South Korea announces stimulus measures to support faltering growth

South Korean Finance Minister Yoo Il Ho speaks at the Asian Infrastructure Investment Bank (AIIB) on Jan 16, 2016.
South Korean Finance Minister Yoo Il Ho speaks at the Asian Infrastructure Investment Bank (AIIB) on Jan 16, 2016.PHOTO: AFP

SEJONG, SOUTH KOREA (REUTERS) - South Korea unveiled a set of stimulus measures on Wednesday (Feb 3) to keep Asia's fourth-largest economy on a recovery track in the face of falling oil prices and tumbling demand from China and other major economies.

The measures include boosting public spending by 6 trillion won (S$7.07 billion) and lending by policy banks by 15.5 trillion won, both during the first quarter and compared with previous plans.

The finance ministry said in a statement that individual consumption taxes on passenger cars would also be cut to 3.5 per cent from 5 per cent, effective until the end of June.

"Our economy has been recovering on the back of consumption since late last year, but economic conditions have been worsening more than expected since the start of the year while the slump in exports is deepening," said Finance Minister Yoo Il-ho in opening remarks at a meeting with other government ministers.

Mr Yoo has primed markets for a stimulus package as economic growth is seen under severe pressure and said the government would also focus on job growth this year as well as nurture new sectors like healthcare and sports.

The government estimates the latest measures would lift economic growth for the January-March period by 0.2 percentage points on a quarter-on-quarter basis.

Exports in January tumbled 18.5 per cent from a year earlier, while consumer and business sentiment indicators as well as house prices all softened.

March futures on three-year treasury bonds were up early in the day, trading up 0.08 points at 110.16 on expectations the Bank of Korea may join the government and ease policy further.

The consensus is currently for rates to be unchanged for an extended period of time as household debt remains high, but with inflation inching down in January and exports suffering early in the year some analysts say they would not be surprised if the central bank cut rates soon.

The Bank of Korea last cut interest rates in June to the current record-low 1.50 percent and has grown less dovish since, with Governor Lee Ju-yeol stressing the importance of structural reform to achieve long-term growth.