What to make of Korea’s stimulus package?

The Korean government today announced plans for a fiscal stimulus package worth about 20trn won (equivalent to 1.3% of GDP) in response to growing headwinds facing the economy. The decision follows the Bank of Korea’s move to cut interest rates to a new record low earlier this month. Details of the stimulus package are still thin on the ground. Although reports suggest the stimulus will consist of an extra 10trn won in government spending and a further 10trn won in investments from state-owned enterprises (SOEs), it is unclear how much of this is new money and whether the investment from SOEs will even materialise. Given this, we doubt the boost to growth will be anywhere near as big as the headline figure indicates. The government today also cut its growth forecast for this year from 3.1% to 2.8%. With external uncertainties rising following the UK’s vote to leave the EU and the recovery in China proving weaker-than expected, the risks to our 3.0% growth forecast for 2016 are firmly to the downside. We will be reassessing our forecasts in the next Emerging Asia Outlook, to be published next month.