OREANDA-NEWS. Korea's economic policy plan for 2016, which includes an emphasis on bolstering domestic demand and structural reform, should be positive for growth, says Fitch Ratings. That said, over the long term it will not be easy to compensate for a new normal of lower trade growth and the government's lowered 3.1% forecast for real GDP growth in 2016 may yet prove optimistic.

Korea's Ministry of Strategy and Finance on 16 December announced the new economic policy initiatives, which aim to stimulate nominal GDP growth at a time when external demand is likely to remain lacklustre. Key measures include front-loading budgetary spending in 2016, reducing the regulatory burden for businesses at the local level and reiterating a pledge to carry out reforms in labour policy, education, finance and the public sector.

Korea's real GDP growth has been falling steadily in recent years and Fitch estimates it will be 2.5% in 2015 and 2.9% in 2016, down from an average 3.7% in 2010-2014. The government's proactive approach to manage the slowdown should have a positive effect on growth, although the impact will depend on the implementation details. Allowing the economy to focus more on domestic, as opposed to external, demand should also lead to more sustainable growth at a time when China is structurally slowing and other key trading partners, including Japan, the US and Europe, remain at lower growth rates relative to the past decade's average.

The government is also enacting policies to help bolster trade, including enhanced support to export-oriented sectors. A new free trade agreement with China was ratified earlier in the month, which will lead to steadily lower tariffs over the coming years.

High and rising household debt is a challenge to the government's economic policy objectives, as it could limit the potential for private consumption growth. Korean household debt rose to 164% of disposable income at end-2014 from 154% at end-2010. The high debt load has limited policy flexibility and seems to have deterred the Bank of Korea from taking a looser monetary policy stance - the policy rate has been held at 1.50% since June this year. The risks from the build-up in household debt have been mitigated somewhat by a rise in assets on the household balance sheet over the same period.

The government is putting more emphasis on nominal as opposed to real GDP growth, pointing to continued concerns about low inflation. The government and Bank of Korea have lowered the CPI inflation target to 2% from a 2.5%-3.5% range. This will likely improve monetary policy credibility - inflation has not been within the target range since 2012 - but Fitch expects inflation to remain low, averaging 0.75% in 2015 and 1.8% in 2016.