Below is an article from “Moody‘s Credit Outlook”, 16 Jun 2016 issue.


Last Friday, Korea’s (Aa2 stable) Ministry of Strategy and Finance (MOSF) announced that it had collected KRW96.9 trillion in taxes in the first four months of the year, a 23% increase from the same period a year earlier and already 43% of the government’s targeted tax revenues for 2016.

The increased revenue is credit positive for the sovereign because it supports government finances. Moreover, the increased tax revenue reflects an increase in corporate profits and a rise in consumption, which indicates that the government’s policies to boost domestic demand to offset weak external demand are working, which is important given the Korean economy’s openness and dependence on China (Aa3 negative).

Fiscal stimulus in the form of extra public spending measures and tax cuts in 2015 have contributed to increasing domestic consumption, which in turn has led to higher tax revenues. 

Year-to-date corporate income tax revenues through April increased 31.3% from a year earlier, while personal income tax revenues grew 22.8%. Value-added tax (VAT) receipts also increased by 22.4% (see Exhibit 1). 

According to the MOSF, local companies’ improved earnings in 2015 drove the increase in corporate tax receipts while increased consumer spending in the first quarter of 2016 drove the increase in VAT receipts.



Trends in quarterly GDP data also illustrate the effectiveness of the government’s counter-cyclical policies in 2015, as the growth contributions of private consumption and investment increased throughout the year (see Exhibit 2).



Dampened global growth in recent years weakened demand for Korean exports and real GDP growth slowed to 2.6% in 2015 from 3.3% in 2014. At the same time, an outbreak of Middle East Respiratory Syndrome in May 2015 dampened consumer confidence and threatened to reverse an incipient recovery in domestic demand, which deteriorated following the Sewol ferry disaster in April 2014.



In response, the government announced a KRW15 trillion fiscal stimulus package and implemented several measures to bolster domestic demand, including tax cuts, targeted increases in government spending, and an official Black Friday sales day. Other measures include KRW3.1 trillion in additional funds spending, around KRW6.8 trillion in accelerated public and private investment and government-backed loans, and a frontloading of 29.2% of the 2016 budget in the first quarter of the year. In addition, the Bank of Korea cut interest rates twice in 2015 and most recently in early June, bringing the policy rate to 1.25%.



We expect real GDP growth to slow slightly to 2.5% this year, driven primarily by further growth slowdown in China, which is Korea’s largest export destination, accounting for 26% of exports in 2015, and restructuring in the corporate sector. High frequency indicators also point to a slowdown in consumption and consumer sentiment in the early months of this year, which led the government to announce that it would soon reveal another fiscal stimulus package for the second half of the year.



The Korean government’s strong fiscal position creates space for such counter-cyclical policy measures. Even with supplementary spending measures, the government only posted a small KRW200 billion (0.01% of GDP) fiscal deficit in 2015. In the first four months of this year, total expenditures increased by 3.3%, but because total revenues (including non-tax and fund revenues) increased by 13.6%, the overall fiscal balance remained in a surplus of about KRW4.2 trillion (0.3% of 2015 GDP), and we expect it to remain in a small surplus of about 0.2% of GDP for the year. Data since 2011 show that government expenditures tend to be higher in the first half of the year, whereas revenues are generally more stable or slightly higher in the second half.



Shirin Mohammadi, Associate Analyst, Sovereign Risk Group, Moody‘s Investors Service, Inc.
Steffen Dyck, Vice President - Senior Credit Officer, Sovereign Risk Group, Moody’s Deutschland GmbH



Source: Moody’s https://www.moodys.com/