Gov't seeks to bring extra budget into fight against economic slump

Gov't seeks to bring extra budget into fight against economic slump

Feb 25, 2020

Seoul (South Korea) Feb 25: The government and ruling party agreed Tuesday to push for an extra budget to avert an economic slowdown amid the fast spreading outbreak of the new coronavirus.
"The need for an active role of finances, including an extra budget, has increased due to a sharp increase in the number of infected people over these past few days," Finance Minister Hong Nam-ki said in a policy coordination meeting also attended by top leaders of the ruling Democratic Party and ranking officials from the presidential office Cheong Wa Dae.
Hong's remarks marked a complete turnaround from about three weeks earlier when he insisted an extra budget may not be necessary.
The number of people diagnosed with the novel virus, dubbed COVID-19, had remained at less than 30 until early last week, but began to shoot up following two mass infection cases in the country's southeastern city of Daegu and North Gyeongsang Province.
As of Tuesday, South Korea has reported 893 confirmed cases with nine related deaths.
The proposed extra budget clearly follows the sharp increase in the number of infected people, but it is not intended for the fight against the virus itself.
South Korea already has 512.5 trillion won (US$423.7 billion) for its annual spending, the largest budget in the country's history, while Hong says the government can and will immediately inject up to 2 trillion won from its reserve funds into its war against the novel virus.
The extra money, if approved by the parliament, will instead be used to revamp the local economy, which many say will further slow down on reduced spending and exports.
"South Korea is now facing problems both at home and abroad. With COVID-19 now spreading in the country, its local consumption is dramatically dwindling while a drop in exports may be inevitable due to rapid cooling in the economy of China that accounts for a large portion of our exports," Eugene Investment & Securities analyst Huh Jae-hwan said.
South Korea's exports have already dropped for 14 consecutive months since December 2018, partly due to an equally steady decline in shipments to China, the world's single largest importer of South Korean products.
Many economic players have already revised down their growth estimates for both China and South Korea, citing the crippling effects of the virus outbreak on their consumption and exports.
Global ratings agency Moody's has lowered its growth outlook for South Korea to 1.9 percent from the previous 2.1 percent, while Fitch Solutions, the consultancy arm of global credit appraiser Fitch Group, has slashed its own growth projection for Asia's fourth-largest economy to 2.2 percent from 2.5 percent.
The Bank of Korea (BOK) earlier estimated the local economy would expand 2.3 percent on-year in 2020, slightly rebounding from the 2.0 percent growth that marked the slowest rise in a decade.
The BOK is set to offer its latest growth outlook on Thursday, and many expect the South Korean central bank to join others in revising down its growth estimate for South Korea.
Already many industries are reporting heavy damage due to the fallout from the virus outbreak.
South Korea's top carmakers Hyundai Motor and Kia Motors were earlier forced to shut down their production facilities for days due to a shortage of parts from their Chinese suppliers. Their operations resumed only after they found replacement parts from Southeast Asian suppliers.
Major retailers are estimating their annual operating profit will fall by up to 30 percent this year.
The analysts say the only thing that can save local businesses and the economy may be a "swift" injection of a "massive" extra budget.
"With the rise in the number of infections, a drop in indicators on domestic consumption will be inevitable," said An Ki-tae, an analyst at NH Investment & Securities.
"If the country draws up a massive extra budget and funnels the money into infrastructure projects that have immediate stimulating effects, a V-shaped recovery may be possible in the second quarter," he said.
Whether the deeply polarized parliament will approve an extra budget still remains to be seen, especially with the rival parties intensifying their policy offensives against one another ahead of the upcoming parliamentary elections in April.
Also, the country has only three times devised an extra budget in the first quarter -- in 1998 and 1999 in the aftermath of the Asian financial crisis and in 2009 in the aftermath of the 2008 global financial crisis.
"It is only right that the government provide its 2 trillion won in reserve funds at the earliest date possible instead of waiting for an extra budget," Finance Minister Hong said.
"The government will take bold and swift support measures."
Source: Yonhap News Agency