Growth forecast drops to 2.8 percent this year, despite expansionary policies


Investor confidence was restored Tuesday with the market responding positively to the South Korean government’s plan for extra spending in the second half of this year to cushion the economy from internal and external shocks.

Economic policymakers attend a news conference to announce the government's policy direction for the seond half of this year in Seoul on Tuesday. (Yonhap)

The benchmark KOSPI edged up 0.49 percent at 1,936.22 on continued institutional buying, after opening with a loss following overnight selloffs on Wall Street.

But the Seoul equity index soon headed for an upswing as the Finance Ministry announced that it will aggressively carry out expansionary fiscal policy and spend around 20 trillion won ($17.1 billion), including a supplementary budget of some 10 trillion won. The Korean currency gained with the won-dollar exchange dropping 11 won at 1,171.3 won.

The government said that it can afford to spend 10 trillion won more from its own coffers without having to issue debt, due to its increased tax revenue. Despite a slowdown, the government expects tax surplus of 9 trillion won this year. Currently, it has a surplus of some 1.2 trillion won, according to the Finance Ministry. This would mark the first time since 2003 for the government to allocate more spending without debt financing.

“Taking into account the advice from local think tanks and academic experts, the government has decided to draw up an extra budget to address people’s concerns,” President Park Geun-hye said in a meeting with economic ministers and members of the National Economic Advisory Council.

The key purpose of the extra budgeting, Park said, is to create new alternative employment for people taking the blow of restructuring plans, especially those in the faltering shipbuilding sector.

With Brexit, or the U.K.’s vote to leave the European Union, and Korea’s corporate restructuring expected to severely affect the country’s jobs, exports and consumption, Finance Minister Yoo Il-ho stressed that time cannot be wasted in implementing its fiscal stimulus, calling for rapid approval of its budget proposal.

“To see immediate effects of extra spending, we will submit the budget plan to the National Assembly as soon as possible,” Finance Minister Yoo told reporters after unveiling its economic policy for the latter half.

President Park cited Brexit and its possible consequences, reiterating calls for structural reform and the passage of economic revitalizing bills.

“Though the impact of Brexit on our economy is to remain limited, we have to up our guard against possible volatility of the global financial market,” she said.


“In order to innovate our economic constitution, I expect the 20th National Assembly to speed up on passing the economic bills, while the government will work on structural reforms.”

Even with the central bank’s rate cut to the record low of 1.25 percent and the government’s fiscal stimulus, the Finance Ministry noted the difficulties of Korea growing 3 percent as initially forecast, lowering its growth projection to 2.8 percent this year. The country will also inject 12 trillion won both directly and indirectly via a fund into policy banks to finance the restructuring of debt-laden shipping and shipbuilding companies.

Its extra spending could lift its growth by 0.2 percentage points from last year’s 2.6 percent. However, the government noted that this may not be enough to offset the global economic slowdown coupled with the increasing ripples of Brexit and the negative effects of corporate restructuring on employment. Less than 200,000 people have been employed from April-May, with the youth unemployment rate hitting record highs in recent months. Less than 300,000 jobs are expected to be created this year, down from 340,000.

The government is likely to launch its stimulus measures before the end of July as analysts have suggested that it is within this timeframe that the economy will be able to see the impact on its growth this year.

The Finance Ministry also said that besides seeking market stability for the middle class, it was imperative that the country pursue structural reforms in four sectors, such as labor, public, finance and education, as planned.

By Park Hyong-ki, Bae Hyun-jung

(hkp@heraldcorp.com)
(tellme@heraldcorp.com)