Market bets on cigarette price hike

By Korea Herald

Analysts expect next government will raise prices to fund welfare program

  • Published : Jan 15, 2013 - 19:43
  • Updated : Jan 15, 2013 - 19:43
Despite denial from the Finance Ministry, the incoming Park Geun-hye government is expected to raise the prices of cigarettes to fund social welfare programs, analysts said Tuesday.

The Ministry of Strategy and Finance denied news reports that policymakers are poised to raise cigarette prices or create a new tax on the products.

The official denial came a day after a news provider reported that “the Finance Ministry and the Ministry of Health and Welfare are pushing ahead with a hike in tobacco prices by 500 won ($0.43) to 1,000 won per pack in a bid to increase its tax revenue.”

Dismissing the report, the ministry said it “has not considered raising cigarette prices (over the past few months).”

Some analysts, however, predict that the incoming administration will ultimately raise the prices, citing the president-elect’s promise to expand social welfare.

They share the view that a hike in cigarette prices or relevant taxes could act as a steady funding resource for the incoming administration, which would try to secure a higher amount of public funds to actively allocate the social welfare budget.

“The possibility that the government will seek a hike in taxes on tobacco prices is getting higher,” Dongbu Securities said Tuesday.

The brokerage firm cited the necessity of additional tax revenue for its forecast, adding KT&G is projected to see an improvement in earnings with the possibly policy-led price hike.

An analyst commented on the government’s research report, which estimates that the tax will raise 2.67 trillion won should the price per pack climb 500 won, and 4.46 trillion won if it climbs 1,000 won.

In the second half of 2012, a lawmaker of the governing Saenuri Party submitted a bill calling for tax hikes on cigarettes to curb smoking.

Calling on policymakers to change its cigarette tax structure and increase the prices in relation to the inflation rate, Rep. Lee Man-woo said the cigarette taxes are not indexed for inflation as the government has been fixing the price for many years.

Last year, the Ministry of Health and Welfare clarified that it plans to raise the price of a pack of cigarettes to 5,000 won, double the current average price.

As some ministry officials raised the feasibility of hikes on a gradual basis, analysts expect the increase margin will be 500 won in 2013 and 1,000 won each consecutive year until 2015.

Despite high consumer prices and a widening income gap between the income classes, critics say that Korea is a haven for smokers.

Korea had the second-highest smoking rate in the Organization of Economic Cooperation and Development of 44.3 percent, following Greece with 46.3 percent.

The OECD countries that had the cheapest cigarette prices following that of Korea also showed a relatively high smoking rate with Estonia at 38.6 percent, Poland (33.5 percent), Hungary (31.9 percent) and Mexico (21.6 percent).

Japan ranked fourth in the smoking rate with 38.9 percent following Turkey at 43.8 percent.

A Health Ministry official said that increasing cigarette prices would be the best way to decrease smoking rates.

Meanwhile, some foreign tobacco brands in Korea recently slashed prices of some products or seeking a price cut to increase their market shares.

By Kim Yon-se (