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South Korea's economy forecast to grow at slowest rate in 7 years

Central bank's calculation of 2.6% growth this year pressures President Moon

A large part of South Korea's economy is dependent on big conglomerates like Samsung, whose electronics division took a 28.7% operating profit tumble in the last fiscal quarter.   © Reuters

SEOUL -- After decelerating to its slowest pace in six years in 2018, South Korea's economy is set to further brake in 2019. The Bank of Korea on Thursday projected growth of 2.6% over the next 12 months, down from 2.7% last year.

The forecast comes two weeks after President Moon Jae-in pledged to revive Asia's fourth-largest economy. Now Moon, whose approval ratings are slumping, will be under even more pressure on the economic policy front.

The president in May will enter his third year in office; so far, he has no economic achievements to point to.

The central bank blamed South Korea's plight on weak Chinese demand. China's economy in 2018 grew at its slowest pace in 28 years.

Tommy Wu, a senior economist at Oxford Economics in Hong Kong, forecast even lower growth of 2.3% for this year.

"Slowing Chinese and global demand will continue to weigh on Korea's exports, especially before Chinese growth finds a floor around the second quarter," Wu said. "Demand for semiconductors and petrochemical products is expected to remain weak."

Also on Thursday, the BOK maintained its key rate at 1.75%, after raising it by 25 basis points in November.

The previous hike was aimed at cooling Seoul's overheating housing market and curtailing capital flight, a phenomenon sparked by the U.S., which continues to crank up its benchmark rate. But it is difficult now for central bank to raise rates further -- the capital's housing market is losing steam, and the country is saddled with low inflation, low growth and high youth unemployment.

"Monetary policy is still accommodative, and the growth will be similar to last year," BOK Gov. Lee Ju-yeo told reporters after the decision. "The time has not yet come to discuss an interest rate cut."

Citibank pointed out that government expenditures may moderate in the first quarter, leaving an economy that would have to fend more for itself.

"Both facilities investment and construction investment are expected to further contract, mainly due to a slowdown in the memory chip cycle and housing market tightening measures," said Kim Jin-wook, an economist at Citibank who expects growth to drop to 2.4% in 2019.

South Korea is home to Samsung Electronics, the world's largest memory chip maker, and SK Hynix, a key player in the sector. Samsung saw its operating profit tumble 28.7% to 10.8 trillion won ($9.6 billion) in the fourth quarter from a year earlier due to falling prices for DRAM and NAND chips.

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