South Korea plans mini-stimulus to shore up economic growth

A man walks in a park at a business district in Seoul, South Korea, on March 23, 2016.
A man walks in a park at a business district in Seoul, South Korea, on March 23, 2016. PHOTO: REUTERS

SEOUL (REUTERS) - South Korea has increased its planned spending for this year, the finance ministry said on Thursday (April 28), in its latest bid to jump-start the economy and pre-emptively address risks to growth.

At the same time, the country's central bank will keep monetary policy "flexible" to support economic activity and maintain financial stability, the finance ministry said in a statement.

For 2016, the government will aim to spend 96.4 per cent of its budget, up from the originally planned 95.9 per cent.

"We have avoided a sharp downturn in the economy through aggressive responses but momentum in the private sector remains weak," said the ministry.

The finance ministry said taxes accumulated so far this year have been satisfactory, affording the government some scope to keep the pace of spending brisk.

Meanwhile, the government's budget spending goal for the first half of the calendar year will be raised to 275.2 trillion won from 268.6 trillion won, the statement said.

This would leave less than half of its 386.4 trillion won budget planned for this year left for the remaining six months.

To address any spending crunches, the government said it would expand investments by state-run companies and encourage regional governments to draw up provincial supplementary budgets as fiscal reinforcement.

South Korea also plans to extend the sunset clause for eased mortgage rules from this year to end-July next year to keep activity in the housing market alive.

Household borrowing dramatically surged in 2014 when the rules were first eased.

While the pace of borrowing has stabilised somewhat, the trend remains upward.

This means South Koreans will be able to take advantage of the relaxed loan-to-value and debt-to-income limits of 70 and 60 per cent, respectively, for another year.

However, the government said measures to shore up demand-side growth alone would not be enough to mitigate risks due to other constraints such as a rapidly ageing population.

To address this, it will encourage companies to seek profits in new sectors through new tax credits for investments in non-traditional sectors, such as the development of Internet-connected devices called the Internet of Things.

"Investment has been sluggish on excessive regulations and uncertainties. Research and development investment, which is directly connected to our future livelihood has specifically been quickly shrinking after 2013," the ministry said.

Investment in intellectual property products rose just 1.5 per cent in 2015, according to the Bank of Korea, the slowest growth for the sector since a 4.0 per cent fall in 1998 during the Asian Financial Crisis.

Meanwhile, the ministry confirmed it would be extending trading hours for the country's stock exchange and foreign exchange markets by 30 minutes from the current six hours, in line with previous ministry officials' comments to Reuters.