Korea Plans More Rate Cuts, Fiscal Stimuli
By Kim Jae-kyoung
Staff Reporter
The government is planning more interest rate cuts and fiscal stimuli with the aim of realizing a 3 percent growth target this year.
The news comes as the country has experienced two quarters of negative growth, indicative of a recession, for the first time in a decade.
In a TV program Saturday, Strategy and Finance Minister Kang Man-soo said that the government is ready to spend more on top of the 51 trillion won ($38.4 billion) it has already committed.
``The world is undergoing an unprecedented economic crisis and there is a global consensus for fiscal expansion. If necessary, the government will spend more because its fiscal health is still strong,'' Kang said.
The Bank of Korea (BOK) is also ready to bolster the economy by slashing key rates and supplying more liquidity to the economy.
BOK Governor Lee Seong-tae also hinted at slashing its base rate again at a monetary policy meeting Friday.
The government has earmarked 3.7 trillion won from its annual budget for state-run financial services companies and corporations as part of efforts to frontload its budget spending _ 650 billion won for the Korea Development Bank (KDB), 360 billion won for the Industrial Bank of Korea (IBK), 300 billion won for Korea Asset Management Corp. and 140 billion won for Korea Housing Finance Corp.
The government plans to frontload this year's budget spending by providing 62.5 percent of this year's budget of 248 trillion won in the first half of the year.
Financial Services Commission Chairman Jun Kwang-woo said, ``The government will supply more than 50 trillion won to smaller firms this year through KDB and IBK.''
``There are concerns over excess investment by small shipbuilders, (for example) manufacturing bulk carriers. The restructuring of non-viable companies will gain momentum in the first quarter,'' he added.
Governor Lee also said that the BOK will help local lenders increase their capital and inject more liquidity into the banking system through aggressive open market operations of buying more bonds and advocating low-rate loans earmarked for smaller firms.
The central bank is moving to contribute half of a proposed 20 trillion won fund for recapitalizing banks. The fund will be launched in January to buy preferred stocks, subordinated bonds and hybrid debt from banks so that banks can strengthen their capital base.
In its latest report, HSBC said that Asia's fourth largest economy is forecast to shrink 4.4 percent year-on-year in the first quarter following the previous quarter's estimated contraction of 2.8 percent, two consecutive quarters of economic contraction.
It will be the first recession since the 1997-1998 financial crisis when the economy shrank for three consecutive quarters.
Exports were down 17 percent last month over a year ago and industrial output declined 14.1 percent year-on-year, the worst in 40 years. Both are expected to continue on a downward spiral.
``Interest rates in Korea are still too high, and are still above the rates in other comparable countries. We should have used lower rates earlier to give more strength to the Korean economy,'' Market Force Company CEO James Rooney told The Korea Times.
``I can easily imagine that rates could go as low as one percent to be beneficial to the Korean economy today, and the sooner the better,'' he added. ``But lower rates do not bring any benefit if nobody can borrow money. So the real issue is to unfreeze the broken financial system or find new ways to get the blood supply back into the economy.''
HSBC Asia senior economist Frederic Neumann advised the government to focus on frontloading its fiscal spending to quicken economic recovery.
``As in other countries, tax cuts may prove less effective in this environment than outright spending increases given that amid the current uncertainties tax savings may be shoved under the mattress rather than spent,'' he said.
``While continuous trade surpluses may help ease pressure on the won, inflation pressure will continue to cool for coming months, opening the door for the central bank to cut by at least 25 basis points at the Friday meeting,'' he added. But many analysts predict a 50 basis point reduction this week.