Supplementary budget possible to prop up the economy: vice finance minister


The government is considering fresh measures to prevent sudden capital flight as a “complex set of growing external uncertainties” could destabilize the market, the Finance Ministry said Tuesday.

“Capital control measures currently in place have been reasonably effective, but we’re studying the imposition of additional measures in case of excessive cross-border capital flows,” Vice Finance Minister Shin Je-yoon said in a briefing on the ministry’s policy plans for this year. Finance Minister Bahk Jae-wan reported the policies to President Lee Myung-bak in the day.

Shin’s comments come as the ministry advanced budget spending and flagged more stimulus spending as possible policy tools to prop up the economy.

He stressed the dangers of a sudden withdrawal of foreign funds in the country’s bond markets and banks’ foreign debt, which raises insolvency risks in the worst case scenario.

“But we don’t plan to impose a financial transaction tax, especially on equities,” he added.

Highlighting growing signs of strain in Asia’s fourth largest economy, the ministry said it will offload 44.1 percent of the annual budget in the first quarter of this year.

The allocation is the biggest portion for a first three months since 2002 and represents a sizable increase from 39.9 percent for the same period last year. It said 70 percent of the annual budget will be spent during the first half of the year, up from last year’s 67.3 percent.

“We plan to adopt expansionary macroeconomic policy should conditions deteriorate in the real economy and post 1 to 2 percent growth this year,” the latest report said.

The new policy direction is based on the assessment that the country could be in more trouble this year from the fiscal crisis in Europe and rising volatility from commodities. Finance Minister Bahk Jae-won on Monday said economic conditions could “worsen due to uncertainties from a number of factors.”

The government has a “three-step” contingency plan in place to protect the economy from changing conditions. In case of the highest crisis level, where excessive capital flight from stocks, bonds and financial institutions threatens to push the real economy into recession, the ministry plans to allocate a supplementary budget to prop up the economy.

The country posted a trade surplus of $33.3 billion in 2011. The Ministry of Knowledge Economy forecasts the figure to shrink to $25 billion on slowing demand from major economies.

By Cynthia J. Kim
(cynthiak@heraldcorp.com)