Samsung’s Crisis Could Undermine South Korea’s Economic Growth

October 13, 2016, 7:08 AM UTC

South Korea’s central bank conceded on Thursday that Samsung Electronics (SSNLF) smartphone crisis could potentially undermine economic growth, but largely maintained its view that the country’s recovery is still on track.

After keeping interest rates unchanged at 1.25% in a unanimous vote on Thursday, Bank of Korea Governor Lee Ju-yeol said this year’s growth was expected to reach 2.7%, steady from the bank’s last forecast made in July.

“Third quarter growth seems to have met our expectations, and it looks like it won’t be too difficult to obtain our growth forecast,” Lee told a news conference.

The governor explained the bank’s monetary policy board had factored in the gradual economic recovery seen so far, household debt which continues to rise at a swift pace, and the pending rate hike by the U.S. Federal Reserve.

All but one of 24 economists surveyed by Reuters had expected the Bank of Korea to leave the policy rate its record low 1.25% as board members weighed the risks to household indebtedness from further rate cuts.

As markets expected, next year’s growth forecast was revised down to 2.8% from 2.9%.

Lee said the bank needed more time to assess the effects Samsung Electronics scrapping its fire-prone Galaxy Note 7 premium smartphone would have on the economy.

Samsung‘s problems were calculated into Thursday’s revisions, he said, but the bank was not able to reflect the most recent changes because of time constraints.

A growing number of analysts see the central bank remaining on hold, possibly throughout 2017, as interest rates in the U.S. head up.

“It now remains to be seen what Samsung or the (industrial) strikes will materialize into,” said Lee Sur-bee, fixed income analyst at Samsung Securities.

“For example, if the Note 7 debacle does turn into an export crisis, we will know by early 2017 and the Bank of Korea can turn dovish again then.”

The Bank of Korea’s policy board has taken a more hawkish tone of late compared to previous months, as household debt surged and annual inflation in September accelerated to 1.2%, its highest in seven months, on a recovery in consumption and a jump in some fresh food prices.

The bank has also emphasized the diminished effects that rate cuts can have on the economy compared to previous years because of structural factors such as an aging population and a rigid labor system.