SEOUL, June 28: South Korea cut this year’s economic growth target on Thursday and unveiled plans to boost public spending by more than $7 billion to shore up Asia’s fourth-largest economy in the face of the euro zone crisis.
The move came as a series of fresh data added evidence that the heavily export-dependent economy was coming under growing stress not only from the cooling global economy, but also from the overleveraged household sector.
The government now aims for 3.3 percent growth in the economy this year, down from its target of 3.7 percent set six months ago and lower than last year’s recorded 3.6 percent expansion.
Finance Minister Bahk Jae-wan told a televised news conference that an international crisis has now become a constant rather than a variable, while analysts said the central bank would probably have to cut interest rates soon.
‘Late last year, the dominating view was that uncertainties surrounding Europe’s fiscal crisis would be cleared by the end of the first half of this year, but now it appears we have to accept the crisis as a constant,’ Bahk said.
NO BIG STIMULUS BUT TWEAKS PLANNED
South Korea’s revised growth target is still higher than the rate expected from the more developed economies but it would represent the lowest pace of expansion since 2009 for the $1.12 trillion economy.
The finance ministry, which aims to bring the fiscal balance back to a surplus next year, said it would be able to boost public spending by as much as 8.5 trillion won ($7.35 billion) this year without increasing borrowings.
It said the government would be able to boost total expenditure by 4.5 trillion won this year by utilising more of approved spending and through some adjustments between accounts. Public funds and state firms will secure another 4 trillion won for more investment.
The ministry said these plans would not change the government’s target of cutting the fiscal deficit to 1.1 percent of annual gross domestic product from 2 percent last year as the money would come from adjustments of existing accounts and from what was left over from the previous year.
Bahk said the economy remains resilient and was not weak enough for the government to draw up an additional budget spending bill that is usually adopted for a massive stimulus. Such a bill would require parliamentary approval.
CENTRAL BANK UNDER PRESSURE
A set of fresh data released on Thursday underscored growing risks facing the country’s economy as an influential industry body cut export and import forecasts, seasonally adjusted exports in May fell from April and loan delinquencies rose.
The Korea International Trade Association (KITA) cut this year’s export growth forecast to 2.4 percent and that for import growth to 4.1 percent, compared with its previous forecasts set at about 8 percent each.
The central bank said exports in May fell by a seasonally adjusted 2.5 percent from April, while a regulatory agency said the delinquency ratio on household loans hit the highest in five and a half years in May.
Analysts said the Bank of Korea, which has said its policy priority remained stabilising inflation, would soon have to consider cutting interest rates to shore up the economy.
‘It will take some time for Europe to produce a clear policy solution and so the pressure is on for the Bank of Korea to lower rates possibly in the third quarter,’ said Yoon Yeo-sam, fixed-income analyst at Daewoo Securities.
The Bank of Korea raised the policy interest rate by a total of 125 basis points between July 2010 and June 2011 as inflation spiked. But it has since left the rate unchanged at 3.25 percent to assess the global situation.
The central bank next reviews its policy on July 12.
Meanwhile, the finance ministry lowered this year’s consumer price inflation projection to 2.8 percent from the previous 3.2 percent. Last year, consumer price inflation was 4.0 percent.
For next year, the finance ministry set its first official economic growth target at 4.3 percent, in line with market expectations for a global recovery, while predicting inflation would edge up to 3.0 percent.
(agencies)
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