Soth Korea Forecast-Jan 30th 2006

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Soth Korea Forecast-Jan 30th 2006

From the Economist Intelligence Unit
Source: Country Forecast

The political authority of the president, Roh Moo-hyun, will diminish as the next presidential election draws closer at end-2007. Jockeying for position ahead of the election could also trigger splits in existing parties. One indicator of the popularity of the parties will come in the results of the mid-2006 local elections. Fiscal policy is unlikely to be relaxed further in 2006-07, and monetary policy will be tightened slowly. Real GDP growth will pick up in 2006 to 4.8%, reflecting a firming of domestic demand, and ease back to 4.1% in 2007. Further rises in global oil prices could, however, slow the recovery. The won will firm against the US dollar over the forecast period, so helping to contain inflation. The current-account surplus will decline to an average of 1.3% of GDP in 2006-07 from an estimated 2.4% in 2005.

Key changes from last month

Political outlook

The president undertook a miniature cabinet reshuffle on January 2nd, including the appointment of a former deputy head of the National Security Council, Lee Jong-seok, to head the unification ministry. Differences between Roh Moo-hyun and the ruling Uri Party have, however, forced the president to postpone the appointment of a new health and welfare minister, providing further evidence of the Roh Moo-hyun's weakening grip on his party.

Economic policy outlook

The Bank of Korea (BOK, the central bank) raised its target for the overnight call rate by 25 basis points to 3.75% in its December policy meeting. The Economist Intelligence Unit continues to believe, however, that the BOK will maintain a generally cautious policy stance over the early part of 2006 until the domestic demand recovery puts down firmer roots.

Economic forecast

Industrial production rose by a stronger than expected 12.2% year on year in November 2005, mainly on the strength of the booming export sector. This augurs well for a firming of economic activity in the coming months.


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