South Korea Unveils $11 Billion Growth Plan as Economy Weakens

South Korea unveiled 11.7 trillion won ($11.4 billion) in government initiatives to shore up Asia’s fourth-largest economy after growth slumped to the weakest pace in more than a year in the second quarter.

President Park Geun Hye’s administration, contending with a drop in consumer spending in the aftermath of an April ferry disaster, will deploy funds from this year’s budget and step up deployment of cash from government-run programs, it said in a statement today. State-backed lenders will extend 29 trillion won in credit. The Bank of Korea expanded a cheap-loan program for small companies.

The measures, including support for small businesses and the poor, were released hours after a government report showed the economy expanded 0.6 percent in April-to-June from the previous quarter, less than forecast. The slowdown raises the stakes for Park’s longer-term plans to reduce South Korea’s reliance on large conglomerates and boost the role of small and innovative enterprises.

“The government and the Bank of Korea are determined to reverse weak sentiment,” said Chang Jae Chul, an economist at Citigroup Inc. in Seoul. “A rate cut became more likely today with the central bank and the government announcing support measures together.”

‘Long Tunnel’

The Kospi index fell 0.1 percent at the close in Seoul today, erasing earlier gains as local institutional investors sold stocks amid disappointing earnings at some South Korean companies. The won dropped 0.5 percent against the dollar to 1028.78.

South Korea should ease regulations to help create more jobs and spur investment while household income needs to rise steadily in order for consumption to increase, Park said at a meeting of ministers today, according to a statement on the presidential office’s website.

The nation could fall into a “long tunnel” of depression unless it achieves a recovery in the domestic economy as soon as possible, Park said.

The BOK increased the ceiling for the loan facility for small companies to 15 trillion won from 12 trillion. It has held its benchmark interest rate steady since May last year when it lowered it to 2.5 percent, with its latest decision this month to stay on hold meeting opposition from one board member.

Growth Outlook

Politicians have stepped up pressure on Governor Lee Ju Yeol to lower borrowing costs. Chung Hee Soo, a ruling party lawmaker and chairman of a parliamentary finance committee, demanded a 50-basis-point rate cut to boost domestic demand, and Lee Man Woo, another ruling party lawmaker, called for one or two cuts in the rate this year.

The ferry accident that left more than 300 people dead or missing prompted consumers to cut spending on entertainment and travel in mourning. Private consumption fell 0.3 percent in the second quarter, the biggest fall since the third quarter of 2011.

The government cut its growth projection for this year to 3.7 percent from 3.9 percent, still higher than a 3.6 percent median forecast in a Bloomberg survey of economists.

The stimulus includes housing support for the poor and aid for small and medium-sized companies. The government also loosened home-loan restrictions in a bid to revive a stagnant property market, and announced tax incentives to encourage companies to boost wages, investment and dividends.

BOK Watched

Goldman Sachs changed its call on the BOK policy rate to a cut from on-hold, with the change to come possibly in August, according to Seoul-based economist Kwon Goohoon in a July 21 report.

“Economic activity in Korea has weakened considerably in magnitude and duration while inflation remains benign,” Kwon wrote.

Nomura Holdings Inc. economist Kwon Young Sun and Societe Generale SA economist Oh Suk Tae also forecast an interest rate cut in August.

The 0.6 percent growth in the April-June period was the weakest since the first quarter last year and was below the median 0.7 percent estimate in a Bloomberg News survey of 17 economists. From a year earlier, the economy expanded 3.6 percent.

Exports increased 1.9 percent after a 1.5 percent gain in the first quarter, and facility investment rose 1.3 percent, according to the BOK.

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