South Korea Announces Stimulus After Lowering Growth Outlook

South Korea announced it will unveil a stimulus package in April to spur the property market and revive the economy after cutting its growth forecast for the second time in four months.

A supplementary budget and details of the measures to encourage property sales will be released over time, the Finance Ministry said in a statement in Sejong today. The economy will expand 2.3 percent this year, down from a 3 percent growth forecast made in December, it said.

The new forecast is more pessimistic than the central bank’s outlook for 2.8 percent growth and compounds concern that expansion in Asia’s fourth-largest economy will stall after slowing to the weakest in three years. Facing a stagnant property market and weaker yen, the Bank of Korea may come under pressure to lower the benchmark interest rate next month.

“This is a major cut, and marks a shift from a government that prioritized fiscal soundness to one that takes a more realistic view of the economy that needs a policy boost,” Lee Chul Hee, a Seoul-based economist at Tongyang Securities Inc., said by phone today. “The Bank of Korea will need to make a strong case that the economic recovery is on track not to make the interest-rate cut in April.”

Today’s revision was the second time the government has lowered its growth forecast since President Park Geun Hye was elected in December. The new forecast doesn’t factor in the coming stimulus package, Choi Sang Mok, a director general at the Finance Ministry, told reporters today.

Bonds Rise

South Korea’s three-year bonds rose, sending the yield to 2.47 percent, the lowest for the benchmark note in data compiled by Bloomberg going back to 2000.

Park’s government prioritizes job growth and helping low-income people while improving regulations for fair trade, according to the statement. Measures to stabilize the foreign-exchange market may include higher levies on banks that hold debt in foreign currencies.

“We’re less confident about the pace of economic recovery than we were last year,” Choi said. “There may be a setback in tax revenue, which isn’t good for economic growth. Economic indicators across industrial production and the service sector aren’t so positive.”

Finance Minister Hyun Oh Seok in his March 22 inaugural speech vowed to use “all possible policy measures” to boost an economy that’s grown less than 1 percent from quarter to quarter for seven periods. A weakening yen is a “problem” that is flashing a red light for exports, Hyun said March 23.

Repurchase Rate

Earlier this month, Bank of Korea Governor Kim Choong Soo and his board held the seven-day repurchase rate at 2.75 percent after a 25 basis-point cut in October. The board will meet April 11 to consider revising its own economic outlook and decide the benchmark interest rate. Seven out of 22 economists surveyed by Bloomberg News expected a 25 basis-point cut in the second quarter.

The Bank of Korea’s board decided today to keep the ceiling of cheap loans used to support small firms at 9 trillion won. The Finance Ministry said in today’s statement that the central bank needs to boost loan support.

“The Bank of Korea will cut the benchmark interest rate in April and also cut the growth outlook,” Kim Hyeon Wook, a Seoul-based economist at SK Research Institute and a former adviser at the Bank of Korea, said in a phone interview. “Governor Kim and his board will want to look as though they are independent but the chance for a rate freeze is slim.”

Supplementary Budget

The government’s supplementary budget will include 14 trillion won ($12.6 billion) in spending, about 1 percent of gross domestic product, Nomura International Ltd. economist Kwon Young Sun said in a report yesterday. Each 10 trillion won of extra spending will add 0.4 percentage point to GDP growth in 2013, he said.

South Korea’s current-account surplus widened to $2.7 billion in February from a revised $2.3 billion in January, the Bank of Korea said today.

The won fell 0.13 percent to 1,113.15 to the dollar at the close in Seoul today after weakening 0.6 percent yesterday, the biggest drop in nine days. South Korea’s Kospi index was little changed at 1,993.53.

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