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South Korea lowers its growth forecast for 2022 and promises to slash corporate tax rates

Image: Reuters Berita 24 English -  According to the finance ministry, South Korea's economy would develop at its slowest pace in three ...

Image: Reuters

Berita 24 English -  According to the finance ministry, South Korea's economy would develop at its slowest pace in three years in 2022, as the world grapples with supply shortages, rising inflation, and quickly rising interest rates.

President Yoon Suk-new yeol's government announced its first economic policy efforts, lowering this year's growth prediction to 2.6 percent from 3.1 percent and raising inflation forecast from 2.2 percent to 4.7 percent, the fastest since 2008.

In a speech on Thursday, Yoon stated, "Our economy and markets are being jolted as we are forced into a complex crisis amid fears of stagflation."

"In accordance with laws and principles, we will take strong steps to abolish any regulations that stifle company competitiveness and entrepreneur spirit, and we will take action against unfair activities that disrupt market order."

The administration recommended lowering the maximum corporation tax rate to 22 percent, the average of nations in the Organization for Economic Cooperation and Development, to aid South Korean businesses suffering inflationary pressures (OECD).

Since 2018, when the past administration hiked it to pay for greater social welfare, the rate on around 100 of the largest firms has been 25%.

Last year, South Korea's economy, Asia's fourth largest, grew at its quickest rate since 2010. However, as soon as the Yoon government took office last month, the country was hit by global supply chain problems, making it impossible to maintain exports.

The global economy was hampered by bottlenecks, as well as the Ukraine crisis, inflation, faster monetary tightening in major nations, and COVID-19 lockdowns in China, according to the ministry.

During his election campaign, Yoon promised to support a "private-sector-led economy." His policies would aid South Korean businesses in dealing with rising minimum salaries, rising borrowing costs, and the previous administration's work-hour restrictions.

Markets expect the Bank of Korea to keep raising interest rates rapidly after lifting them by 125 basis points since mid-2021. Further increases are predicted to have a negative impact on private spending for households with the world's largest debt loads.

The ministry announced on Thursday that one of its core strategic priorities is to increase capital investment in important technology areas. Between 8% and 12% of huge companies' investment in semiconductors and organic light-emitting diodes will be tax deductible, up from the present 6% to 10%.

Separately, South Korea plans to expand international dealers' access to trading in the US dollar/Korean won (USD/KRW). This will aid the country's application to join the MSCI developed markets index.

The government intends to increase the USD/KRW spot market's trading hours to 17 hours, from 0000 GMT to 1700 GMT. It will also allow international dealers to participate, with more information to be released in the third quarter.

Only locally licenced financial institutions can engage in onshore USD/KRW trading hours, which are currently 0000 GMT to 0630 GMT.

The government has decided to eliminate capital gains taxes on ordinary stock investors, except for holdings worth more than 10 billion won ($7.74 million) in any one stock, in order to boost share prices after the market fell about 18 percent this year.

Beginning next year, the government proposes to reduce the tax on stock transactions from 0.23 percent to 0.20 percent.

(1 USD = 1,291.1900 KRW)

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