Forex Flash: South Korean Fiscal front-loading should boost Q1 GDP - Nomura

Nomura Economist Young Sun Kwon notes that the government's plan to spend 60% of its annual expenditure budget in H1 should contribute markedly to Q1 GDP in seasonally adjusted growth terms.

He comments that since the 2008 financial crisis, Korea‟s government has spent about 60% of its annual expenditure budget in H1 to support domestic demand (for example, 60.8% and 60.1% in 2010 and 2012, respectively). This year, the government‟s fiscal frontloading target ratio is also set at 60%. He is expecting government consumption to increase by 3.1% (sa) q-o-q in Q1 and contribute 0.4 percentage points to our 0.7% Q1 2013 GDP growth forecast.

Young feels that due to this fiscal front-loading, Q2-Q4 2013 GDP will likely be dependent upon private sector domestic demand and exports, on which he is sanguine. He writes, “We expect global demand, especially from the US, euro area and Japan, to improve in Q2-Q4 on a sequential basis, supporting Korea‟s exports and investments.”

He is maintaining his call for the BoK to keep rates unchanged at 2.75% throughout 2013 and also, although this is not his base case, he notes that if the new government formulates a supplementary budget, upside risks to our 2.5% 2013 GDP growth forecast would increase and the likelihood of a rate cut would lessen.