In a meeting with reporters last week, Finance Minister Choi Kyung-hwan dismissed warnings that the Korean economy may be facing its worst ever conditions as exaggerated.

“Some have said our economy is heading toward a grave crisis, but all data are showing Korea is doing better than most of its peer countries under difficult situations,” he said.
Choi, who concurrently serves as deputy prime minister for economic affairs, argued that if exports had not fallen, Asia’s fourth-largest economy could have expanded by nearly 4 percent this year. As he indicated, declining exports are projected to push down the country’s 2015 growth rate by about 1 percentage point below 3 percent.

Still, his remarks were rebuffed by economists here as far from reality. They note that the Korean economy is becoming mired in a complicated set of problems that might be resolved only through speedy and thorough structural reforms.

“None of the difficulties confronting our economy are easy to solve,” said Cho Young-moo, an analyst at LG Economic Research Institute. “Temporary stimulus measures may no longer be instrumental in revitalizing the economy.”

The combined turnover of Korean companies, which decreased by 1.2 percent last year, marking the first annual decline since the national statistical office began compiling related data in 2006, is expected to shrink at a steeper pace this year.

More than 3 in 10 local firms have failed to generate enough profits to pay interest on their debts for three consecutive years.

Amid a slump in global trade, the country’s exports fell by 7.4 percent from a year earlier in the first 11 months of the year. With their competitiveness eroded by rivals from both advanced and emerging nations, Korea’s manufacturing exporters, which have led the country’s rise to become a major economic powerhouse, are becoming more of a drag on its growth.

The economic team headed by Choi, who took office in July last year, has tried to shore up the economy with a series of measures to bolster domestic demand. The finance minister’s remarks last week might be seen as pointing out that the efforts to boost the property market and consumer spending had prevented the economy from being drawn into a steep downturn.

But economists note such stimulus measures have treated only the symptoms, rather than the underlying cause of Korea’s deepening economic woes.

In fact, Korea’s ratio of national debt to gross domestic product is on the brink of surpassing 40 percent and household debt has risen to nearly 1.2 quadrillion won ($1 trillion) as Choi has been pushing to galvanize domestic expenditure by drawing up a supplementary budget, reducing consumption tax rates and holding nationwide sales promotion events.

The chief economic policymaker said at a year-end meeting with reporters that the Korean economy would face tough challenges in 2016 as overall conditions at home and abroad might show little improvement.

“Everyone must be on guard as the New Year is certain to be full of difficulties,” said Choi, a third-term lawmaker.

His critics indicate that the minister, who is expected to step down soon to run for reelection in next April’s parliamentary polls, will leave his successor with few stimulus options, as he has used most of them up. They caution that the country may be pushed over a “consumption cliff” as early as the first quarter of next year.

Economic commentators take note of the rising ratio of household debt to disposable income as a key indicator of depleting spending power. The figure was estimated to reach 166.9 percent in June.

Given these more adversary circumstances, local economic research institutes dismiss the government’s 2016 growth forecast of 3.3 percent as being simply out of reach. Instead, they predict Korea’s growth rate will be in the middle to upper 2 percent range next year, similar to this year’s level estimated to hover around 2.7 percent.

The foreseen exhaustion of stimulus measures further heightens the need to accelerate structural reforms that are essential to prevent the economy from being trapped in the frame of low growth, economists say. They criticize Choi and his predecessors for having been reluctant to carry out restructuring work in a bold and thorough manner out of concerns over its short-term painful impact.

On Wednesday, the government is scheduled to disclose economic policy directions for 2016, which many economists say should focus on suggesting firm and specific measures to speed up structural reforms and finding new growth engines to buttress the Korean economy in the coming decades.

By Kim Kyung-ho (khkim@heraldcorp.com)