BOK See Economic Recovery in Second Half Unlikely

As Bank of Korea (BOK) has lowered its outlook for 2003 economic growth from 4.1% to 3.1% following the Korea Development Institute`s downward revision, the government has decided to lower its growth target from the 4% to the 3% level.

Along with this, the central bank cut the overnight call rate by 0.25 percentage points to stimulate the sagging economy, while the government has decided to pursue measures to invigorate corporate investment, such as deregulation in the capital area, in addition to the implementation of a supplementary budget.

At a Monetary Board meeting on Thursday, the central bank cut the call rate by 0.25 percentage points from 4.0% to 3.75% and the loan rate for liquidity control from 3.75% to 3.5% in order to advance economic recovery.

This rate cut followed the 0.25 percentage point cut in May, this year. Therefore, the call rate was reduced by a total of 0.5 percentage points this year.

"There are clear signs of contracting domestic demand and economic slowdown. In addition, considering conditions at home and abroad, it is difficult to expect that the economy will rapidly grow even in the second half," BOK governor Park Seung said. "Because of the continuous downward trend in consumption, investment, production and construction, it was inevitable to boost consumption by interest rate cut."

The BOK revised its current account forecast for this year from a $1 billion deficit to a surplus of $2 billion and its inflation rate prediction from 3.9% to 3.5%.

By quarterly growth rate, the central bank expected a 3.7 % growth for the first quarter, 1.9% for the second quarter, 2.7% for the third, and 3.8% for the fourth.

Meanwhile, Kim Jin-pyo, deputy prime minister for finance and economy, convened an economy-related ministerial meeting on Thursday to prepare an economy management plan for the second half, centering on promotion of investment.

The government concluded that reductions in earned income tax and special exercise tax as well as the implementation of the \4.2 trillion supplementary budget, being discussed in the National Assembly, are not enough to stimulate the economy through domestic demand increase because of consumer confidence is depressed. Therefore, the government decided to inject new vigor into the faltering economy by expanding corporate and foreign investment.

To do so, the government plans to ease regulations preventing the extension of high-tech industry plants in the capital area, which could have a huge impact on the economy.

It will also apply reduction in taxes, including the corporate tax, to privately established foreign company industrial complexes and prepare other incentives to attract foreign investment, including enhancement of foreign workers` living conditions.

And as the government also concluded that if the current economic downturn continues into the second half, more and more small and medium-sized companies will become insolvent, thereby influencing the financial market, it decided to strengthen its financial support to such companies.

Kwu-Jin Lim Kwang-Am Cheon mhjh22@donga.com iam@donga.com