Mers prompts fiscal stimulus in South Korea as confidence falls

[SEOUL] South Korea plans a stimulus package of more than 15 trillion won (US$13.5 billion) to cushion the economic impact of a deadly respiratory disease and a drought.

The finance ministry announced the stimulus Thursday while cutting its outlook for the nation's economic growth this year to 3.1 per cent and slashing its inflation projection to 0.7 per cent. The package will include a supplementary budget, the ministry said, without outlining how much of the spending will be new outlays.

"We're trying to cope with shocks from non-economic issues by boosting fiscal spending sufficiently and keeping it expansionary," said Lee Chan Woo, a director general at the ministry. "This supplementary budget is to offset the effect of the Middle East Respiratory Syndrome, the drought, and to help low-income earners."

The won weakened 0.2 per cent to trade at 1,110.70 per dollar at 11:31 amin Seoul while the Kospi stock index declined 0.1 per cent.

Data released earlier Thursday by the central bank shows consumer confidence in June fell to the lowest level since December 2012, following the spread of mers to South Korea in May.

The disease, first reported in the nation on May 20, has infected 180 people and killed 29, according to the health ministry.

More than 120,000 tourists have canceled trips to South Korea since the outbreak began, government data shows.

Sales at department stores fell almost 30 per cent in the first two weeks of the outbreak from the previous fortnight as shoppers stayed at home. That compares with the 8.7 per cent contraction in the two-weeks after the deadly Sewol ferry disaster last year.

"Credit card spending, a leading indicator of general consumption, shows that private spending is decreasing faster than after the Sewol accident from last year," Mr Lee said.

On top of this, the Seoul metropolitan area and Gangwon province to the east are suffering their third-worst droughts on record, according to the Korean weather service.

The Bank of Korea has already reduced borrowing costs in a "preemptive step" to support consumption, taking its key interest rate to a record low of 1.5 per cent earlier this month.

The ministry's cut to its 2015 growth forecast, from an earlier projection of 3.8 per cent, brings it into line with current estimates from the central bank. Its downgrade of inflation expectations from 2 per cent previously compares 0.9 per cent from the BOK.

The finance ministry said the slowing global economic recovery and a weak yen and euro are other risks to South Korea, which are delaying a recovery in exports. Overseas shipments will fall 1.5 per cent this year, the ministry forecasts.

South Korea has posted fiscal deficits since the budget swung into the red in 2008 during the global financial crisis. An original aim to balance the books by 2014 was pushed back until at least 2017.

Following a 17.3 trillion won extra spending package in 2013, there was no supplementary budget last year, despite a record shortfall in tax receipts.

BLOOMBERG