South Korea plans to pump an extra $11 billion into its economy next year to help fend off the impact of the global financial storm, which is beginning to hit exports - the country's economic lifeblood.
Finance Minister Kang Man-soo said on Monday economic growth could fall to its lowest in more than a decade without the fiscal stimulus, which will need approval by parliament where the pro-government party has a large majority.
His comments came just after the government gave stark proof of the damage from the global economic downturn, announcing that export growth in October had fallen to a 13-month low, worse than analysts had expected.
“If the current situation continues, the economy is expected to grow by around 3% next year. If the global economy shrinks further, it may be difficult to achieve 3% growth,” Kang told reporters.
Financial markets have slumped in the face of the global downturn, with both the won and the main KOSPI share index losing around a third of their value since the start of the year in some of the most volatile trading seen since the Asian financial crisis a decade ago which ravaged its economy.
The 14 trillion won ($11 billion) package includes 11 trillion won in additional government spending next year and 3 trillion in tax cuts. Much of the extra spending is aimed at the real estate and construction industries.
Money will also go to smaller firms, which face the risk of bankruptcy because of the liquidity squeeze and which together employ around 90% of the workforce.
Asia's fourth-largest economy has looked particularly exposed to the lack of liquidity in the world's financial markets, that has left its financial institutions struggling to raise funds to pay off foreign debt and made them reluctant to lend at home.
With the new package, the latest in a series of policies since October to combat the effects of the looming global recession, growth next year could reach 4%, Kang said, still short of the 5% the government had hoped for.
“While they (the measures) will certainly help, most investors believe it will take some time before benefits of those measures are reflected in the real economy,” said Hwang Keum-dan, analyst at Samsung Securities.
Kang said he expected the current account to swing to a surplus next year of about $5 billion in 2009 after posting its first deficit in 11 years in 2008, estimated at $10 billion.
The government will also sharply increase bond sales to fund intervention in the currency market and offer state guarantees on foreign-currency deposits at local financial institutions. (Reuters)