Fiscal Policy

The US Department of the Treasury said that the South Korean government needs to adopt expansionary fiscal policy in the short term in its recent FX policy report to Congress.
The US Department of the Treasury said that the South Korean government needs to adopt expansionary fiscal policy in the short term in its recent FX policy report to Congress.

 

The Department of the Treasury of the United States said in its recent report that the South Korean government needs to adopt expansionary fiscal policy in the short term in view of the three factors of low growth, external uncertainties and its much fiscal room. “Although fiscal soundness should be maintained in the mid to long term, this is required in that its economic growth rate is as low as slightly over 2% with exports remaining sluggish and an interest rate hike by the Fed being around the corner in the face of external risks such as the insolvency of Deutsche Bank,” it explained.

Expansionary fiscal policy is being advocated by South Korean economists, too. “If the South Korean government fails at sufficient fiscal input at an appropriate time, the economy will take a direct hit and handling will take much more resources then,” one of them pointed out. Societe Generale recently predicted that the South Korean government is likely to come up with a supplementary budget next year due to a fiscal shortage and downside economic risks.

The South Korean government is stubborn though. Deputy Prime Minister Yoo Il-ho remarked that the government is concerned about a fiscal deficit with a large amount of fiscal resources already used. Vice Minister of Strategy & Finance Song Eon-suk echoed by saying that fiscal soundness is something that can rarely be recovered once lost as seen in the case of Japan.

In its most recent Report to Congress on International Economic and Exchange Rate Policies, the Department of the Treasury put South Korea on the monitoring list as it did in April. The department regards a country as a currency manipulator when it records a trade surplus of more than US$20 billion a year against the United States, records a current account surplus exceeding 3% of its GDP and shows a net dollar purchase exceeding 2% of its GDP. South Korea satisfied only the first two at this time. Specifically, its figures were US$30.2 billion and 7.9% along with a net dollar selling of 1.8%.

Still, the department continued to put pressure on the South Korean government when it comes to its foreign exchange policy. “South Korea’s current account surplus is too much even in view of low international prices,” it said, continuing, “The amount will reach 6.2% of its GDP even in a case where the international oil price rises to US$80 or so per barrel.” It also pointed out that the South Korean government has yet to disclose the history of its forex market intervention unlike many emerging and advanced economies. Deputy Prime Minister Yoo Il-ho recently said that the government would disclose the history after acceding to the Trans-Pacific Partnership (TPP). In addition, the U.S. Department of the Treasury mentioned that the South Korean currency is currently undervalued by 4% to 12% on a real effective exchange rate basis.

 

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