Korea: Government passes supplementary budget and proposes additional emergency spending to combat Covid-19
March 25, 2020
Policymakers have needed all hands on deck in recent weeks, as the global spread of Covid-19 has weighed heavily on all aspects of the Korean economy. The domestic spread of the virus prompted the government to unleash multiple rounds of fiscal stimulus, which are expected to top roughly KRW 81.7 trillion (USD 65 billion)—approximately 4.0% of GDP—and could cause the government to record the first fiscal deficit since the height of the financial crisis.
On 17 March, the government passed a supplementary budget worth approximately KRW 11.7 trillion (USD 9.3 billion) to counter the Covid-19 outbreak. The supplementary budget was proposed just days after the government unveiled KRW 20 trillion (USD 15.8 billion) to combat the virus outbreak. The extra budget will be spent on controlling the disease outbreak and supporting domestic businesses. The majority of the supplementary budget (KRW 2.4 trillion) will be spent towards supporting small- and medium-sized businesses (SMEs) in the form of low interest rate loans, rent cuts on commercial properties and providing wage support to ensure businesses can continue paying workers amid quarantine efforts. Moreover, KRW 3.0 trillion (USD 2.4 billion) will be spent on boosting private consumption and employment levels, including vouchers for local products, increasing wages for seniors and expanding the employment support program. The government has set aside KRW 2.3 trillion (USD 1.8 billion) to control the disease outbreak by compensating private healthcare institutions for its losses and strengthening disease prevention.
Two days later, the government proposed an additional KRW 50 trillion (USD 39.6 billion) in spending to support the economy from the impact of Covid-19. The budget includes approximately nine programs designed to ease the burden on borrowers, support business activity and ensure ample liquidity in the financial system. As part of the 19 March package, the government will spend KRW 12 trillion (USD 9.5 billion) on offering emergency funding and low interest rate loans to businesses. For smaller domestic enterprises and merchants, the government will offer liquidity assistance worth KRW 8.5 trillion (USD 6.7 billion).
The government is also aiming to defer loan repayments for SMEs for at least six months, suspend loan interest payments and support debt restructuring programs. Moreover, to avoid a credit crunch, the government will issue KRW 6.7 trillion worth of primary collateralized bond obligations (P-CBOs) over a three-year period and create an equity market stabilization fund.
Commenting on Korea’s emergency spending efforts, Robert Carnell, head of Asia-Pacific research at ING, noted:
“The scale of this stimulus is perhaps not so surprising viewed against the backdrop of the looming legislative election on April 15, 2020. Even so, we see GDP for 2020 coming in at only -0.3%. Given what is going on in the rest of the world, we would not regard that as a bad outcome. But the risk is heavily skewed to the downside.”
The economy remains hampered by the extreme measures put in place to fight the spread although, boding well for the outlook, efforts towards containing the outbreak domestically have proven effective thus far. At its peak Korea reported 813 new cases on 26 February; however, on 23 March, Korea reported just 64 new cases and the total cases reported stood at roughly 8,961. Looking ahead, the government will likely continue to match fiscal spending with the severity of the disease domestically.
Author: Steven Burke, Economist