Seoul earmarks $11bn to stir demand

South Korea on Monday unveiled an $11bn stimulus package to boost stagnant domestic demand in Asia’s fourth-largest economy as export growth slows amid the global downturn.

Data released on Monday showed that exports, the main growth driver, grew at the slowest pace in 13 months in October, hit by falling demand from China.

Lee Myung-bak, the president who campaigned last year on a pledge to boost annual economic growth to 7 per cent, told a radio programme that the stimulus package would help assure growth of 4 per cent next year. The government says 200,000 jobs will be created.

“Now is the time we have to take good care of the real economy,” Mr Lee said. “We can’t blame the world economy. To achieve 4 per cent growth, companies should do their utmost but, considering worsening exports, we should implement policies to revive domestic demand.”

The package includes an extra Won11,000bn ($8.7bn, €6.8bn, £5.5bn) in spending on infrastructure and measures to help out small businessmen and farmers, plus Won3,000bn in tax cuts. The government has already promised Won19,000bn in tax cuts and Won4,900bn in additional spending and about Won8,000bn to support the ailing construction industry.

Without the new measures, said Kang Man-soo, the finance minister, a further slowdown threatened.

“If the current situation continues, the economy is expected to grow by about 3 per cent next year. If the global economy shrinks further, it may be difficult to achieve 3 per cent growth,” he said.

The measures are likely to be followed by a 0.25 per cent interest rate cut this week. Data show consumer prices rose 4.8 per cent in October, easing from a 5.1 per cent rise in September. The Bank of Korea cut its benchmark interest rate by 75 basis points to 4.25 per cent last week.

Exports, which account for more than half of gross domestic product, rose 10 per cent in October from a year earlier, compared with September’s 28.2 per cent gain, as exports to China fell 1.8 per cent. But October’s trade surplus was $1.22bn, as import growth slowed to 12 per cent on falling oil prices.

The global credit crunch has sent South Korea’s financial markets into a rapid dive, with the Korean won falling almost 30 per cent against the dollar this year and the benchmark Kospi stock index dropping more than 40 per cent. The economy grew at the slowest pace in four years in the third quarter. However, the won rose about 2.2 per cent on Monday and the Kospi ticked up 1.4 per cent.

Hwang In-sung, of Samsung Eco­nomic Research Institute, said: “It remains questionable how effective the measures will be in spurring demand as the fundamental problem stems from the external environment.”

By Song Jung-a in Seoul
Published: November 3 2008 07:18 | Last updated: November 3 2008 07:18

Source: Financial Times

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