MERS Prompts Fiscal Stimulus in Korea as Confidence Falls

Updated on
MERS in Korea
People wearing masks stand next near exchange rate signage in Seoul. Photographer: SeongJoon Cho/Bloomberg

South Korea plans a stimulus package of more than 15 trillion won ($13.5 billion) to cushion the economic impact of a deadly respiratory disease and a drought.

The finance ministry announced the stimulus Thursday while cutting its outlook for economic growth this year to 3.1 percent and slashing its inflation projection to 0.7 percent. The package will include a supplementary budget, the ministry said, without outlining how much of the spending will be new outlays.

“We’re trying to cope with shocks from non-economic issues by boosting fiscal spending sufficiently and keeping it expansionary,” said Lee Chan Woo, a director general at the ministry. “This supplementary budget is to offset the effect of the Middle East Respiratory Syndrome, the drought, and to help low-income earners.”

The won was little changed at 1,108.61 per dollar at 1:08 p.m. in Seoul. The Kospi stock index was also little changed. The yield on South Korea’s 10-year government bond rose 1 basis point to 2.49 percent.

“With no detail on how much will be in the extra budget, the government announcement won’t be enough to support declining consumer sentiment,” said Oh Suk Tae, a Seoul-based economist for SG Securities Co. He said at least 10 trillion won of new outlays is needed.

Data released earlier Thursday by the central bank shows consumer confidence in June fell to the lowest level since December 2012, following the spread of MERS to South Korea in May.

Death Toll

The disease, first reported in the nation on May 20, has infected 180 people and killed 29, according to the health ministry.

More than 120,000 tourists have canceled trips to South Korea since the outbreak began, government data shows.

Sales at department stores fell almost 30 percent in the first two weeks of the outbreak from the previous fortnight as shoppers stayed at home. That compares with the 8.7 percent contraction in the two-weeks after the deadly Sewol ferry disaster last year.

Finance minister Choi Kyung Hwan said the government needs more time to analyze the impact of the MERS before deciding the size of the extra budget.

“Issuing government bonds will be inevitable to fund the supplementary budget, which could hurt our fiscal position temporarily,” Choi said.

Growth Impact

“Credit card spending, a leading indicator of general consumption, shows that private spending is decreasing faster than after the Sewol accident from last year,” Lee at the ministry said.

On top of this, the Seoul metropolitan area and Gangwon province to the east are suffering their third-worst droughts on record, according to the Korean weather service.

The Bank of Korea has already reduced borrowing costs in a “preemptive step” to support consumption, taking its key interest rate to a record low of 1.5 percent earlier this month.

The ministry’s cut to its 2015 growth forecast, from an earlier projection of 3.8 percent, brings it into line with current estimates from the central bank. Its downgrade of inflation expectations from 2 percent previously compares 0.9 percent from the BOK.

The finance ministry said the slowing global economic recovery and a weak yen and euro are other risks to South Korea, which are delaying a recovery in exports. Overseas shipments will fall 1.5 percent this year, the ministry forecasts.

South Korea has posted fiscal deficits since the budget swung into the red in 2008 during the global financial crisis. An original aim to balance the books by 2014 was pushed back until at least 2017.

The ministry plans to submit supplementary budget plans for parliamentary approval early July.

For more, read this QuickTake: MERS

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