South Korea yesterday announced a US$10.7 billion plan to stimulate economic growth in the face of a global slowdown.
The government, saying it expects a significant slowdown in exports, detailed plans to spend an extra 11 trillion won next year, plus tax cuts totaling 3 trillion won, to boost sagging domestic demand.
“The ongoing global financial turmoil originating from the US subprime mortgage credit crunch is causing concern over a global economic downturn,” Minister of Strategy and Finance Kang Man-soo told reporters.
PHOTO: AP
“Financial market uncertainties have been aggravated and are exerting a knock-on impact on the real economy,” he said, stressing the need for the package to stimulate Asia’s fourth largest economy.
The government, under fire for weeks over its perceived weak leadership amid the global crisis, announced a wide-ranging plan to stabilize the shaky won and to boost the economy.
The finance ministry, in a statement announcing the measures, said short-term prospects for a turnaround in the global turmoil appear dim.
“Against this background, the [South] Korean government proposes ... policy measures to cope with these unprecedented challenges by announcing pre-emptive, decisive and sufficient counter-measures,” it said.
Of the 11 trillion won in extra public spending proposed for next year, 4.l6 trillion won would be spent on social infrastructure such as schools, universities, hospitals and libraries. Another 3.4 trillion would be used to help small and medium-sized firms, farmers and fishermen. One trillion won would be used to help low-income households and 1.1 trillion to support local governments. In addition to government spending, public enterprises would also expand investment by 1 trillion won.
Next year’s original budget submitted to parliament this month was for 273.8 trillion won, including spending by state-run funds, based on an assumption of 5 percent growth next year.
But the ministry yesterday cut its growth forecast for next year to around 4 percent, while tipping growth of 4 percent to 4.5 percent this year.
It announced a series of steps to revitalize the sagging property market, warning that “a potential sharp drop in asset prices may undermine the financial health of [South] Korean financial institutions.”
These largely ease restrictions imposed in recent years to curb speculation when the property market was soaring. South Korea had been dogged by fears of a re-run of the 1997-1998 financial crisis, partly because its banks were more exposed than elsewhere in Asia to repayment of dollar-denominated loans.
Last month, the government announced state guarantees worth up to US$100 billion on foreign borrowing by local banks. It followed up last week with news of a currency swap arrangement worth US$30 billion with the US Federal Reserve.
The news sharply pushed up the stock market and the won, which had been Asia’s worst performing major currency this year.
The finance ministry said yesterday it would also try to expand bilateral swap arrangements with China and Japan.
It said it would increase the ceiling of the foreign exchange stabilization fund from the current 15 trillion won to 20.6 trillion won, equivalent to twice the average daily exchange trading volume.
Extra funds would go to promote exports, while efforts to reach free trade deals with the EU and India would be speeded up.
Authorities would try to avoid “extreme volatilities” in the foreign exchange market with smoothing operations. And Foreign currency bank deposits would enjoy the same level of guarantees as local currency deposits.
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