By Yoon Ja-young
The government is likely to draw up a supplementary budget to contain the fallout from Middle East Respiratory Syndrome (MERS), analysts said Friday.
Politicians are calling for the extra budget. Kim Moo-sung, chairman of the ruling Saenuri Party, said Friday that the government must take preemptive steps to keep MERS from hurting the economy further, adding pressure on the government to come up with the additional funding.
He praised the Bank of Korea’s rate cut to 1.5 percent the previous day.
Finance minister Choi Kyung-hwan appears to have no other choice but to accept the call for the supplementary budget, analysts said.
“Even before the outbreak of MERS, there was demand for a supplementary budget. When considering that MERS led to around a 3 trillion won loss in economic growth so far, it seems certain that the government will choose this option,” said Kim Byung-yeon, an analyst at NH Investment and Securities.
According to the National Finance Law, the government can use supplementary budgets in cases of war, natural disasters, an economic recession, massive unemployment, changes in relations with North Korea or other major changes in economic conditions.
Economists say that it is time to use the supplementary budget as domestic consumption has been seriously hit by MERS. According to data from the finance ministry, sales at department stores fell by 16.5 percent in the first week of June compared with the previous year, and retail outlets saw a 3.4 percent dip in sales during the same period.
According to the Korea Center for International Finance, Morgan Stanley estimates MERS could slash Korea’s growth rate by 0.15 percentage points if it is contained within a month. The growth rate will go down by 0.8 percentage points if the outbreak lasts for three months. That means the country’s economic growth rate could go below 3 percent this year due to the virus.
Economists generally agree that a supplementary budget can help sustain the economy. The Korea Development Institute (KDI) estimates that the supplementary budget in 2013 pulled the economic growth rate up by 0.3 percentage points.
The Bank of Korea recently cut the key rate to a historically low 1.5 percent, but analysts say a rate cut is not enough to boost the economy.
“The effect would be negligible since the market regards it as the last key rate cut,” Kim said.
Shin Dong-jun, a chief strategist at Hana Daetoo Securities, says it is the finance ministry’s turn to come up with measures following the central bank’s rate cut.
“Now, it’s time to take fiscal policies, such as a supplementary budget, to prevent a deficit with the government tax income and contraction of the domestic consumption on fear over MERS,” he said.
He added that on top of the supplementary budget, the key rate cut should be accompanied by micro measures to control the surging household debt.
Strategy and Finance Minister Choi has been cautious about the option due to problems such as fiscal soundness, but he seems to be turning more positive. “Depending on how the MERS incident evolves, we may face a situation where additional measures are needed,” he recently said in a meeting with reporters, not excluding the option of a supplementary budget.
After setting the supplementary budget, the finance ministry must get approval from the National Assembly. The governing Saenuri Party floor leader Yoo Seung-min said that though the parties acknowledge the need for a supplementary budget, one should also take into account government debt and the fiscal deficit.