GWACHEON, South Korea—South Korea announced a $5.23 billion stimulus package, the latest round of state support for Asia's fourth-largest economy, as it struggles with the global economic downturn.
The Ministry of Strategy and Finance said in a statement it was focused on "using all possible resources available for now" to help the economy, but analysts still expect another interest rate cut from the Bank of Korea later this week.
Despite the growing risks to economic growth, the Seoul government has resisted drawing up an extra budget for stimulus, opting to reserve its fiscal firepower in case things worsen significantly.
The 5.9-trillion-won ($5.23 billion) package—4.6 trillion won of stimulus for the remainder of this year and 1.3 trillion won for next year—doesn't require a new national budget, the ministry said.
It expects the latest stimulus package to add 0.06 percentage point to this year's economic growth and 0.1 percentage point to next year's.
The stimulus announced Monday will cut taxes on individual incomes and purchases of houses or cars, as well as expand state-funded social welfare programs.
It follows an 8.5-trillion-won stimulus package announced in June to boost the economy in the second half of 2012. The combined stimulus of 13.1 trillion won for this year equates to 1% of the country's gross domestic product.
Even so, Woori Investment & Securities analyst Peter Park said the stimulus was unlikely to boost the economy as much as the government hopes, and he expects another policy rate cut when the central bank meets later this week.
"Even with the latest stimulus package, it's difficult to achieve 3% GDP growth this year," said Mr. Park.
"Who would buy houses and cars when no one expects a pickup in the housing sector and the overall economy? A rate cut this Thursday is called for."
Daewoo Securities analyst Yoon Yeo-sam also bet on more Bank of Korea stimulus and expects a 0.25 percentage point rate cut Thursday.
The BOK kept its benchmark interest rate steady at 3% at its August rate review after delivering a surprise 0.25 percentage point cut in July.
Markets didn't react much to the announcement of the stimulus package, as investors awaited policy decisions from the Bank of Korea and the U.S. Federal Reserve this week.
South Korea's Kospi index closed down 0.3% while the dollar edged down to finish at 1,129.30 won in the domestic trading session, from 1,130.30 won late Friday in Seoul.
"Korea's long track-record of fiscal discipline gives it policy flexibility to respond to global headwinds," said Andrew Colquhoun, Fitch's head of Asia Pacific sovereign ratings.
"Fitch views the impact of the stimulus as announced as consistent with Korea's ratings at their current level," he added.
South Korea's export-led economy has been severely hit by shrinking overseas demand amid the prolonged euro-zone sovereign-debt crisis and weakened global economy.
Overall exports in August fell 6.2% from a year earlier—the second straight monthly decline—as exports to the European Union fell 9.3%. Imports in August fell 9.8%.
The domestic economy is also losing steam. Sales at the country's top three department stores fell by 6.1% in August from a year earlier for a third monthly decline.
In June, the finance ministry cut its 2012 growth forecast to 3.3% from its earlier projection of 3.7%. Many analysts expect GDP growth in a mid-2% range.
wsj.com
The Ministry of Strategy and Finance said in a statement it was focused on "using all possible resources available for now" to help the economy, but analysts still expect another interest rate cut from the Bank of Korea later this week.
Despite the growing risks to economic growth, the Seoul government has resisted drawing up an extra budget for stimulus, opting to reserve its fiscal firepower in case things worsen significantly.
The 5.9-trillion-won ($5.23 billion) package—4.6 trillion won of stimulus for the remainder of this year and 1.3 trillion won for next year—doesn't require a new national budget, the ministry said.
It expects the latest stimulus package to add 0.06 percentage point to this year's economic growth and 0.1 percentage point to next year's.
The stimulus announced Monday will cut taxes on individual incomes and purchases of houses or cars, as well as expand state-funded social welfare programs.
It follows an 8.5-trillion-won stimulus package announced in June to boost the economy in the second half of 2012. The combined stimulus of 13.1 trillion won for this year equates to 1% of the country's gross domestic product.
Even so, Woori Investment & Securities analyst Peter Park said the stimulus was unlikely to boost the economy as much as the government hopes, and he expects another policy rate cut when the central bank meets later this week.
"Even with the latest stimulus package, it's difficult to achieve 3% GDP growth this year," said Mr. Park.
"Who would buy houses and cars when no one expects a pickup in the housing sector and the overall economy? A rate cut this Thursday is called for."
Daewoo Securities analyst Yoon Yeo-sam also bet on more Bank of Korea stimulus and expects a 0.25 percentage point rate cut Thursday.
The BOK kept its benchmark interest rate steady at 3% at its August rate review after delivering a surprise 0.25 percentage point cut in July.
Markets didn't react much to the announcement of the stimulus package, as investors awaited policy decisions from the Bank of Korea and the U.S. Federal Reserve this week.
South Korea's Kospi index closed down 0.3% while the dollar edged down to finish at 1,129.30 won in the domestic trading session, from 1,130.30 won late Friday in Seoul.
"Korea's long track-record of fiscal discipline gives it policy flexibility to respond to global headwinds," said Andrew Colquhoun, Fitch's head of Asia Pacific sovereign ratings.
"Fitch views the impact of the stimulus as announced as consistent with Korea's ratings at their current level," he added.
South Korea's export-led economy has been severely hit by shrinking overseas demand amid the prolonged euro-zone sovereign-debt crisis and weakened global economy.
Overall exports in August fell 6.2% from a year earlier—the second straight monthly decline—as exports to the European Union fell 9.3%. Imports in August fell 9.8%.
The domestic economy is also losing steam. Sales at the country's top three department stores fell by 6.1% in August from a year earlier for a third monthly decline.
In June, the finance ministry cut its 2012 growth forecast to 3.3% from its earlier projection of 3.7%. Many analysts expect GDP growth in a mid-2% range.
wsj.com
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