No major economic policy impact from S Korea legislative elections

SINGAPORE (ICIS)–South Korea’s legislative elections on 10 April will unlikely have a material impact on the country’s near-term economic policies, but a majority win by the conservative People Power Party (PPP) would allow President Yoon Suk-yeol to implement his fiscal priorities.

His People Power Party does not control majority of the 300-seat National Assembly, which is dominated by its rival Democratic Party since 2020.

“President Yoon Suk-yeol could find it easier to advance his fiscal and economic reform agenda if the opposition’s current majority in the National Assembly is reduced or overturned,” Fitch Ratings said in a note.

Yoon, who was elected as South Korea’s president in March 2022, has proposed to eliminate capital gains tax but this continues to face opposition from the Democratic Party.

In January, the South Korean government leader pledged to overhaul the country’s tax system, which he perceives as excessively burdensome, discouraging stock investments.

“Passage of the administration’s fiscal rule, which is under discussion in the [legislative] body, could help anchor fiscal policy in the medium term,” Fitch Ratings said.

If the ruling PPP wins, it is expected to have a positive effect on tax reforms, corporate value-up programs, and lifting a short-selling ban, as the government pushes for these reforms in the National Assembly, Global Markets Research said in a note.

However, should the opposition democratic party win, they are likely to urge increased fiscal spending in 2025 and beyond, aligning with their preference for an expansionary fiscal policy, it said.

With the democratic party currently in the majority, South Korea’s budget for 2024 was passed with few changes to the government’s original proposal.

“However, both parties are calling for some kind of fiscal stimulus – the DP argues for a cash transfer programme, while the PPP prefers a reduction in value-added tax (VAT) – and fiscal policy may, therefore, turn more supportive for growth in the second half of this year,” ING said.

“Although the general election will likely change the current political landscape, we expect the election results to have a limited impact on economic policy, as the National Assembly does not have executive powers,” Nomura said.

“We believe the general election results will have no impact on monetary policy as the Bank of Korea (BoK) will remain independent, regardless of the election results,” it added.

The BoK, which is scheduled to meet two days after the parliamentary elections, is expected to deliver a dovish hold on interest rates in response to intensifying slowdown in the domestic economy, Nomura said.

“We expect the BOK to enhance its dovish signals, including a dovish tweak to the policy statement and lowering the dot plot, which would support our forecast for a first 25 basis point cut in July, and subsequently take the policy rate down substantially to 2.5% by end-2024, from the current 3.5%.”

In March, South Korea’s central bank indicated interest rate cuts were unlikely in the first half of 2024 as inflation remains above target. It has left its benchmark interest rate unchanged at 3.50% since January 2023.

Consumer inflation in March stood at 3.1%, unchanged from February, amid higher oil prices.

South Korea is Asia’s fourth largest economy – after China, Japan and India – and a major petrochemical net exporter.

Its GDP growth weakened to 1.4% last year from 2.6% in 2022, weighed down by high interest rates; economic slowdown by China, its biggest trading partner; and poor global demand for memory chips, its primary export.

Focus article by Nurluqman Suratman