By Seyoon Kim
Feb. 10 (Bloomberg) -- South Korea’s new Finance Minister Yoon Jeung Hyun pledged to increase stimulus spending after forecasting the economy will shrink about 2 percent this year and lose about 200,000 jobs.
Yoon’s estimate is a reversal of the government’s December prediction of 3 percent growth in 2009 and would be South Korea’s first contraction since the Asian financial crisis a decade ago. The government will submit a spending plan to parliament by the end of March, he told said in Gwacheon today, declining to add how much extra stimulus is sought.
The government already has allocated 51 trillion won ($36.8 billion) in tax cuts and infrastructure projects to shore up domestic demand as exports decline and unemployment climbs. South Korea will consider setting up a fund to buy stakes in troubled companies to stem defaults as the economy slows, the new top financial regulator Chin Dong Soo said separately today.
“South Korea faces substantial downside risks and policy makers ought to take active steps, even more than they feel comfortable with,” said Kwon Young Sun, an economist at Nomura International Ltd. in Hong Kong. “The government can use the extra budget to help middle and low-income earners, while the central bank can cut rates further.”
Standard & Poor’s said today the government’s finances are “relatively healthy” and extra spending is unlikely to threaten the nation’s foreign-currency credit rating of A.
Yoon, 62, began in the top finance post today after President Lee Myung Bak fired most of his economic team following a slump in voter support as the local currency plunged and the economy faltered.
‘Regaining Trust’
Yoon’s prediction of 200,000 job losses is the worst since 1.3 million positions were lost in 1998.
“It isn’t pleasant for me to have to talk about an economic contraction, but I believe honesty is the first step toward regaining trust in the government from the market and the people,” Yoon said.
The Kospi stock index fell 0.3 percent to 1,198.87 at 3 p.m. in Seoul, narrowing this year’s gain to 6.6 percent. The won, Asia’s worst-performing currency in 2008, slipped 0.1 percent to 1,382.9 against the dollar.
Policy makers across Asia are stepping up spending to revive their export-dependent economies.
China is rolling out a 4 trillion yuan ($585 billion) stimulus package, equivalent to almost a fifth of gross domestic product, to support an economy that is growing at the weakest pace in seven years. Japan’s 10 trillion yen ($111 billion) relief measures are worth about 2 percent of its economy.
Yoon also said the government will inject capital into financial institutions “preemptively” if needed.
Credit Rating
South Korea is setting up a 20 trillion won fund to be used for buying banks’ preferred stock and subordinated debt as the weakening economy increases bad loans and erodes banks’ capital.
“It depends on the size, but I don’t think the extra budget or the capital injection to the banks will pose a threat to Korea’s sovereign rating,” Takahira Ogawa, Standard & Poor’s Singapore-based director of ratings, said in an interview.
S&P raised South Korea’s long-term foreign-currency credit rating in July 2005 to A, the sixth highest it awards.
The economy shrank 3.4 percent last quarter from a year earlier. Exports, which are equivalent to more than 50 percent of GDP, fell a record 32.8 percent in January.
“We’ll place utmost priority on creating jobs through activating domestic demand and will pursue a supplementary budget as early as possible,” Yoon said.. “I will do my best so the economy turns around next year,” he added, without providing a growth forecast for 2010.
Interest Rates
The central bank last month cut its benchmark interest rate to a record low of 2.5 percent and will reduce borrowing costs again this week, according to a Bloomberg survey of economists.
Asia’s fourth-largest economy will shrink 4 percent this year before rebounding to 4.2 percent growth in 2010, the International Monetary Fund forecast last week.
To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net
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