[Weekly Review] Government Forms 11.7 Trillion Won COVID-19 Supplementary Budget... Bank of Korea May Cut Interest Rates

Largest Scale in 7 Years, 4th Time Under Moon Jae-in Government
US Also Emergency Rate Cut...Increased Possibility of BOK Rate Cut
Last Year’s Per Capita Income Declined for the First Time in 4 Years

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] The government has prepared an additional supplementary budget (supplementary budget) worth 11.7 trillion won to overcome the novel coronavirus infection (COVID-19) crisis early and revive the stagnant local economy. This is the largest scale in seven years and the fourth supplementary budget under the Moon Jae-in administration.

Along with the preparation of the supplementary budget, the possibility of the Bank of Korea lowering interest rates has also increased. This is because the United States also abruptly cut its benchmark interest rate by 50 basis points (1bp=0.01 percentage points) to reduce the shock of the COVID-19 crisis. Last year's provisional real economic growth rate was recorded at 2.0%, the same as the preliminary figure. However, there are ongoing forecasts that growth this year will be limited to the 1% range. Last year, South Korea's per capita Gross National Income (GNI) declined for the first time in four years.

◆ Four consecutive supplementary budgets under the Moon Jae-in administration... largest scale in seven years = The supplementary budget announced by the government this time is the fourth largest ever and the largest scale for an infectious disease supplementary budget. In 2015, during the Middle East Respiratory Syndrome (MERS) outbreak, 11.6 trillion won was allocated, and in 2003, during the Severe Acute Respiratory Syndrome (SARS) outbreak, 7.5 trillion won was allocated. Excluding the revenue adjustment (5.4 trillion won), the expenditure supplementary budget is 8.5 trillion won, which far exceeds the expenditure supplementary budget during MERS (6.2 trillion won).

The government plans to first utilize 70 billion won from the Bank of Korea surplus and 70 billion won from fund reserves as supplementary budget resources, and raise the remaining 10.3 trillion won by issuing government bonds.

Of the total supplementary budget of 11.7 trillion won, 2.3 trillion won will be invested in enhancing the quarantine system such as infectious disease quarantine, diagnosis, and treatment; 2.4 trillion won to support recovery of small and medium-sized enterprises and small business owners affected by COVID-19; 3 trillion won to support livelihood and employment stability for early overcoming of COVID-19; and 800 billion won to support recovery of the stagnant local economy.

Specifically, to revive frozen consumption, consumption coupons worth about 2 trillion won will be distributed over four months to 5 million people including low-income groups, the elderly, and children. Also, 1.7 trillion won will be allocated to expand emergency ultra-low interest loans for small and medium-sized enterprises and small business owners. For small businesses with five or fewer employees who continue to employ low-wage workers, an additional subsidy of 70,000 won per person per month will be provided for four months to alleviate the management burden of small business owners.

A separate budget will be allocated for special support to the Daegu and Gyeongbuk regions, where COVID-19 confirmed cases are concentrated. A total of 1.507 trillion won will be invested, including 6 billion won for building a specialized infectious disease hospital in the Yeongnam region and expanding negative pressure beds for medical infrastructure, 1.4 trillion won for emergency funds for small and medium-sized enterprises and small business owners, and 101 billion won for local economy and damaged store recovery support. Meanwhile, social overhead capital (SOC) support such as roads and railways is excluded from this supplementary budget.

◆ Possibility of Bank of Korea rate cut in line with supplementary budget = Bank of Korea Governor Lee Ju-yeol held an emergency executive meeting from 9 a.m. on the 4th to discuss countermeasures against the US interest rate cut. This was the day the news of the US emergency interest rate cut was reported. Experts had already anticipated that the Bank of Korea, which kept rates steady last month, would lower rates next time.

The important factor is the timing. First, the Bank of Korea may hold an extraordinary Monetary Policy Committee meeting in March and implement a rate cut faster than expected. Since the Fed is also likely to cut rates further at the Federal Open Market Committee (FOMC) regular meeting on the 17th-18th (local time), there is a scenario where the Bank of Korea follows suit after observing the FOMC results. The Bank of Korea also held an extraordinary Monetary Policy Committee meeting at the end of October 2008 during the financial crisis and cut rates by 75 basis points. There is also a possibility of cutting rates in sync with the supplementary budget processing to maximize synergy.

At the emergency executive meeting, Governor Lee said regarding the US rate cut, "It is necessary to operate monetary policy in the future by appropriately considering changes in policy conditions." He explained, "Due to the Fed's action, the US policy rate (1.00~1.25%) has lowered to a level similar to the domestic benchmark rate (1.25%)," and that they would consider such changes in conditions. He also cited as factors for policy condition changes ▲ the rapid global spread of COVID-19 since late last week, raising concerns about the global economic situation, and ▲ the G7 governors and finance ministers agreeing to strengthen policy coordination.

He added, "From the perspective of concerns about capital outflows, it is true that the scope of future monetary policy operation has somewhat widened," but "the effective lower bound is not estimated solely by considering capital outflows, but can also be evaluated from various aspects such as real economy ripple effects and side effects on financial stability."

◆ Last year's Gross National Income declined for the first time in four years = Last year, South Korea's per capita Gross National Income (GNI) declined for the first time in four years. The impact of low growth, low inflation, and the weak won was significant.

According to the "2019 4th quarter and annual national income (provisional)" announced by the Bank of Korea, the per capita GNI, which first surpassed $30,000 in 2017, decreased in 2019 to $32,047. This is the first decline in four years. Per capita GNI is a statistic dividing the total income earned by nationals domestically and abroad by the population. It is generally considered an indicator showing the living standards of a country's people.

The main reason for the decrease in per capita income was the exchange rate. The per capita GNI calculated in dollars decreased by 4.1% compared to the previous year. This was due to the average exchange rate last year being 1,165.7 won, a 5.9% increase (weak won) compared to the previous year (1,100.3 won). When converted to dollars, per capita GNI decreases when the won-dollar exchange rate rises. However, the won-based per capita GNI also increased to 37.356 million won, but the growth rate (1.5%) was the lowest since the 1998 financial crisis (-2.3%).

The decline in growth rate reflecting inflation was also a reason why economic agents found it difficult to feel growth. Last year's nominal GDP increased by 1.1% compared to the previous year. This is the lowest level since the 1998 financial crisis (-0.9%) and dropped to one-fifth of the 2017 level (5.5%). When nominal growth rate is low, it is evaluated that the economic agents' perceived economy has declined. Households find it difficult to feel increased income, and companies feel that operating profits have increased less. Amid ongoing deflation concerns, the extremely cooled economic situation is reflected in the indicators.

The main factor for the slowdown in nominal GDP growth rate is inflation. The GDP deflator, known as 'GDP inflation,' recorded -0.9% last year, marking a negative figure. This is the first time the GDP deflator has recorded a negative annual figure since 1999, right after the financial crisis.

With the direct hit from the spread of COVID-19, the consumer price index also slowed again in February. According to Statistics Korea, the consumer price index in February was 105.80 (2015=100), up 1.1% compared to the same month last year. Consumer prices remained below 1% for 12 consecutive months, including 0.8% in January last year, 0.0% in August, the first official negative (-0.4%) in September, 0.0% in October, 0.2% in November, and 0.7% in December. Although the inflation rate rose to 1.5% in January this year, it slowed to 1.1% in February. In particular, the service price inflation rate was only 0.4%, the lowest in about 20 years. Among service prices, food service prices, which account for a significant portion, rose only 0.7%, the lowest increase since January 2013 (0.7%).

This content was produced with the assistance of AI translation services.