The South Korean government is to soon propose a supplementary budget of about 10 trillion won (US$8.53 billion) to the South Korean National Assembly, the government said yesterday, as it tackles Brexit turmoil in financial markets, weak exports and a corporate overhaul of the country’s shipping and shipbuilding industries.
South Korean President Park Geun-hye called on all government ministries to have the supplementary budget ready as soon as possible.
“Unrest in global financial markets has been growing from Brexit. Uncertainties over the Chinese economy and geopolitical risks from North Korea are still pressuring our economy,” she said at a meeting of economy-related officials and lawmakers.
“The economic situation inside and outside our country is more serious than ever. If we do not take extraordinary measures there are concerns growth and employment will contract in the second half of the year,” she added.
The supplementary budget is to be spent on stimulus measures, including a big retail spending drive, rebates on appliances, a tax incentive to replace older diesel cars and additional unemployment benefits for shipbuilding workers.
The extra budget is to be mostly funded from a surplus in tax revenue for the first half of the year, avoiding the need to sell more treasury bonds and run up additional government debt.
Equities cautiously inched up after the announcement, as an extra budget had been widely expected, given South Korea’s soft economic growth.
Shares were up by 0.4 percent, while the won rose 0.8 percent against the US dollar, helped partly by offshore factors.
“This looks like the finance ministry just pushed the ball over to the Bank of Korea again,” said Stephen Lee, an economist at Samsung Securities.
“What I’m a bit concerned about is that tax revenue going forward might not be as great as it was in the first half of the year... We might face some difficulties later if the Brexit aftermath on exports and capex [capital expenditures] is worse than expected,” Lee added.
Lee said the Bank of Korea might face pressure to cut interest rates again after it lowered them to a record-low 1.25 percent to bolster economic growth earlier this month.
South Korean Minister of Strategy and Finance Yoo Il-ho last week said a supplementary budget would have to be ratified before the middle of next month to have maximum effect.
Lawmakers in both ruling and opposition parties favor the extra budget.
Reflecting more difficult conditions inside and outside the country, the South Korean Ministry of Strategy and Finance lowered its growth forecast for this year from the 3.1 percent projected in December last year to 2.8 percent.
Inflation for this year was also downgraded to 1.1 percent from the 1.5 percent previously forecast.
The extra budget comes as the latest buffer against possible fallout from the corporate restructuring of the country’s struggling shipping and shipbuilding firms.
Earlier this month, the government and central bank said they would create an 11 trillion won fund to support two state-run banks most exposed to the industries.
Lee noted global financial markets were reacting more sensitively to political events around the world, saying there was a danger of volatility spiking again when Italy holds its own referendum regarding constitutional reforms in October and from the US presidential election on Nov. 8.
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