South Korea Has Room for Fiscal Stimulus, Yoon Says

By Shamim Adam and Seyoon Kim

May 5 (Bloomberg) -- Finance Minister Yoon Jeung Hyun said South Korea has scope to add to its fiscal stimulus if needed to aid an economy where the jobless rate has climbed to the highest since 2005 and bad loans have risen to the most in four years.

“We do see positive signs” that the effects of extra spending and lower interest rates “are showing right now,” Yoon said in an interview yesterday in Bali, Indonesia. The nation “has a lot more fiscal room to maneuver,” though the government doesn’t have plans to allocate more spending, he said.

The Kospi stock index has risen 24 percent this year, beating a 4 percent gain by the MSCI Asia Pacific Index on optimism government spending and record interest-rate cuts will support Asia’s fourth-biggest economy. Warren Buffett, chairman of Berkshire Hathaway Inc., said on May 3 that some South Korean companies are undervalued and are on his “radar screen.”

“The worst is behind us,” Kim Jong Chang, governor of the Financial Supervisory Service, said yesterday in an interview in Seoul. Bad loans at the nation’s banks are “manageable” and industry profits will begin to recover next year, he said.

Parliament approved on April 30 the government’s revised 17.2 trillion-won ($13.6 billion) package of cash handouts, cheap loans, labor-market aid and infrastructure spending that adds to 50 trillion won allocated in relief measures.

“We don’t have any further plans because we haven’t started to execute the supplementary budget yet,” Yoon said. “In terms of other policy measures that can be taken, for example for the financial markets or other situations, of course we will continue to add on those as we see necessary.”

Sound Position

South Korea has leeway to add to stimulus to ensure an economic recovery takes hold, the International Monetary Fund and Organization for Economic Cooperation and Development both signaled in global outlook reports.

“We do have a very sound fiscal balance. Right now, we are aggressively using our expansionary fiscal measures to try to revive the economy as much as possible,” Yoon, 62, said in Bali, where he is attending the annual Asian Development Bank meeting.

The country’s budget deficit will be 3.2 percent of gross domestic product in 2009, less than an average 10.4 percent shortfall for major advanced economies, according to IMF forecasts.

Bank of Korea Governor Lee Seong Tae left the benchmark interest rate unchanged at 2 percent for a second month on April 9 after 3.25 percentage points in reductions since early October, saying there are signs the economic slump may abate.

“Because of the interest-rate cuts and measures to try to strengthen the financial sectors, we also see signs of recovery in the financial industry,” Yoon said.

Economy Expands

South Korea’s economy unexpectedly expanded 0.1 percent in the first quarter from the previous three months, when it contracted 5.1 percent.

Still, “we don’t believe it is a full-fledged recovery in consumption yet,” Yoon said. “This is an area we have a lot of concern about. In a recession right now, unemployment could be one of our biggest issues.”

Consumers, already burdened by record debt, may rein in spending amid fears for job security. The jobless rate climbed to 3.7 percent in March as the number of people employed fell by the most since March 1999.

South Korean banks’ bad-loan ratio climbed to the highest in almost four years in the first quarter, the financial regulator said yesterday. Hana Bank, the country’s fourth biggest, had the highest ratio followed by Woori Bank.

Signs of Improvement

In contrast to the deteriorating jobs market, other economic indicators are painting a more positive picture.

Confidence among manufacturers for May rose to a seven- month high. Exports, which are equivalent to about 60 percent of GDP, fell 19 percent in April from a year earlier, less than the 22 percent decline in March.

“Without a full recovery in the global economy, it would be very difficult for our economy to have a full-fledged recovery,” said Yoon, who became finance minister in February. “The general view is probably at the end of this year, or next year would be the bottoming out period for the economy.

“After that bottom has been passed, we will see stronger signs in the economy,” he said, adding the nation’s growth in 2010 is likely to surpass the 1.5 percent expansion predicted by the IMF last month.

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.net; Seyoon Kim in Seoul at skim7@bloomberg.net.