South Korea Plans to Spend Record 17.7 Trillion Won

By Seyoon Kim

March 24 (Bloomberg) -- South Korea plans to spend a record 17.7 trillion won ($13 billion) on cash handouts, cheap loans, infrastructure and job training to revive an economy on the brink of its first recession in more than a decade.

The stimulus will boost economic growth by 1.5 percentage points and help create 552,000 new jobs, the finance ministry said in Gwacheon today. The package, equivalent to 1.9 percent of gross domestic product, is more than double the spending in 1998 during the Asian financial crisis.

President Lee Myung Bak, whose approval rating has dropped since he took office in early 2008 as the economy faltered, aims to get the plan passed by parliament in April to add to the 51 trillion won in stimulus already allocated. Asian governments have pledged about $700 billion in spending as the deepening global recession roils their export-dependent economies.

“The key is how fast the government can get approval from the parliament and how efficiently the government will implement the plans,” said Lim Jiwon, an economist at JPMorgan Chase & Co. in Seoul.

South Korean lawmakers last month pushed and shoved each other in parliament over a bill to ease restrictions on media ownership, potentially hampering the Lee administration’s efforts to pass other legislation.

The spending package, the biggest to be announced at one time in South Korea, is part of the government’s request for an extra budget of 28.9 trillion won. The extra budget includes 11.2 trillion won needed to fund previously announced projects amid a shortfall in tax revenue.

Shares Increase

The Kospi stock index advanced 0.8 percent to 1,208.88 at 12:05 p.m. in Seoul, extending this year’s gain to 7.5 percent. The won climbed 0.6 percent to 1,384 per dollar and has risen 9.4 percent in the past month, Asia’s best-performing currency.

“An active role for fiscal policy is called for more than ever,” Finance Minister Yoon Jeung Hyun told reporters. The spending will “help our economy recover from the current difficulty and stabilize peoples’ lives,” he added.

Asia’s fourth-largest economy shrank 5.6 percent last quarter from the previous quarter, the biggest drop since 1998.

Neighboring Japan is preparing a spending package that economists say may be bigger than the 10 trillion yen ($103 billion) already pledged to support an economy facing its worst recession since 1945. China has a 4 trillion yuan ($585 billion) stimulus plan, which runs through 2010.

Job Losses

South Korea plans to spend 3.5 trillion won on job creation and employment training and 4.5 trillion won expanding loans to smaller companies facing a shortage of cash, the ministry said today. About 3 trillion won is allocated to rebuild roads, railways and other infrastructure in provincial areas, it said.

South Korea lost 142,000 jobs in February, the biggest decline since September 2003. Industrial production plunged a record 25.6 percent in January.

The government will spend 4.2 trillion won providing cash and coupons to about 2.6 million people with little or no income, improving heating systems for rental homes and extending cheaper loans to college students from low-income families.

South Korea plans to finance 16.9 trillion won of the stimulus by selling debt, the ministry said today, which would take this year’s total bond sales to a record 91.2 trillion won.

The benchmark 2014 government bond yield has risen almost half a percentage point since the end of 2008 on concern auctions will overwhelm investor demand. The yield gained 6 basis points to 4.34 percent today.

Parliament Approval

The government needs parliamentary approval for the budget proposal. While the ruling Grand National Party agreed on the plan, the main opposition Democratic Party suggested a stimulus of 13.8 trillion won. Any delay in passing the package will erode confidence, according to Moody’s Investors Service.

“The Korean government’s policy approach is becoming more cohesive and proactive,” Thomas J. Byrne, a senior vice president at Moody’s, said in an interview in Seoul.

“Confidence would be undermined if this coordinated approach fizzles and the key thing would be whether the government will succeed in getting these various programs passed through the National Assembly in April,” he said.

In July 2007, Moody’s raised its rating on South Korea’s long-term foreign-currency debt to A2, the sixth-highest investment grade.

Industrial Bank of Korea, which has received 1 trillion won of state capital since November, will get 300 billion won from the extra budget to enable it to increase lending to exporters, the ministry said today. Korea Asset Management Corp., a state agency that liquidates distressed assets, will get 200 billion won to boost its capacity to buy bad debt from banks.

President Lee’s administration has set up a 20 trillion won fund to replenish Korean banks’ capital as bad loans increase, and is establishing a 40 trillion won fund to buy distressed corporate bonds.

National debt will increase to 366.9 trillion won, or 38.5 percent of the GDP, after the extra budget, the finance ministry forecast. That’s up from 32.5 percent in 2008.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net