and organic LEDs will be deductible from corporate tax, up from the current 6 per cent to 10 per cent.

To revive share prices after the market's fall of almost 18 per cent this year, the government has decided to remove capital gains taxes on retail stock investors, except for holdings worth more than 10 billion won (S$10.8 million) in any one stock.

The government also plans to cut tax on stock transactions to 0.2 per cent from 0.23 per cent beginning next year.