September 10, 2012 / 1:52 AM / 6 years ago

South Korea sets $5.2 billion stimulus package as economy falters

SEOUL (Reuters) - South Korea unveiled a $5.2 billion stimulus package on Monday, including tax breaks worth $2 billion, as the government tries to shore up Asia’s fourth-largest economy in the face of Europe’s protracted debt crisis.

The steps would save taxpayers some 2.3 trillion won ($2.0 billion) in personal income tax, home transaction tax and domestic sales tax on automobiles and large electronics appliances, the finance ministry said in a statement.

“The fiscal crisis in Europe is continuing for a longer period than expected and the simultaneous slump in the advanced and emerging economies is continuing,” Finance Minister Bahk Jae-wan said at a policy meeting.

Shares in construction companies posted modest gains, with the Seoul stock market’s construction sector subindex .KRXCNST gaining 1.2 percent by 0444 GMT. But the broader market .KS11 was flat as investors shrugged off the measures.

Some economists were not impressed by the package, the bulk of which was complicated and did not appear to involve new spending. They said the moves would have only a limited effect on boosting spending by consumers, who remain worried about the highly uncertain future.

“I expect a lot of this is just pure politics, just trying to be seen to be doing something,” said Erik Lueth, Hong Kong-based senior regional economist at Royal Bank of Scotland, adding that fiscally conservative Korean households will only spend a portion of the tax breaks.

South Koreans will elect a new president in December. Recent opinion polls show a close contest between two leading figures, the ruling party’s candidate and an opponent who has not officially declared his candidacy.


The ministry said the package, which also includes a plan to make sure provincial governments spend their full budget allocations, would amount to 4.6 trillion won this year and 1.3 trillion won for next year, worth about $5.2 billion in total.

The measures were a follow-up to a $7 billion package in late June. Together, the stimulus packages are equal to about 1 percent of gross domestic product.

A ministry official said the two sets of measures would have the effect of increasing this year’s economic growth by 0.19 percentage points, but an increasing number of experts have been cutting the country’s economic growth forecast.

An official at the International Monetary Fund told Reuters last week that it would most likely cut its forecast for South Korea’s economic growth this year below 3 percent from the current 3.25 percent.

Combined exports in July and August fell by 7.6 percent from a year earlier, sharper than a 0.8 percent annual decline for the second quarter. Sales at South Korea’s top department and discount stores also contracted simultaneously for the third straight month in August year-on-year.

The Bank of Korea lowered its 2012 growth forecast to 3.0 percent in July from 3.5 percent previously but is widely expected to lower the view again when it releases revised forecasts in October.

The government has ruled out more direct measures to boost budget spending, however, saying it did not want to increase debt levels and fiscal soundness was important given Europe’s problems.

After the country’s export-reliant economy lost steam, the central bank cut interest rates in July for the first time in three years and is widely tipped to make another 25-basis-point rate cut at a policy meeting on Thursday.

($1 = 1130.3000 Korean won)

Editing by Choonsik Yoo and Richard Borsuk

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