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(LEAD) (News Focus) Driven into corner, S. Korean economy gets strong medicine

All Headlines 15:02 June 28, 2016

(ATTN: UPDATES with finance minister's comments in paras 20-23; ADDS photo)
By Kim Boram

SEJONG, June 28 (Yonhap) -- Low borrowing costs and expansionary fiscal spending are the best combination for a stuttering economy. But South Korea's economic situation seems to need a stronger dose of medicine -- an extra budget -- as there are no signs of Asia's fourth-largest economy getting on a recovery path in the face of a protracted slump in exports and domestic demand.

More recently, financial turmoil sparked by Britain's unexpected choice to leave the European Union (EU) is adding more concerns to policymakers here who opted to scrape the bottom of the barrel -- drawing up a 10 trillion-won (US$8.45 billion) supplementary budget with effects that might be direct and immediate.

The country's economic policymakers led by Finance Minister Yoo Il-ho had been adamant about not taking the last-resort action this year while adhering to its growth estimate of 3.1 percent and ignoring calls to lower the growth target and create a supplementary budget.

But the top economic policymaker started to make a shift in his stance last week on the necessity of drawing up an extra budget to prop up the economy amid growing voices for stronger fiscal reinforcement to regain economic growth momentum.

In deed, international organizations like the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) called for more aggressive fiscal intervention into the economy.

"Speedy implementation of additional fiscal stimulus should be a priority and should be complemented by monetary easing," the IMF said in its latest report.

The IMF and the OECD cut South Korea's growth forecast to 2.7 percent each, while the state-run think tank Korea Development Institute lowered its prediction to 2.6 percent and the Bank of Korea (BOK) slashed its own estimate to 2.8 percent.

Earlier this month, the central bank also cut its policy rate to a historic low of 1.25 percent for the first time in 12 months in an apparent move to stir up the economy and beckon the government to take similar actions.

The ruling Saenuri Party also pressed the finance ministry to take its own step, claiming that an expanded budget is needed to support ongoing corporate restructuring and buttress the economy.

Looking back, the South Korean economy has been facing a triple whammy -- flaccid domestic demand, faltering outbound shipments and tough corporate overhaul moves. And the British vote to exit the European Union (EU) also emerged as another nagging problem for the economy.

South Korea's exports have dropped every single month since the first month of 2015, marking a record 17-month losing streak, weighing heavily on the production side.

Industrial output fell 2.8 percent on-year in April, posting negative growth for the second consecutive month and widening its downward pace from March.

Private consumption has been on an apparent upside mode since the fourth quarter of last year to offset faltering exports on the back of the government-led tax cut programs and nationwide sales promotion events.

In March, the country's retail sales gained 4.2 percent from a month earlier on a sharp rise in durable goods like passenger cars, but the figure backtracked 0.5 percent on-month in April.

For the first three months of the year, however, the private side hardly contributed to growth, according to the government data.

The gross domestic product gained 0.5 percent from a year earlier, fully backed by the government which poured some 40 percent of this year's budget in the three-month period.

The first-quarter expansion also marked the lowest since the second quarter of last year, when the country was hit hard by an outbreak of the Middle East Respiratory Syndrome.

Also, nationwide corporate restructuring being underway in the most troubled shipbuilding and shipping sectors has been regarded as one of the biggest threats to the South Korean economy in the second half due to a possible surge in the unemployment rate.

The British choice for a "Brexit" on Thursday last week dealt a further blow to South Korea as heightened uncertainties in the financial sector are feared to spill over to the real economy.

"The government will thoroughly analyze the mid- and long-term impact Brexit will have on trade, foreign exchange and financial markets, and take pre-emptive measures," Finance Ministry Yoo Il-ho said in a joint press conference in Seoul. "We're in need of an extra budget that focuses on minimizing the external repercussions and the impact of restructuring."

He said the government will complete the parliamentary procedures as soon as possible so as to minimize the negative repercussions coming from outside of South Korea.

"We will present (the extra budget proposal) before the National Assembly as fast as we can," Yoo said. "I ask the National Assembly to pass the proposal quickly considering the urgent need for additional fiscal backup."

The finance ministry added that the proposed extra budget will be financed with a tax surplus and others, without selling state bonds.

Joo Won, a researcher at Hyundai Research Institute, said 10 trillion won is not enough to stave off fallout from the Brexit and heightened global uncertainties.

"I think the scale is a bit smaller than expected," said the expert. "It will cost a lot to go through corporate restructuring in the second half. The extended spending should be used to ease unemployment instability and raise industrial competitiveness."

Professor Baek Ehung-gi of Sangmyung University said it has been necessary to form a supplementary budget to support corporate restructuring in whatever form.

"Future developments of restructuring may drag the entire economy into a slump. I think an extra budget was needed to revive the economy," he said.

He said it is more important to convince economic players that the government is fully prepared to take every economic-stimulus measure, including monetary policy.

"The government has to be open-minded so it can use all fiscal and monetary means," said the professor. "The government has to make its economic policy firmer and come up with follow-up measures to help the private sector feel the effects."


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