By Jihoon Lee and Cynthia Kim
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.
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% from 3.1% and raised the inflation forecast from 2.2% to 4.7%, the fastest since 2008.
“Our economy and markets are being shaken as we are thrown into a complex crisis amid fears of stagflation,” Yoon said in a speech on Thursday.
“We will make bold moves to remove any regulations that hampers corporate competitiveness and entrepreneur spirit and take action against unfair practices that disrupt market order in accordance with laws and principles.”
To help South Korean businesses facing inflationary pressures, the government proposed to lower the maximum corporate tax rate to 22%, the average of countries in the Organization for Economic Cooperation and Development (OECD).
The rate on about 100 of the largest companies has been 25% since 2018, when the former government increased it to pay for more social welfare.
South Korea’s economy, Asia’s fourth largest, last year recorded its fastest annual expansion since 2010. But as the Yoon administration came to office last month, the country was suddenly facing global supply chain disruptions and resulting difficulty in sustaining exports.
The ministry said the global economy was suffering from bottlenecks, plus the Ukraine crisis, inflation, faster monetary tightening in major countries, and COVID-19 lockdowns in China.
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 the Bank of Korea will keep moving aggressively after hiking interest rates by 125 basis points 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% and 12% of big conglomerates’ investment in making semiconductors and organic light-emitting diodes will be deductible from corporate tax, up from the current 6% to 10%.
Separately, South Korea would improve foreign dealers’ access to U.S. dollar/Korean won (USD/KRW) trading. This will help the country in its quest for inclusion in the MSCI developed markets index.
The government plans to extend trading time of the USD/KRW spot market to 17 hours — 0000 GMT to 1700 GMT. It will also allow dealers based abroad to participate, with details to be disclosed in the third quarter.
Currently, onshore USD/KRW trading hours are 0000 GMT to 0630 GMT and only locally licensed financial institutions can participate.
To revive share prices after the market’s fall of almost 18% this year, the government has decided to remove capital gains taxes on retail stock investors, except for holdings worth more than 10 billion won ($7.74 million) in any one stock.
The government also plans to cut tax on stock transactions to 0.20% from 0.23% beginning next year.
($1 = 1,291.1900 won)
(Reporting by Jihoon Lee and Cynthia Kim; Editing by Bradley Perrett and Kim Coghill)