South Korea’s export-driven economy is likely to shrink by 2 percent this year and shed around 200,000 jobs, the new finance minister said yesterday in a grim assessment on his first day in office.
The government will introduce a supplementary budget within weeks, Yoon Jeung-hyun told a press conference.
His forecast contrasts sharply with the government’s previous official growth target of 3 percent this year. It indicates that Asia’s fourth-largest economy is set for its first recession since the East Asian financial crisis of 1998.
“As the new finance minister, it is unpleasant for me to offer such a grim view of the economy, but I believe that honesty is the first step towards regaining trust in the government from the people and the market,” Yonhap news agency quoted him as saying.
Yoon replaces Kang Man-soo, who was sacked last month after incurring severe media criticism for his handling of the downturn.
Yoon had led an implementation of strict mortgage lending controls between 2004 and 2007 as the head of the Financial Supervisory Commission, helping cool the housing price bubble.
Yoon is the first minister to forecast a contraction in the economy as exports slump and domestic spending remains weak.
He said the economy would start picking up from the second half.
“To turn the likely contraction to [growth], we will set up a supplementary budget at the earliest possible time,” Yoon said, without giving a figure.
This would be submitted to parliament by the end of next month. Legislators in December approved a 284.5 trillion won (US$205.5 billion) budget for this year — up more than 10 percent from last year — and Seoul has previously announced extra stimulus spending and billions of dollars in tax cuts.
Yoon’s prediction is still more optimistic than many foreign forecasters’.
Morgan Stanley said yesterday that GDP could contract more than 2.8 percent this year. The IMF forecast a 4 percent contraction before the economy rebounds in 2010.
Official figures show the economy shrank 5.6 percent quarter-on-quarter in the last three months of 2008, the largest contraction since the first quarter of 1998.
Exports last month dropped by a third year-on-year, the steepest decline since Seoul started announcing monthly tallies in 1980.
Yoon added that the finance ministry would continue to pump foreign currency liquidity into the financial system to stabilize the markets.
The watchdog Financial Services Commission said separately that the government would help launch a fund to ease corporate restructuring.
Chairman Chin Dong-soo said such a fund was needed to support the sale of assets by companies about to undergo restructuring, or to invest in those companies.
The finance ministry, in a statement, said the country would likely record a current account surplus of US$13 billion this year, higher than the previous forecast of around US$10 billion, thanks to shrinking import bills and less spending by South Koreans on overseas travel.
It said inflation this year would likely ease to the higher-end of the 2 percent range compared with the previous projection of around 3 percent.
“Our top priority is to create jobs,” Yoon said. “Of course, we need to create high-quality jobs, but currently we do not have the luxury of hesitating. Now is the time to focus on creating work, no matter whether good or bad.”
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