S.Korea cuts 2022 growth outlook, vows to cut corporate tax rate

© Reuters. FILE PHOTO: A truck carrying a shipping container travels past cranes at Pyeongtaek port in Pyeongtaek, South Korea, July 9, 2020. REUTERS/Kim Hong-Ji/File Photo

By Jihoon Lee and Cynthia Kim

SEOUL (Reuters) - South Korea's economy will grow at its slowest pace in three years in 2022, as the world faces supply bottlenecks, surging inflation and rapidly rising interest rates, the finance ministry said on Thursday.

Setting out its first economic policy initiatives, the new government of President Yoon Suk-yeol said it had lowered this year's growth forecast to 2.6% from 3.1% and raised the inflation forecast from 2.2% to 4.7%, the fastest since 2008.

"We are putting our utmost priority in stabilizing prices as that's our shared understanding," finance minister Choo Kyung-ho said, referring to Bank of Korea (BOK) Governor Rhee Chang-yong and other top policymakers, with whom he had met early on Thursday.

To help South Korean businesses reduce inflationary pressure, the government proposed to lower the maximum corporate tax rate to 22%, the average of countries in the Organization for Economic Cooperation and Development. The rate on about 100 of the largest companies has been 25% since 2018, when the former government increased it to pay for more social welfare.

South Korea's economy, Asia's fourth largest, last year achieved its fastest annual expansion since 2010. But as the Yoon administration came to office last month, the country was suddenly facing global supply chain disruption and resulting difficulty in sustaining exports.

The ministry said the whole world economy was suffering from bottlenecks, plus the Ukraine crisis, inflation, faster monetary tightening in major countries, and lockdowns in China.

Yoon pledged in his election campaign to support a "private-sector-led economy". His measures would help corporate South Korea cope with higher minimum wages, rising borrowing costs and the previous administration's limits on working hours.

Markets are predicting the BOK will keep moving aggressively after implementing 125 basis points of interest rate rises since mid-2021. The expected further rises will likely hit private consumption for households saddled with the world's highest debt loads.

On Thursday, the ministry said boosting capital investment in key technology sectors was one of its main policy initiatives. Between 8% and 12% of big conglomerates' investment in making semiconductors and organic light-emitting diodes will be deductible from corporate tax, up from the current 6% to 10%.

Separately, South Korea would improve foreign dealers' access to USD/KRW trading. This will help the country in its quest for inclusion in the MSCI developed markets index.

The government plans to extend trading time of the USD/KRW spot market to 17 hours - 00:00 GMT to 17:00 GMT. It will also allow dealers based abroad to participate, with details to be disclosed in the third quarter.

Currently, onshore USD/KRW trading hours are 00:00 GMT to 06:30 GMT and only locally licensed financial institutions can participate.

To revive share prices after the market's fall of almost 18% this year, the government has decided to remove capital gains taxes on retail stock investors, except for holdings worth more than 10 billion won ($7.74 million) in any one stock.

The government also plans to cut tax on stock transactions to 0.20% from 0.23% beginning next year.

($1 = 1,291.1900 won)