South Korea unveils $19.3b stimulus package to support Mers-hit economy

Pedestrians, some wearing face masks, in Seoul on June 25, 2015.
Pedestrians, some wearing face masks, in Seoul on June 25, 2015. PHOTO: AFP

SEJONG, SOUTH KOREA (REUTERS) - South Korea proposed on Friday a stimulus package worth 16.1 trillion won (S$19.3 billion) to jump-start Asia's fourth-largest economy as it fights to overcome the twin challenges of weak domestic and global demand.

The government set an 11.8 trillion won supplementary budget, which included new spending plans of 6.2 trillion won, and 5.6 trillion won to cover a tax shortfall, the finance ministry said in a statement.

It also confirmed a separate financial package totaling 9.9 trillion won.

Even though the additional spending will put a strain on the government's fiscal position, the ministry said Seoul's immediate priority is to revive an economy reeling from a collapse in exports and the spread of the deadly Middle East Respiratory Syndrome (Mers) virus.

"Our fiscal soundness will worsen temporarily, but we have decided it is more important to make the economy recover early on and create a sturdy fiscal foundation," said Vice Finance Minister Bang Moon-kyu told an embargoed briefing.

The government is targeting gross domestic product growth of 3.1 per cent this year, though analysts doubt it could be achieved even with the additional spending - the finance ministry expects the total stimulus to boost economic growth by 0.3 percentage points.

The ministry said it plans to sell 9.6 trillion won in new treasury bonds to fund the bulk of the supplementary budget, with the remainder funded by other means such as existing public funds.

The financial support package include plans to increase the amount of credit guarantees and trade financing, and has no direct bearing on the budget.

The outbreak of Mers in late May - the largest outside of Saudi Arabia with 33 deaths and 184 cases reported so far - has scared off tourists and kept South Koreans off cinemas, restaurants and shopping areas.

Confidence among consumers and manufacturing companies slumped to multi-year lows, recent surveys showed, highlighting why policymakers had to move quickly to prop up the ailing economy.

The government's fiscal deficit would now reach 3.0 per cent of the annual gross domestic product this year, higher than a 2.1 per cent deficit projected earlier.

The debt-to-GDP ratio will also rise to 37.5 per cent this year from the previous target of 35.7 per cent projected, the ministry said. This is still far lower than the world average of 57.7 per cent in 2014, according to the CIA's World Factbook.

The central bank cut the policy interest rate by 25 basis points to a record low of 1.50 per cent last month, citing the impact of Mers on domestic demand. Some analysts say the Bank of Korea will have to cut the rate again in coming months.

The government will move the supplementary budget to parliament on July 6 for approval.