South Korea Planning Additional $13 Billion Stimulus, Extra Spending to 2009 Budget

By Mike Caggeso
Associate Editor
Money Morning

South Korea, Asia's fourth-largest economy, approved an additional $20.7 billion (28.9 trillion won) to the national budget - with $13 billion intended to stem the nation's economic decline and rising unemployment.

The extra spending is on top of the original 284.5 trillion won budget for 2009, and will be mostly funded by selling government bonds. The remaining 11.2 trillion won will be spent making up shortfalls in tax revenue, Korea's Yonhap News Agency reported.

The government submitted the budget to the National Assembly parliament for approval, and a decision will be made next month.

"The global economic downturn is taking place at a faster pace than has been expected in terms of its depth and breadth," Finance Minister Yoon Jeung-hyun told reporters. "Reflecting changed economic conditions at home and abroad, the government decided to draw up this extra budget to overcome the current crisis as quickly as possible."

Yoon said he expects the additional measures - on top of deregulation and increased corporate investment - could create 550,000 new jobs in 2009 and add two percentage points to the country's gross domestic product (GDP).

In the fourth quarter, Korea's GDP shrank 5.6% from the previous three-month period. And for 2009, he expects about 200,000 job losses and a 2% GDP contraction.

"The key is how fast the government can get approval from the parliament and how efficiently the government will implement the plans," Lim Jiwon, an economist at JPMorgan Chase & Co. (JPM) in Seoul, told Bloomberg.

South Korea, EU Free Trade Deal

Meanwhile, South Korea and European leaders are nearing the completion of what could be the largest free trade pact for both economic entities - and larger than South Korea's current free trade arrangement with the United States.

Negotiators for both sides told Forbes that the "provisional" agreement will remove most tariffs on bilateral trade for the next five years

Like the additional stimulus and budget, the sooner the pact is implemented, the better for export-heavy South Korea.

After China, the EU is South Korea's second-largest trading partner, with bilateral trade eclipsing $98 billion last year. And European businesses are the biggest foreign investors in South Korea, The Wall Street Journal reported. 

Both sides are expected to reach an agreement next week at the G20 Financial Summit, but a few issues could throw a stick in the spokes of a deal. Differences remain on auto and parts tariffs, rules of origin and duty drawbacks.

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