$26b stimulus for S. Korean economy

Women wearing face masks shop for socks in the popular Myeongdong shopping area in Seoul.
Women wearing face masks shop for socks in the popular Myeongdong shopping area in Seoul.PHOTO: AFP

Government acts to boost growth as Mers outbreak hits domestic spending and tourism

SEOUL • The South Korean government is to inject 22 trillion won (S$26.4 billion) into the flagging economy, which has been hit by the Middle East respiratory syndrome (Mers) outbreak and sluggish consumption.

The stimulus package was passed at a Cabinet meeting, the Finance Ministry said yesterday. "The extra budget will help revitalise the economy and stabilise the livelihoods of ordinary people who have been affected the most by the fallout from Mers," Vice-Finance Minister Bang Moon-Kyu was quoted as saying by Yonhap news agency.

As of yesterday morning, the virus had killed 33 people in South Korea, and a total of 184 cases had been confirmed. Forty-two patients remain hospitalised, and 12 of them are in critical condition, according to the ministry.

The 22 trillion won package comprises an already announced 15 trillion won supplementary budget and 7 trillion won of other expenditures such as expanded investments by state companies and additional credits for exporters.

The extra expenditure is expected to raise the economic growth rate by 0.3 percentage point this year and by 0.4 percentage point next year. South Korea has forecast that its economy will grow 3.1 per cent this year and 3.5 per cent next year, although analysts doubt that these can be achieved even with the additional spending.

Moody's said consumer sentiment has plummeted as a result of Mers, halting the recovery in domestic demand as the external sector continues to drag down growth.

The outbreak has scared off tourists and kept South Koreans away from cinemas, restaurants and shopping areas.

"Our tracking model suggests GDP growth slowed to 2.6 per cent year over year in the second quarter, which is lower than our 2.9 per cent estimate from May," Ms Emily Dabbs of Moody's Analytics said in an article this week.

Confusion and secrecy over the Mers outbreak have fanned public uncertainty, and parallels have been drawn with the government's poor response to last year's Sewol ferry disaster, which subdued domestic demand for many months, Ms Dabbs said.

More than 300 people, mostly teenagers, were killed in the ferry accident in April last year.

The government of Ms Park Geun-Hye has also been criticised for an inadequate response to the Mers outbreak, with the President's approval rating near a record low.

"Should the government fail to regain the public's trust, the outbreak could take a larger economic toll. The outbreak has caused us to lower our GDP forecast to 2.6 per cent for 2015," Ms Dabbs said.

The Bank of Korea this month slashed its benchmark interest rate by a quarter basis point to another record low of 1.5 per cent to stem the impact from the outbreak.

Some analysts predict that the central bank will have to cut the rate again in the coming months.

Despite lingering fears over Mers, the country is hosting two international sports events this week - the World University Games in southern Gwangju City and the ITTF World Tour Korea Open in the western city of Incheon.

Scores of heat-sensing cameras have been installed at airports, athletes' villages, sports venues and hotels, with some 600 medics monitoring participants.

Nevertheless, some athletes have pulled out.

One-third of Hong Kong's 100-strong team opted to stay at home after the city issued a South Korea travel warning to its citizens.

AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on July 04, 2015, with the headline '$26b stimulus for S. Korean economy'. Print Edition | Subscribe