South Korea will propose a supplementary budget of around 10 trillion won ($8.44 billion) to parliament soon, the government said on Tuesday, as it manages Brexit turmoil in financial markets, weak exports, and a corporate overhaul of the country’s shipping and shipbuilding industries.
The extra budget will be mostly funded from a surplus in tax revenue for the first half of the year. The finance ministry will not sell more treasury bonds to raise the funds to avoid running up additional government debt.
Lee Hoseung, director general of the economic policy bureau at the Ministry of Strategy and Finance, announced the government’s policies for the second half of the year in an embargoed briefing, which included the extra budget plans.
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“We saw very bad growth in January and February due to financial jitters from China on top of North Korea’s missile launches and a nuclear test,” he said.
“March was better on many terms…but we feel activity in the private sector is still lacking.”
Markets were largely unfazed by the announcement as an extra budget had been widely expected, given South Korea’s slow economic growth.
Shares bounced but the momentum didn’t last, with the main bourse trading flat as of 0227 GMT. The won was largely moving in line with offshore factors.
“This looks like the finance ministry just pushed the ball over to the Bank of Korea again,” said Stephen Lee, an economist at Samsung Securities.
“What I’m a bit concerned about is that tax revenue going forward might not be as great as it was in the first half of the year…We might face some difficulties later if the Brexit aftermath on exports and capex is worse than expected.”
Lee said the Bank of Korea many face pressure to cut interest rates again after it lowered them to a record low 1.25 percent to bolster economic growth earlier this month.
Finance Minister Yoo Il-ho said last week a supplementary budget would have to be ratified before mid-July to have maximum effect. Lawmakers in both ruling and opposition parties favour the extra budget.
Reflecting more difficult conditions inside and outside the country, the finance ministry lowered its growth forecast for this year to 2.8 percent from the 3.1 percent projected in December 2015.
Inflation for 2016 was also downgraded to 1.1 percent from 1.5 percent forecast previously.
The extra budget comes as the latest buffer against possible fallout from the corporate restructuring of the country’s struggling shipping and shipbuilding firms. Earlier this month, the government and central bank said they would create an 11 trillion won fund to support two state-run banks most exposed to these industries.
Lee noted global financial markets were reacting more sensitively to political events around the world. He saw a danger of volatility spiking again when Italy holds its own referendum regarding constitutional reforms in October and from the US presidential election on November 8.
To keep capital flows from rocking the economy, the government said it will continue with plans to ease the cap on the foreign currency forward positions local banks can hold from 40 percent from the current 30 percent starting July.
It will also pass an amendment in September to temporarily lower an existing levy on foreign exchange borrowings by banks, securities firms, creditors and insurance companies. The levy aims to reduce sudden volatility in markets.